S&P confirms Michael Foods, off positive watch

Standard & Poor's confirmed Michael Foods Inc. including its $200 million 11.75% senior notes due 2011 at B- and $100 million senior secured revolving credit facility due 2007, $125 million term A loan due 2007 and $245 million term B loan due 2008 at B+ and removed it from CreditWatch positive. The outlook is positive.

Michael Foods were originally placed on CreditWatch with positive implications following the company's announcement that it had signed a letter of intent to sell Kohler Mix Specialties Inc., its dairy products division, to Dean Foods Co. Proceeds were expected to be used to repay a portion of Michael Foods' outstanding bank debt.

Subsequently the company announced an agreement to be acquired by Thomas Lee Partners and its senior management in a deal valued at $1.05 billion.

S&P said it expects that any improvement in Michael Foods' capital structure after the divestiture of its dairy products division will be offset by the additional debt required to finance the pending sale to Thomas Lee Partners.

The ratings reflect Michael Foods Inc.'s high debt leverage following the expected sale relative to the company's ability to generate cash flow, S&P said. Somewhat mitigating these concerns is Michael Foods' solid market position as the No. 1 producer and distributor of egg products with an estimated 45% U.S. market share.

S&P rates Nalco notes B, loan BB

Standard & Poor's assigned a B rating to Nalco Co.'s proposed $900 million of senior notes due 2011 and $900 million of senior subordinated notes due 2013 and a BB rating to its planned $1.65 billion of senior secured credit facilities. The outlook is stable.

S&P said Nalco's ratings reflect a strong competitive position in water treatment and process chemicals, solid operating margins and stable cash flows, overshadowed by very aggressive debt leverage.

During the next several years, management is expected to use virtually all discretionary cash generation for debt reduction, thus aiding the necessary strengthening of key financial ratios to appropriate levels for the initial ratings, S&P added.

Consolidated revenues and operating earnings exhibit a meaningful degree of stability, aided by the considerable diversity of sales geographically and broad end-market applications and the value-added service nature of Nalco's business. Operating margins (before depreciation and amortization), which have only minimal exposure to raw material supply or pricing, are expected to be in the 18% to 19% range near term, after considering the impact of business restructuring costs and other unusual charges, S&P said.

Nalco is emerging from this transaction with weak cash flow protection, as evidenced by funds from operations to total debt at well under 10%, S&P said. Even with meaningful debt reduction, that ratio might only approach the lower end of the appropriate 10%-15% range a few years from now, while the debt to EBITDA ratio, initially well within the 5.5x to 6.0x range, is expected to strengthen to the 4.5x area. Similarly, the company's substantial debt burden likely will allow the EBITDA interest coverage ratio to experience only modest improvement from about 2.0x currently.

Fitch cuts Weyerhaeuser to junk

Fitch Ratings downgraded Weyerhaeuser to junk including cutting its senior unsecured debt to BB+ from BBB-. The outlook was changed to stable from negative.

Fitch said the action was based on a poor prognosis for future debt reduction.

Acknowledging Weyerhaeuser's upside earnings and cash generation potential, it is becoming increasingly difficult to see a sustainable improvement in the company's markets to allow a quick return to investment-grade financial metrics, absent an equity offering, Fitch said. Weyerhaeuser has a debt to rolling 12-month EBITDA ratio of 5.9 times through June 2003.

Weyerhaeuser has been selling non-core timberlands which now contribute upwards of 25% of the company's operating earnings. Weyerhaeuser has also been cutting costs and capital expenditures. Weak operating margins in pulp and paper and a lackluster outlook for containerboard together with import duties paid on softwood lumber hamper cash generation, Fitch said.

S&P puts Quality Distribution on positive watch

Standard & Poor's put Quality Distribution Inc. on CreditWatch positive including its corporate credit at B- and assigned a B- rating to its planned $125 million of senior subordinated notes and a B+ to its planned $215 million bank facility.

S&P said the watch placement is based on the company's plans to restructure its balance sheet by issuing $115 million of common equity, converting its preferred stock into common shares, issuing $125 million of senior subordinated notes and entering into a new $215 million bank facility. The intent of the recapitalization is to reduce the company's overall debt levels, extend its debt maturities and increase revolver availability.

S&P said it expects to raise the corporate credit rating to B+ from B- on completion of the transactions.

Quality Distribution's ratings reflect its participation in a low-margin, fragmented industry, combined with a weak financial profile.

The company was formed in 1998 by the merger of Montgomery Tank Lines Inc. and Chemical Leaman Tank Lines Inc., which resulted in an expanded terminal network with nationwide coverage. The transaction also added a significant debt burden and high interest payments. Initial operational challenges from the merger have been resolved, and the integration has resulted in the realization of some cost savings.

