Moody's confirms Hollywood Entertainment

Moody's Investors Service confirmed Hollywood Entertainment including its $225 million 9.625% senior subordinated notes at B3 and bank debt at Ba3.

Moody's said the confirmation follows the company's announcement that it had amended its credit agreement to allow for an immediate $30 million stock repurchase and establish a basket for future repurchases based on cash flow generation. The amendment also increases the amount of allowable debt subordinate to the banks' position, which has the potential to raise leverage as it increases the company's financial flexibility.

Moody's said the ratings were confirmed based on the use of operating cash flow to reduce debt ahead of Hollywood's required amortization schedule, as well as the expectation that leverage measures will improve more slowly or decline modestly in the future relative to the recent past.

The ratings continue to incorporate the expectation that Hollywood will continue to generate positive net cash flow and that it will maintain appropriate coverage ratios; that the revolving credit facility will remain largely undrawn; and that Hollywood's debt levels and leverage measures will be near or better than those anticipated when the company recapitalized in early 2003, Moody's added. The ratings also reflect Hollywood's continued high effective leverage after adjusting for rent payments; modest fixed charge coverage ratios after adjusting for leases and capital expenditures; and a higher risk profile due to the higher seasonality, cyclicality, and competition as games and DVD's become a higher proportion of Hollywood's business mix.

Over the longer term, the ratings also recognize that the video rental industry faces challenges from changing technology such as video on demand, Moody's noted. The shift from VHS to DVD, as well as the sell-through price points for DVD's and Hollywood's changing merchandise mix, have increased competition from alternate retail channels.

S&P cuts Remington outlook

Standard & Poor's lowered its outlook on Remington Arms Co. Inc. to negative from stable and confirmed its ratings including its corporate credit at B+.

S&P said the outlook change reflects the challenging environment for Remington's products and its tight cushion of covenant compliance.

The soft economy and poor hunting weather are negatively affecting the company's product segments with no significant improvement expected for the second half of the year, S&P said. Visibility is limited for the rest of the year as the fall hunting season does not start until the end of September and firearm purchasers are now buying closer to the start of the season. Historically, about 30% of sales are in the third quarter.

The company received an amendment of covenant violations from its banks for the quarter ended June 30, 2003. However, if business conditions deteriorate further, Remington may need to seek additional covenant waivers or amendments for upcoming quarters as well, S&P said.

For the 12 months ended June 30, 2003, Remington's EBITDA margin declined to 12.7% from 14.8% at the end of 2002, reflecting the general weakness in the industry. The effect was felt across the company's three product segments with firearms sales down 9.3%, ammunition down 11.2%, and other products down 22.1% (off a very small base) year to date.

For the same period, pro forma lease adjusted EBITDA coverage of interest was about 2x, slightly lower than 2.1x at the end of 2002, S&P said. Pro forma lease adjusted debt to EBITDA for the same periods were 5.65x and 4x, respectively. Part of the increase in leverage is due to seasonal working capital usage whereby the company builds up inventory in anticipation of the fall hunting season. Historically, the company has generated positive free cash flow with its low capital spending. The discretionary cash flow deficits are mainly the result of the company's aggressive dividend policy, which is now restricted by covenants.

S&P puts AdvancePCS on positive watch

Standard & Poor's put AdvancePCS and Caremark Rx Inc. on CreditWatch positive including AdvancePCS' $200 million 8.5% senior notes due 2008 at BB and $275 million revolving credit facility due 2005 at BB+ and Caremark Rx's $250 million senior secured term B loan due 2005, $300 million revolving credit facility due 2005 and $450 million 7.375% senior notes due 2006 at BBB-.

S&P said the actions follows Caremark's announcement it plans to acquire AdvancePCS.

The two businesses appear complementary, S&P said. While Caremark's traditional strengths are in corporate clients, mail-order prescription, and specialty pharmaceutical distribution, AdvancePCS has a strong position in the managed-care market.

The combined company would wield greater leverage in negotiating with pharmaceutical companies for drug rebates. Caremark also hopes to achieve $125 million in synergies from the acquisition within the first 12 months of closing.

