Moody's lowers Allegheny Energy's debt

Moody's Investors Service downgraded Allegheny Energy Inc.'s senior unsecured debt to B1 from Ba1. Furthermore, Moody's downgraded Allegheny Energy Supply's senior unsecured and issuer rating to B1 from Ba2, Monongahela Power Co.'s senior secured to Baa3 from A3, senior unsecured and issuer rating to Ba1 from Baa1 and preferred stock to Ba3 from Baa3, Potomac Edison Co.'s senior secured to Baa3 from A3 and senior unsecured and issuer rating to Ba1 from Baa1, West Penn Power Co.'s senior unsecured and issuer rating to Baa1 from A1, Allegheny Generating Co.'s senior unsecured to B1 from Ba2 and Allegheny Energy Supply Statutory Trust 2001's senior secured to B1 from Ba2. Ratings are still on review for possible further downgrade.

The downgrade reflects limited financial flexibility, deterioration in cash flow and earnings, cash from operations failing to cover capital spending and dividends, poor near term prospects for merchant power prices and poor returns generated on substantial investments in that area, potential default under its credit facilities, the need to extend its $70 million bilateral line of credit that expires on Nov. 30, uncertainties regarding the delay in filing financial statements and the need to sell assets in order to bolster liquidity, Moody's said.

The downgrade of the subsidiaries reflects the potential need for these companies to support the cash needs of the parent company.

The continuing review will focus on prospective cash flow generation and asset sales, the implications of uncertainties of financial reporting, the ability of the utility subsidiaries to obtain their own credit lines and the probable outcome of negotiations with lenders who will probably request collateral in exchange for continued waivers or extensions, Moody's added.

S&P keeps United Air lines on developing watch

Standard & Poor's said UAL Corp. and United Air Lines Inc. remain on CreditWatch with developing implications. Both have a CCC corporate credit rating.

S&P's comment came after United aid it has negotiated with Kreditanstalt fur Wiederaufbau (KfW) tentative terms to defer to 2007 about $500 million of debt maturing Nov. 17, 2002 and Dec. 2, 2002, gaining near-term liquidity relief and advancing its attempt to avoid bankruptcy.

The deferral of debt owed to KfW and a recently announced tentative cost-cutting agreement with United's pilots improved the airline's chances of obtaining a requested $1.8 billion federal loan guaranty from the Air Transportation Stabilization Board, S&P said.

However, United still faces a $375 million Dec. 2, 2002 debt payment on the 1997-1 class A enhanced pass-through certificates, and needs to complete cost-reduction agreements with other unions and with various suppliers and providers of aircraft financings, S&P added. Agreement with the various labor unions, in particular, is difficult and complicated, and could still fail, despite recent progress.

Moody's confirms Nevada Power, Sierra Pacific Power

Moody's Investors Service confirmed Nevada Power Co. and Sierra Pacific Power Co. with a negative outlook, ending a review for possible downgrade begun on April 24, 2002. Moody's said Sierra Pacific Resources remains on review for possible downgrade.

Moody's also assigned a Ba2 rating to Nevada Power's recent $250 million offering of 10.875% general and refunding mortgage notes, series E, due 2009 and to Sierra Pacific Power's $100 million three-year senior secured credit facility.

Nevada Power and Sierra Pacific Power's senior secured ratings are Ba2. Sierra Pacific Resources' senior unsecured rating is B2.

Moody's said it confirmed Nevada Power and Sierra Pacific Power in response to their recently demonstrated ability to access capital and improve their liquidity positions.

Specifically, Nevada Power used the proceeds from its recent $250 million general and refunding bond offering to repay in full the outstanding balance under its fully-drawn $200 million secured bank credit facility. Similarly, Sierra Pacific Power used the proceeds from its recently closed $100 million three-year senior secured term loan and cash on hand to repay in full the outstanding balance under its fully-drawn $150 million secured bank credit facility.

Moody's also noted that both utilities have successfully arranged for accounts receivable financing conduits (sized at $125 million for Nevada Power and $75 million for Sierra Pacific Power) to provide for liquidity to replace their respective bank credit facilities, which both were due to expire Nov. 28, 2002.

Moody's said it currently believes that the accounts receivable conduits, together with cash balances on hand and ongoing cash flow should provide sufficient liquidity to meet the utilities' ongoing capital requirements over the near term.

The negative outlooks reflect questions including how Enron's claims will be dealt with by the courts; what future treatment by the Public Utilities Commission of Nevada will be provided in the utilities next round of deferred energy rate cases (November 2002 for Nevada Power and January 2003 for Sierra Pacific Power); what court rulings relating to appeals of the earlier deferred energy rate case decisions might be; what the outcome of the Federal Energy Regulatory Commission 206 complaint case might be; and the ability for the utilities to stay insulated from any further difficulties that their parent, Sierra Pacific Resources, might encounter.

Moody's said Sierra Pacific Resources remains on review because of ongoing concerns about its ability to address the $200 million of notes maturing on April 20, 2003.