From the late 1990s through 2002, a weakening of the economy reduced demand for chemicals and, hence, revenues for Quality Distribution. During this time, some customers shifted from truck transportation to rail (which is less expensive for longer hauls), and insurance premiums rose by more than 100%, S&P noted. However, the company's operating margins after depreciation have remained in the 5.0% to 5.5% range, despite reduced revenues, as a result of management's efforts to reduce operating costs.

Quality Distribution's earnings and cash flow suffer from its significant debt and interest burdens; at Dec. 31, 2002, lease-adjusted debt to capital was 141%, funds from operations to debt was 6.9%, pretax interest coverage was 0.6x, and debt to EBITDA was 6.6x, S&P said. After the proposed refinancing, lease-adjusted debt to capital will be approximately 100% with funds from operations to debt of 15.0%, pretax interest coverage of 1.6x, and debt to EBITDA of 4.0x.

S&P upgrades Majestic Star corporate credit

Standard & Poor's upgraded Majestic Star Casino, LLC's corporate credit rating to B+ from B and confirmed its other ratings including its senior secured credit facility at BB- and senior secured notes at B. The ratings were removed from CreditWatch positive. The outlook is stable.

S&P said the upgrade follows the successful closing of the company's new $260 million senior secured notes due 2010 and $80 million senior secured credit facility, proceeds of which were used to refinance the existing debt at both the company and Majestic Investor.

The upgrade also reflects a change in Majestic Star's financing strategy where funding for all major subsidiaries will be at the parent company level.

Ratings reflect Majestic Star's substantial debt levels and relatively small cash flow base. Pro forma for the refinancing, EBITDA was $58 million for the 12 months ended June 30, 2003, with debt to EBITDA at 5.4x and EBITDA coverage of interest expense at 2.0x, S&P noted.

These factors are offset in part by the company's solid niche market positions and a larger pool of assets (three casinos instead of one) under the new financing structure. Majestic Star owns and operates the Majestic Star Casino, a riverboat gaming facility at Buffington Harbor in Gary, as well as two Fitzgeralds-branded casinos in Tunica, Miss. and Black Hawk, Colo.

Moody's raises IESI outlook, rates loan B1

Moody's Investors Service assigned a B1 rating to IESI Corp.'s proposed $400 million senior secured credit facility comprised of a $200 million senior secured revolving credit facility maturing in October 2008 and a $200 million senior secured term loan maturing in October 2010, raised its outlook to stable from negative and confirmed its existing ratings including its $150 million 10.25% guaranteed senior subordinated notes due 2012 at B3.

The ratings reflect IESI's weak balance sheet, with intangible assets of over a third of the company's total assets relating to IESI's acquisition-based growth strategy; high financial leverage as measured by total debt to EBITDA of approximately 4.5 times for the trailing 12 months period ending June 30, 2003; the relative size of the company vis-a-vis its primary competitors in its Northeast Region; and the geographic dispersion of assets between two regions of operation, Moody's said.

Further, the ratings are constrained by the company's deteriorating profit margins in the last year, and weak return on assets.

The ratings also reflect IESI's receipt of permitted expansion capacity at its Pennsylvania landfill as well as an expected improvement in profit margin and cash flow generation from improved internalization rate associated with the Seneca acquisition (somewhat offset by related increases in capex and environmental liabilities).

The company has also benefited from strong support from its financial sponsors.

The change in the outlook to stable from negative reflects Moody's expectation that operating profitability and internal cash generation will benefit from the pending acquisition. Seneca will increase IESI's disposal volume in the Northeast and decrease the company's dependence on Pennsylvania landfills, which are subject to a $4 per ton surcharge on out-of-state waste. In addition, the acquisition of Seneca brings the size of the company's Northeast operations in line with the size of the South Region operations.

Further, the company benefits from an extension in the maturity profile of the credit facility, thus eliminating a scheduled credit facility repayment in 2004, Moody's said.

S&P rates IESI loan B+

Standard & Poor's assigned a B+ rating to IESI Corp.'s $400 million senior secured credit facility and confirmed its existing ratings including its $150 million 10.25% senior subordinated notes due 2012 at B-. The outlook is stable.

IESI's ratings reflect its small market position relative to its industry peers, a heavy debt burden, a lack of geographical diversification in its revenue base and the risks associated with a debt-financed acquisition growth strategy, S&P said. These factors offset IESI's experienced management team, leading and growing position in several regional markets, efficient operations, and the favorable industry characteristics of the solid waste business.