From a financial standpoint, the significant use of equity financing will provide the combined company with a solid financial profile, S&P noted.

Caremark generated $428 million in free operating cash flows for the 12 months ended June 30, 2003, while AdvancePCS generated $265 million. As of June 30, 2003, the combined companies had $665 million in cash and investments versus $1.1 billion of debt.

However, the proposed acquisition represents a major shift in strategy for Caremark, S&P cautioned. The company has largely avoided the lower margin managed-care market, which has a much lower use of mail-order prescriptions. Caremark will also be challenged to efficiently integrate the various retail and mail-order transaction systems.

S&P rates Buckeye notes B+

Standard & Poor's assigned a B+ rating to Buckeye Technologies Inc.'s new $200 million senior unsecured notes due 2013 and confirmed its existing ratings including its subordinated debt at B. The outlook is stable.

S&P said the ratings reflect Buckeye's leading shares in value-added product markets and good geographic diversity, offset by excess industry capacity, a meaningful proportion of cyclical commodity sales and its aggressive debt leverage.

Operating margins (before depreciation and amortization) are slowly recovering as a result of cost reductions, S&P said. However, they remain impaired by still weak, though improving, fluff pulp prices and lower cotton cellulose volumes stemming from raw material shortages in fiscal 2002. In addition, Buckeye has yet to reap commercial benefits from substantial investments in new products.

Buckeye has upgraded and expanded its operations primarily through debt-financed capital investment and acquisitions during the past few years and, as a result, it remains highly leveraged. The company's reported total debt of $664 million at June 30, 2003 ($605 million net of cash), represented a modest decline of $37 million during this last difficult fiscal year.

Although credit measures are gradually strengthening, progress has been slower than expected because of weak economic conditions in the U.S. and Europe, S&P said. Debt to EBITDA has declined to 6.8x at June 30, 2003, from its peak of 7.9x a year ago, and should strengthen to below 4x during the next two years as markets recover, cotton cellulose volumes increase, and new capacity is absorbed. Funds from operations to debt is weak at 8%, but should improve to between 15% and 20% with higher earnings in the intermediate term. EBITDA interest coverage, currently 2x, should likewise strengthen toward 3x during the next two years. Buckeye should remain free cash flow positive with more modest capital expenditure levels of about $40 million annually compared with peak spending of $153 million in fiscal 2001.

Moody's rates Buckeye notes B3

Moody's Investors Service assigned a B3 rating to Buckeye Technologies Inc.'s proposed $200 million guaranteed senior unsecured notes due 2013 and confirmed its existing ratings including its $150 million 8% senior subordinated notes due 2010, $100 million 9.25% senior subordinated notes due 2008 and $150 million 8.5% senior subordinated notes due 2005 at Caa1. The outlook remains negative.

Moody's said the ratings reflect Buckeye's high leverage with no near-term ability to meaningfully delever; weak but improving profitability and low return on assets; weak liquidity as evidenced by limitations on new borrowings associated with the subordinated notes indentures and that 20% of its sales are concentrated with a key customer.

The ratings are supported by the company's leading market positions in most product categories; broad range of specialized products offered by the company; the company's leadership in product innovations and development; as well as an experienced management team with a sizable equity interest in the company.

The negative outlook reflects Moody's concerns about Buckeye's existing liquidity pressure as evidenced by weak internal free cash flow generation of the firm, measured as cash from operations less capex, and the limited ability to borrow in the near term.

Despite the $25.4 million net debt reduction in fiscal 2003, Buckeye's leverage remains very high, Moody's said. Measured as total debt to EBITDA, leverage was approximately 6.8 times in fiscal 2003, close to an amended covenant limit of 7 times. Free cash flow in fiscal 2003, which accounted for mere 4% of total debt, emphasizes the high leverage of the company.

The company's interest protection measures remain modest for the rating category. Measured as EBIT to interest expense, interest coverage is approximately break-even, but fixed charge coverage, inclusive of operating leases and the current portion of the long-term debt, is insufficient, at 0.5 times, virtually flat as compared to a year ago.

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