Moody's cuts James Cable

Moody's Investors Service downgraded James Cable Partners, LP including lowering its $88 million 10.75% senior unsecured notes due 2004 to Ca from Caa2. The outlook is stable.

Moody's said it lowered James Cable because of the company's lingering operating underperformance and liquidity tightness, particularly as the February 2003 interest payment date approaches, and the correspondingly heightened risk of considerably diminished recovery prospects for bondholders given a default scenario coupled with both the existing status of company operations and current market conditions.

James Cable has experienced consistent declines in operating performance over the past year several years, but perhaps most meaningfully over the past year alone, as its subscriber base continues to experience steady churn to competing DBS satellite services, and margin erosion proceeds seemingly unabated as top line growth is unable to keep pace with programming and other cost increases, Moody's said.

At the same time, the company has now fully drawn down on its $30 million revolving credit facility, and remains in capital preservation mode as it attempts to make its upcoming interest payment, Moody's added. While the company may be able to just make its next coupon payment in February 2003, its liquidity will continue to be constrained without an additional source of financing.

The stable outlook reflects Moody's expectation that some value in excess of 10%-to-15% of principal outstanding will be realized and/or is financeable based on even distressed cash flow generating levels under a restructured and less leveraged balance sheet, and therefore that further downward rating revisions are not likely to occur or be necessary.

Moody's rates R.H. Donnelley's loan Ba3; notes B1; subordinated notes B2

Moody's Investors Service rated R.H. Donnelley Inc.'s $1.6 billion of senior secured bank facilities at Ba3, $300 million of senior notes at B1 and $450 million of senior subordinated notes at B2. The outlook is stable.

The ratings assignments follow the company's acquisition of the Sprint Publishing Assets (SPA), which will be financed through the bank and bond debt offerings and $200 million of cumulative convertible preferred stock contributed by Goldman Sachs Capital Partners.

Ratings reflect high leverage and thin interest coverage following the transaction, concerns regarding the operating history of SPA, issues affecting yellow page producers - such as modest growth opportunities, volatile paper prices, uncertainty within the telecom sector, competition from independent yellow page publishers, Internet directories, and other media for advertisers, in addition to some economic cyclicality - and the recent weakness in operating performance of DonTech (a partnership between Donnelley and SBC) due to the economic recession and increasing competition in some of its markets, Moody's said.

Ratings also consider SPA's market dominance, significant stability of the yellow page business versus other advertising-driven media, less direct competition, relatively high operating margins, fair amount of customer diversity and possible enhancement of the SPA operations, Moody's said.

The stable outlook reflects the expectation that Donnelley will be able to integrate SPA without much degradation in operating performance, Moody's said.

Pro forma for the acquisition, Debt-to-adjusted EBITDA will be close to 6 times, cash flow coverage will be about 2 times EBITDA-less CapEx-to-interest expense and retained free cash flow will be about 9%.

Moody's rates Rexnord loan B1, notes B3

Moody's Investors Service assigned a B3 rating to Rexnord Corp.'s proposed $225 million of senior subordinated notes due 2012 and a B1 rating to its proposed $75 million senior secured revolving credit facility due 2008 and $360 million senior secured term loan due 2009. The outlook is stable.

Moody's said the ratings reflect Rexnord's broad exposure to highly cyclical industrial end-markets, considerable fluctuations in its financial performance, significant debt leverage, moderate free cash flow generation, substantial goodwill and other intangible assets, and the challenging economic environment.

Positives include the company's strong position in a number of niche markets, established brands and customer relationships, high percentage of aftermarket replacement sales, the appointment of George Sherman (former CEO of Danaher Corp.) as non-executive chairman, the potential working capital improvement and cost-cutting opportunities, and the strong sponsorship and track record of The Carlyle Group, Moody's added.

Moody's said it assigned a stable outlook because it expects continued challenging operating environment in most of Rexnord's end-markets, offset by potential gains from its operating efficiency and cost-saving initiatives.

Rexnord has historically generated good margins, with EBITA margins of 18% and 17% in fiscal year 2000 and 2001, respectively, Moody's said. Due in large part to volume decreases as well as difficulties at the industrial chain business, the company's EBITA margins declined to 13% in fiscal 2002, a lower but still adequate level for an industrial company at the low point of a business cycle. However, Rexnord will be highly leveraged, with funded debt of approximately $585 million at closing, or 4.6 times adjusted last 12 month EBITDA (6 times on an EBITA basis). Funded debt would represent about 62% of total capitalization, or 81% of LTM (Sept. 30, 2002) sales.

S&P raises Dean Foods outlook

Standard & Poor's revised its outlook on Dean Foods Co. and Dean Holding Co. to stable from negative and confirmed their ratings including Dean Foods' senior secured debt at BB+, preferred stock at B+, Dean Holding's senior unsecured debt at BB- and Dean Capital Trust's preferred stock at B+.

S&P noted the two-notch difference between the corporate credit and senior secured debt ratings reflects the large amount of secured debt from by the $2.7 billion senior secured bank facility.

S&P said the outlook revision reflects Dean Foods' progress in integrating the old Dean Foods operations since the completion of the acquisition in December 2001.