IESI has financed its acquisitive actions through a combination of debt and preferred stock. The company has been able to increase its free cash flow and generate higher return on assets while achieving growth through acquisitions.

Its most recent acquisition, Seneca Meadows Landfill, is the largest landfill in the state of New York with annual revenues of more than $45 million, S&P noted. The acquisition improves IESI's internalization rate, reduces dependency on its Pennsylvania and third party landfills, and will likely support an expanded market position in the Northeast. Seneca Meadows has a remaining life of seven years based upon its current limit of 6,000 tons/day. In early 2003, Seneca began working on a permit for a 50 million ton expansion that would increase the landfill life by over 27 years. It is anticipated to take three to four years to receive the expansion permit for the increased capacity.

Because of a time lag in realizing the benefits of the Seneca Meadows transaction, debt to EBITDA will spike to approximately 5.5x at the end of 2003, but should return to the 3.0x to 3.5x range, S&P said. Similarly, EBITDA interest coverage is expected to remain in the appropriate 3.5x to 4.0x range.

Moody's rates Keystone notes B3, loan B1

Moody's Investors Service assigned a B3 rating to Keystone Automotive Operations, Inc.'s proposed $175 million guaranteed senior subordinated unsecured notes due 2013 and a B1 to its $165 million proposed guaranteed senior secured bank credit facilities consisting of a $50 million revolving credit facility due 2008 and a $115 million term loan due 2009. The outlook is stable.

Private equity sponsor Bain Capital Partners, LLC and management have agreed to purchase all of the company's stock for $440 million, representing an 8.4x multiple of Keystone's adjusted EBITDA as of June 28, 2003.

Keystone's capitalization following the proposed leveraged buyout will consist of $175 million of common equity, together with a new $165 million guaranteed senior secured credit agreement and $175 million of newly issued guaranteed senior subordinated unsecured notes.

Moody's said the ratings reflect Keystone's small absolute size and high pro forma leverage resulting from the substantial purchase price that Bain Capital has contracted to pay for the company.

Keystone will be almost 62% capitalized with debt at closing, despite the fact that $175 million of common equity will contributed.

The company will additionally have a negative closing tangible equity balance and a sharply lowered return on total assets, given that about $373 million of the total acquisition consideration will be allocated to goodwill and other identifiable intangibles.

While Moody's believes that Keystone's proposed liquidity is adequate at almost $50 million and that the company has in place effective working capital management systems, the rating agency would be more comfortable with some additional availability given the seasonality and high inventory requirements of the business.

Moody's said it believes that inventory management remains a critical risk, given Keystone's very large number of stock keeping units and focus on expanding the number of products offered and customers served. Disruption of either of the company's two primary warehouse distribution centers could adversely affect operating results.

Pro forma total debt/ EBITDA leverage for the 12 months ended June 28, 2003 is high at approximately 5.5x, Moody's said. Total debt is additionally estimated at a substantial 77% of revenues. Pro forma EBITA coverage of interest for the period is about 1.8x and the EBITA return on total assets is about 7.6%.

Moody's confirms Rayovac, upgrades Remington

Moody's Investors Service confirmed the ratings of Rayovac Corp. including its $120 million senior secured revolving credit facility due 2009, €40 million senior secured revolving credit facility due 2009, $300 million senior secured term loan B due 2009, $50 million senior secured term loan B due 2009, €50 million senior secured term loan A due 2008 and €125 million senior secured term loan B due 2009 at B1 and $350 million senior subordinated notes due 2013 at B3 and upgraded Remington Products Co., LLC including raising its $180 million senior subordinated notes due 2006 to Caa1 from Caa2. The outlook for Rayovac is stable.

Moody's aid the action follows the completion of Rayovac's acquisition of Remington.

The upgrade of Remington's subordinated notes rating reflects the company's greatly improved operating results and cash flow generation over the past couple of years through disciplined cost reduction efforts that are expected to continue under the new ownership and management team, Moody's said. Further, Remington's focus on its core shaving and grooming categories with strong brand support and product development initiatives has resulted in meaningful market share gains.

At June 2003, Moody's estimates Remington's last 12 months EBITDA at approximately $48 million, up from $34 million at the end of fiscal 2001 (December 2001) on generally flat sales growth.

Despite these improvements, the rating on Remington's notes is restrained by their weak position in the overall Rayovac capital structure and the lack of protective covenants given the recently amended indenture.

On a consolidated basis, Rayovac's ratings continue to reflect its high leverage, which is a significant risk factor, given the ongoing competitive pressures in the North American battery market, where Rayovac is implementing a new merchandising strategy, Moody's said.

