Moody's cuts R.J. Reynolds to junk

Moody's Investors Service downgraded R.J. Reynolds Tobacco Holdings, Inc. to junk and kept it on review for possible further downgrade, affecting $1.8 billion of debt. Ratings lowered include R.J. Reynolds' senior guaranteed unsecured debt to Ba1 from Baa2 and senior unguaranteed unsecured debt to Ba2 from Baa3 and Nabisco Group Holdings Corp.'s $98 million defeased junior debentures due 2047 to Baa1 from A2.

Moody's said the downgrade reflects R.J. Reynolds' uncompetitive operating cost structure; Moody's expectation of significant volume drops in the U.S. tobacco market; increased competition from small manufacturers; and the difficult litigation environment that RJR Tobacco faces over the medium term.

Moody's estimates that in 2002 R.J. Reynolds' operating profit per pack of cigarettes was 17 cents, while it was 52 cents for Philip Morris USA and 69 cents for Lorillard. Moody's believes that this lower profitability could reflect R.J. Reynolds' less efficient manufacturing than its competitors, as well as reduced pricing power. In an environment of reduced opportunities for advertising, the power of R.J. Reynolds' brands (mainly Winston, Camel, Salem and Doral) - and therefore the ability of the company to set higher prices - could be weakening.

R.J. Reynolds' brand portfolio must also compete with that of Philip Morris USA, significantly stronger with a market share of approximately 50%. Moody's notes that R.J. Reynolds has engaged in an effort to reduce its cost structure. However, the likelihood of success of this effort remains uncertain, given the magnitude of the task. Also, Moody's believes that benefits on profitability from this effort are not likely to be immediate.

The downgrade also reflects the severely reduced profitability from decreasing volumes in the U.S. tobacco market, where R.J. Reynolds' derives almost all of its cash flow. In many states facing budgetary difficulties in 2002, legislatures have passed and governors have signed tobacco excise tax increases in order to generate additional revenues. Proposals for further increases are being contemplated in a significant number of other states for 2003.

The ratings remain under review for potential downgrade because of the possible action of rating triggers in the bank credit facility, Moody's said. Moody's added that it expects its rating action to trigger the establishment of a guarantee from the Santa Fe subsidiary and other smaller subsidiaries for the benefit of bank lenders, and - because of a negative pledge clause in their indentures - for the benefit of holders of notes guaranteed by RJRT as well. Should another rating agency also downgrade the guaranteed senior unsecured rating below investment grade, all assets would be pledged to bank lenders.

Moody's rates Abitibi notes Ba1

Moody's Investors Service assigned a Ba1 rating to Abitibi-Consolidated Co. of Canada's $500 million guaranteed senior unsecured notes offering and confirmed Abitibi-Consolidated Inc. and its subsidiaries including its senior unsecured notes and debentures at Ba1, Abitibi-Consolidated Finance LP's guaranteed notes at Ba1, Abitibi-Consolidated Co. of Canada's guaranteed notes at Ba1 and Donohue Forest Products Inc.'s guaranteed senior notes at Ba1. The outlook is stable.

Moody's said the ratings reflect Abitibi's high leverage, minimal coverage and inability to materially reduce debt without a substantial recovery in the company's core products.

Over the past several years, Abitibi's leverage increased significantly due to various opportunistic acquisitions, while higher capital expenditures prevented the company from materially reducing leverage during stronger periods of free cash flow, Moody's said. Over the past several quarters the company's core newsprint and lumber markets have weakened considerably and internal cash flow is no longer sufficient to support meaningful debt reduction.

The company has recently paid down debt with various assets sales, most recently a 75% stake in the St. Felicien pulp mill.

As of March 31, 2003, debt was approximately C$6 billion, including accounts receivable financing, which is very high in comparison to anticipated cash flows over the near term. As a result, operating income and interest coverage in 2003 are expected to be minimal.