Although there is still more to be done in integrating the two firms, the company is ahead of S&P's original expectations, the rating agency said.

In addition, the company has exceeded its original cost savings plans ($60 million in the first year and $120 million within the first three years) and now expects $100 million in the first year and $150 million within the first three years, S&P said.

S&P added that it expects Dean Foods will be acquisitive and will take advantage of consolidating trends in the dairy and related food industries. The combined company has the financial flexibility to pursue acquisitions in related industries under its revolving credit facility.

Dean Foods' financial profile is highly leveraged. EBITDA to interest (including preferred stock dividends as interest) is expected to remain in the 3.5 times to 4.0x range, S&P added. EBITDA margins of about 9% are expected to improve due to greater economies of scale, higher volume, improved efficiencies in both the company's processing and distribution systems, and continued cost-saving initiatives. The company's total debt plus preferred stock to EBITDA is expected to remain in the 3.5x to 4.0x range.

Moody's upgrades Home Interiors

Moody's Investors Service upgraded Home Interiors & Gifts, Inc. including raising its $150 million 10.25% senior subordinated notes due 2008 to Caa1 from Caa2. The outlook is positive. Moody's said the ratings on the previously existing secured bank credit facilities have been withdrawn pending rating of the new facilities.

Moody's said it upgraded Home Interiors in response to its improved financial flexibility; ability to finance growth and required amortization out of internally generated cash flow; and a return to margins more in line with historical performance.

Also supporting the ratings are refinements made to the displayer base, which has helped to increase retention and improve productivity of displayers; the company's long operating history; and the large amount of variable costs in its expense structure, Moody's added.

The ratings also reflect the expectation that the company will be able to comfortably meet its amortization requirements through internally generated cash flow but do not incorporate any further reductions.

However the company still has high leverage and its relatively thin asset coverage and faces the risk of sharp fluctuations in operating performance. The ratings also reflect the risk that the company will not continue to de-lever as rapidly, in light of recent transactions; increased inventory risk from adding permanent inventory to the system to combat shrink; and the risks and benefits associated with new systems implementations, previous new product launches, acquisitions and international expansion, Moody's said. Moody's also notes the amount of cash building on the balance sheet which may be used to make larger acquisitions than previously made by the company.

Moody's said the positive outlook reflects that Home Interiors' was able to improve its liquidity position and refinance its secured debt, which increased the overall financial flexibility of the company; extend term loan amortization; and add incremental debt which was used to increase cash balances. Home Interiors has good debt protection measures for the rating category and its positive operating momentum and Moody's expects the company can continue to improve these measures by sustaining improvements to margins and continued debt reduction.

Moody's confirms Hollywood Entertainment

Moody's Investors Service confirmed its ratings on Hollywood Entertainment, Inc. and kept the outlook at stable. Ratings affected include Hollywood Entertainment's $125 million term loan and $25 million revolving credit facility due 2004 at B1 and $250 million senior subordinated notes due 2004 at Caa1.

Moody's said Hollywood Entertainment's ratings are supported by good operating cash flow from Hollywood's sizable network of existing stores; top line and margin performance which have exceeded expectations since the February refinancing and equity issuance; satisfactory fixed charge coverage ratios for the rating category; good franchise value, demonstrated by customers' willingness to return to the stores once inventory levels rose; and long-term stability in the core video rental business.

Moody's does not believe changes in technology will be a material factor for video rental retailers over the next three to five years.

The ratings continue to reflect Hollywood's high effective leverage resulting from high rent levels; the use of cash to invest in incremental working capital and capex for new concepts, rather than accelerated debt reduction; increasing competition for the fast-growing Game Crazy concept from other retailers offering game trade and exchange options; increased cyclicality as a result of the growth of the game concept; and the upcoming maturity of the subordinated notes which will need to be refinanced in the near term, Moody's added.

Hollywood's large network of established stores generate a fair amount of positive cash flow before financing growth, but Hollywood's management has not demonstrated any intention to pay down debt more rapidly than the amortization schedule requires, Moody's said.

S&P rates Cummins loan, notes BB+

Standard & Poor's assigned a BB+ rating to Cummins Inc.'s new three-year $385 million senior secured credit facility and new $200 million senior notes due 2010. S&P also confirmed the company's existing ratings. The outlook is negative.

If market conditions remain depressed beyond current expectations, further stretching the financial profile, the ratings could be lowered, S&P said.

Proceeds from the new senior notes will be used to refinance near-term debt maturities, reduce outstanding borrowing on the company's revolving credit facility, and for general corporate purposes.

The ratings reflect Cummins' solid business positions within highly competitive and cyclical markets, combined with a somewhat aggressive financial profile, S&P said.

As of Sept. 30, 2002, total debt to EBITDA was around 3.3 times and funds from operations to total debt was around 19%, S&P said.

Cummins continues to focus on improving its cost structure by reducing excess overhead, consolidating facilities, and improving its global sourcing of components. These initiatives should help improve the company's financial performance in the longer term.

In the intermediate term, total debt to EBITDA is expected to be around 3x and funds from operations to total debt is expected to average about 20% to 25%, S&P added.

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