The ratings also recognize Rayovac's more aggressive growth strategy, as Remington represents the company's second major debt-financed acquisition within the past year and moves the company into the highly seasonal and mature electric personal care market (just before the key holiday selling period).

Notwithstanding these risks, Rayovac's ratings and stable outlook are supported by the diversification benefits of the Remington acquisition, which adds another leading, long-lived brand to Rayovac's product portfolio, with strong cash flows in the company's challenged North American market.

S&P rates Genesis notes B-, loan BB-

Standard & Poor's assigned a B- rating to Genesis HealthCare Corp.'s planned $200 million senior subordinated notes due 2013 and a BB- rating to its proposed $260 million senior secured bank facilities due 2010. The outlook is positive.

S&P said the bank loan is rated one notch higher than the corporate credit rating because in a distressed default scenario the estimated asset values offer a strong likelihood that lenders will fully recover the bank debt in the event of a default.

Genesis HealthCare's ratings reflect the risks it faces in an industry that has suffered from such issues as reimbursement cuts and rapidly escalating insurance costs, S&P said.

Though 75% of the company's total beds are located in only five states, the company derives operating benefits from these facility concentrations. Moreover, occupancy and Medicaid trends in those states have been favorable, and Genesis' occupancy rate of 91% is above the industry average.

Still, Genesis HealthCare is attempting to improve its weak return on capital, which is an estimated 8%; the company is divesting selected non-core facilities, improving its payor mix by increasing Medicare business and increasing its occupancy rates by focusing on admissions from hospitals, S&P noted.

Nevertheless, changes in reimbursement and insurance expenses may hurt the company's future financial performance. For instance, Medicare reimbursement was cut 10% in September 2002, causing the company's revenues to fall by $26 million, S&P said. Furthermore, Genesis may experience further reductions in the future, even though Medicare recently raised rates. Meanwhile, Medicaid currently contributes about half of the company's total revenue.

Moody's rates Genesis notes B3, loan Ba3

Moody's Investors Service assigned a B3 rating to Genesis Healthcare Corp.'s planned $200 million senior subordinated notes due 2013 and a Ba3 rating to its planned $75 million senior secured revolving credit facility due 2008 and $185 million senior secured term loan B due 2010. The outlook is stable.

Moody's said the ratings reflect the company's high leverage, potential regulatory constraints on both revenues and operations, escalating expenses and a highly competitive environment. They also incorporate Moody's expectation for near-term stability in operating performance.

Following the spin off, Genesis Healthcare will absorb a majority of the debt and, consistent with its peers in the competitive and mature nursing home sector, will be highly levered, Moody's noted.

Notwithstanding the initial leverage, Moody's believes management is committed to a more conservative financial policy. Moreover, Moody's believe leverage is manageable given its expectation for stable operating trends at the company over the near to intermediate term.

Moody's added that it believes management's focus on operations, the recent increases in Medicare rates and the reduced pressure on wages due to the weak labor market will support steady profitability.

S&P cuts Applied Extrusion

Standard & Poor's downgraded Applied Extrusion Technologies Inc. including cutting its $275 million 10.75% notes due 2011 to B- from B. The outlook is negative.

S&P said the action follows Applied Extrusion's completion of a $100 million, five-year secured credit facility with GE Commercial Finance. The facility consists of a $50 million revolving facility and a $50 million term loan. Proceeds were used to repurchase equipment leases, retire industrial revenue bonds and pay down the existing revolving credit facilities.

The lower rating reflects the company's increased use of secured debt financing, which will diminish the unsecured note holders' recovery prospects in a default scenario, S&P said.

The ratings reflect Applied Extrusion's very aggressive debt leverage, weak liquidity position, and negative cash flows, which more than outweigh its position as the largest oriented polypropylene (OPP) films producer in North America, S&P added. With annual revenues of about $250 million, the company holds an estimated 25% share of the OPP market.

Applied Extrusion's recent operating performance reflects volume declines and capacity utilization below expectations at about 90%, partially offset by some benefits of restructuring costs, S&P noted. Elevated inventory levels have resulted from lower than projected sales; consequently, the company has reduced production through plant shutdowns in the fourth quarter. Production will remain decreased until inventory returns to a normal level. The company has also experienced a $12.5 million (19%) increase in raw material costs this year.

Given the company's limited scale of operations and heavy debt burden, its weak operating performance has led to a steep deterioration in the financial profile, S&P said. Credit measures are very weak with EBITDA interest coverage of about 1.0x and total debt (adjusted for capitalized operating leases) to EBITDA of almost 8x for the 12-month period ended June 30, 2003. Applied Extrusion has been unable to meet its working capital and capital expenditure needs through internal cash generation for several years, and is unlikely to generate free cash from operations until late 2004.

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