On a more positive note, Abitibi and other producers of newsprint were successful in putting through a $35 newsprint price increase in October 2002 and $35 in April 2003, however prices remain relatively low. Abitibi also announced an additional price increase to take effect in August 2003, which if accepted by the market should provide additional support given the company's significant operating leverage - although for Abitibi much of the recent price increase has been offset by the strength of the Canadian dollar.

The stable outlook reflects Moody's expectation that operating performance and credit statistics should improve through the latter half of 2003, as the company continues to focus on cost reduction initiatives, remains disciplined with respect to implementing future price increases and maintains financial liquidity.

S&P rates Abitibi notes BB+

Standard & Poor's assigned a BB+ rating to Abitibi-Consolidated Co. of Canada's new $150 million 5.25% notes maturing 2008 and $350 million 6% notes maturing 2013 and confirmed the BB+ senior unsecured debt rating of parent company Abitibi-Consolidated Inc. The outlook is stable.

S&P said Abitibi's ratings reflect its position as the world's largest newsprint producer and overall low production costs, offset by its heavy exposure to cyclical, commodity-oriented groundwood papers and high debt levels.

Debt reduction has been a major hurdle since Abitibi's heavily debt-financed acquisition of Donohue Forest Products Inc. in 2000, S&P said. Early attempts at debt reduction were offset by an increase in debt related to the increased stake in Pan Asia Paper Co. in 2001.

Although the company used C$420 million for debt reduction from the sale of the St.-Felicien,

Que., pulp mill in 2002, the inability to generate meaningful free cash flow during the current downturn has greatly delayed the achievement of debt reduction targets, S&P noted.

In addition to the weakened markets for all its primary products, the company is very exposed to the strong Canadian dollar with the majority of sales based on U.S. dollar prices. The resultant margin pressure, mostly across paper products, has more than offset any recent price increases.

As a result, credit measures for the four quarters ended March 31, 2002 were very weak, with EBITDA interest coverage of 1.7x and funds from operations to total debt of 4.5%, and will likely continue at low levels in the near term due to an even higher average Canadian dollar, S&P said. The recent decision by the company to reduce dividends by 75% modestly increases the cash flow available for debt reduction, but has a minimal impact on the overall credit profile.

S&P rates Rémy Cointreau bonds BB

Standard & Poor's assigned a BB rating to Rémy Cointreau SA's proposed €150 million bonds due 2010. The outlook is stable.

S&P said the rating reflects Rémy Cointreau's leading position in cognac, business diversity (presence in spirits, liqueurs, and champagne), and leveraged financial profile in line with the rating category.

The proceeds from the bond issue, which could be later adjusted according to investor demand, will, along with a new €500 million syndicated credit facility, be used to refinance existing debt - in particular the group's outstanding bond (€153.8 million, including premium) and €400 million syndicated credit facility.

Overall, the lower cost of debt post-refinancing should save Rémy Cointreau about €4 million in annual net interest expenses (€65 million in fiscal 2003), on a pre-tax basis, S&P said.

S&P added that it expects Rémy Cointreau to maintain its existing business profile and relatively leveraged financial profile. As working capital normalizes, Rémy Cointreau should gradually increase its free operating cash flow generation in order to post funds from operations coverage of net debt in the 12%-15% range by March 2004, and raise it to above 15% thereafter.

Fitch rates NVR notes BBB

Fitch Ratings has assigned a BBB rating to NVR, Inc.'s $200 million 5.00% senior notes due 2010. The outlook is stable.

Fitch said the new issue has more favorable rates and attractive maturity relative to the debt it replaces.

Fitch said NVR's ratings are based on the company's strong credit protection measures, solid free cash flow generation and balance sheet liquidity that results from its unique operating model, and the company's capacity to withstand a meaningful housing downturn.

The cyclical nature of homebuilding is reflected in the rating as are NVR's relatively heavy (although diminishing) exposure to Washington D.C. and Baltimore markets, its track record through the 1990-91 recession (albeit while operating under a different strategy focused on significant land investment), and its active share repurchase program.

NVR's short-dated inventory position turns over rapidly (in excess of 5 times, enhancing operating cash flow, Fitch said. NVR's inventory turnover ratios are consistently and considerably higher than those of its peers. In contrast to other builders that typically generate negative cash flow from operations due to significant land investment during economic expansion, NVR generates meaningful cash flow relative to its reinvestment requirements even during a rapid growth phase as no additional cash is needed for land development activity.

Interest coverage of 39.6x, debt to book capital just below 22%, debt to EBITDA of 0.2x and net debt of only $27.4 million at March 31, 2003, are considered strong for the BBB rating level, Fitch said. While Fitch recognizes this healthy performance has taken place during the favorable upside of the housing cycle, NVR's financial flexibility is solid and its capacity to absorb a significant downturn in its markets have been considerably enhanced over the past several years.

S&P rates National Power bonds BB

Standard & Poor's assigned a BB rating to National Power Corp. (Napocor)'s $500 million bond issue.

S&P said the rating reflects an irrevocable and unconditional guarantee on the bonds by the Republic of the Philippines.

Under the terms of the issue, Power Sector Assets & Liabilities Management Corp. can assume Napocor's role as obligor after meeting certain conditions but without seeking the consent of bondholders. The Republic of the Philippines' guarantee on the debt will survive the substitution of PSALM for Napocor as obligor. The rating on the bonds is also expected to survive the substitution and remain on par with the foreign currency rating on the Republic of the Philippines.

PSALM was created under the Electric Power Industry Reform Act of 2001 to take ownership of Napocor's generation assets, liabilities, real estate, and certain independent power producer contracts, S&P noted. PSALM will also assume ownership of National Transmission Corp., which was created to hold the transmission assets of Napocor. The transfer of Napocor's assets to PSALM is currently on hold pending the approval of Napocor's existing creditors and other conditions precedent. The structure, financial profile, and creditworthiness of PSALM post-transfer are uncertain.

Napocor is the national power generation and transmission company of the Philippines and is 100%-owned by the government of the Philippines. Napocor's standalone credit fundamentals continue to weaken with the restructuring of the electric power industry in the Philippines, S&P said. Significant tariff reductions imposed on Napocor since 2001 by the Energy Regulatory Commission have had a severe impact on the company's financial profile.

Napocor's financial and operating performance is expected to deteriorate further as the Philippines proceeds with privatization and deregulation, S&P said.

S&P confirms CE Generation

Standard & Poor's confirmed CE Generation LLC's senior secured bonds at BB-.

S&P said the ratings reflects that CE Generation's debt is structurally subordinate to about $494 million in nonrecourse project level debt, cash flow is concentrated with the Imperial Valley Projects in California (funded by Salton Sea) and with one offtaker, Southern California Edison, CE Generation's gas-fired cogeneration projects (Saranac, PRL, and Yuma) rely on long-term above-market priced power contracts, CE Generation's cash flow from the Salton Sea and other Imperial Valley geothermal projects will be 60% exposed to Southern California Edison's avoided costs in five years (2007), as the current agreement between Southern California Edison and Salton Sea with respect to contract energy prices expires.

Positives are that about 51% of CE Generation cash flow comes from projects with investment-grade qualities, CE Generation projects have performed well with capacity factors ranging from 77% to 101% for the geothermal projects and 87%-92% for the gas-fired projects during the 2000-2002 period, commercially proven technology is used, which has been performing without major incident since each project began operations.

Forecast debt service coverage ratios of 2.20 minimum and 2.47 average through 2010 are adequate, but could depart from forecasts depending upon Southern California Edison's future avoided costs, S&P said.

Debt service coverage in 2002 was 1.73 against pro forma coverages of 2.61, S&P said. Lower coverages attributable to blocked distributions at the Salton Sea level. As a result of the uncertainty with Southern California Edison, which is the major purchaser of power from the Salton Sea projects, the LOC that supports the one-year debt service reserve fund was not renewed.

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