S&P lowers Rhodia outlook

Standard & Poor's lowered its outlook on Rhodia SA to negative from stable and confirmed its ratings including its senior unsecured debt at BB and subordinated debt at BB-.

S&P said the revision follows poor second quarter results.

The group's financial leverage is still excessive at a time when the operating performance of Rhodia might continue to suffer from raw material price volatility and weak demand across key end markets, S&P added.

Over the past 12 months, ended June 30, 2003, Rhodia reported EBITDA (restated for divestitures and current foreign exchange rates) of €558 million (after restructuring expense of €30 million), which compares with net financial debt (including securitizations) of about €2.6 billion at June 30, 2003. In addition, the group's pension obligations were underfunded by more than €900 million at Dec. 31, 2002.

The group's financial performance in the third quarter will likely remain weak, S&P added. Although the group's average raw material costs should decrease in the near term, positive effects on operating margins are unlikely to be realized fully before the fourth quarter. In addition, there are currently no signs of an immediate improvement in the economic environment.

Moody's raises Philippine Long Distance outlook

Moody's Investors Service raised its outlook on Philippine Long Distance Telephone Co. to positive from stable and confirmed its ratings including its senior unsecured debt at Ba3 and preferred stock at B2.

Moody's said the revised outlook is based on continued improvements in the operating performance of Smart, the wholly owned cellular subsidiary of the company, and the financial and debt maturity profile of PLDT with on-going free cash flow expected to help repay debt maturities in the coming years.

Moody's said PLDT's rating reflect its position as a leading integrated telecommunications provider in the Philippines with significant market share and strong EBITDA margins.

It also reflects PLDT's improving financial profile on the back of a strengthening operating performance facilitating debt reduction and relatively lower capital expenditure spending as a result of the completion of its infrastructure build-out.

However, the ratings also reflect concerns over PLDT's high gearing level, exposure to Peso/dollar exchange rate movements and exposure to potential adverse political and regulatory developments in Philippines that could affect the revenue and competitive position of the company.

The strong operating performance is mainly driven by Smart, PLDT's operating performance in fixed line remaining flat. The growth in consolidated EBITDA by 12% to P25.3 billion in first half 2003 mainly stemmed from the strong growth in Smart, driven by an increased subscriber base.

PLDT continued to generate positive free cash flow (P10.3 billion in the first half of 2003) and has reduced a total of $165 million (P8.7 billion) debt in the first half of 2003 thanks to improving operating cash flows and reduced capex.

Moody's rates PGN notes B3

Moody's Investors Service assigned a B3 to the $200 million 10-year notes issued by PGN Euro Finance 2003 Ltd. and guaranteed by PT Perusahaan Gas Negara (PGN). The rating is on review for possible upgrade, in line with Indonesia's sovereign rating.

Moody's said the ratings reflect PGN's linkage to the Government of Indonesia, currently rated B3.

Moody's said that on a standalone basis PGN's solid operating and financial profiles support a higher rating.

Moody's noted that all PGN's current outstanding debt is soft loans borrowed by the Government of Indonesia from international credit agencies for on-lending to PGN, but these loans are not subject to cross default on Government of Indonesia's other debt obligations, therefore allowing PGN to be rated higher than the Government of Indonesia.

However, the Government of Indonesia's 100% ownership in PGN has in some ways capped the ratings of PGN.

S&P rates PGN B-

Standard & Poor's assigned a B- foreign currency long-term rating to PT Perusahaan Gas Negara (Persero) (PGN). The outlook is stable.

S&P said the ratings are constrained by those on the Republic of Indonesia (foreign currency B-/stable), reflecting among other things PGN's 100% ownership by the government and enshrined government policy role.

In addition, all of PGN's existing debt is onlent from the government and a substantial part of its business is regulated by a government institution, S&P said.

PGN's business faces risks from an uncertain regulatory environment related to its network transportation charges, which account for about 40% of gross profits. The regulatory framework has been undergoing changes with the establishment of BPH Migas as the new independent regulator.

The company's gas sales customer base is concentrated and the extent of prospective gas demand is uncertain. PGN's customers are primarily industrial users, whose demand is closely related to overall economic activity in a nation where the economy remains fragile, S&P said.

The underlying risk that demand will not increase consistently or rapidly is greater at present for PGN as it expands its networks massively, a project that will increase debt four times over the next five years, S&P said.

Supporting the ratings is PGN's strong market position in gas distribution and transmission, with both businesses being virtual monopolies, S&P said. Its long-term gas transmission contracts eliminate gas price risk and minimize gas volume risk.

The company's cash flow coverages are projected to be solid, with funds from operations projected to exceed 30% of debt in 2003 and 2004, S&P said.

Moody's rates Vale Overseas notes Ba2

Moody's Investors Service assigned a Ba2 foreign currency rating to Vale Overseas Ltd.'s $300 million note issue due 2013 guaranteed by Companhia Vale do Rio Doce. The outlook is stable.

Moody's said the rating reflects CVRD's strong operating profile, productive capacity, low cost position in its iron ore operations, its primary business segment and strong cash flow. Also considered in the rating are CVRD's strong niche positions in other metals and mining areas and favorable transportation logistics.

Offsetting factors to CVRD's strong fundamentals in its core iron ore operations include its leverage, currency exposure and a continued, although improving, complex organizational structure, Moody's said. The risks associated with CVRD's diversification into other metals, such as copper, and its ability to execute its diversification plans are also factors considered in the rating.

The stable outlook acknowledges CVRD's low cost production profile, competitive position in the global seaborne iron ore market, key niche positions in other markets, and strong cash flow generation. The fundamentals for iron ore prices in the 2003/2004 contract year are positive and recently concluded year-on-year contract negotiations have resulted in price increases.

Although CVRD's leverage, as measured by the debt/capital ratio of 47%, was down modestly at March 31, 2003 from the year-end 2002 position, it continues higher than prior years reflecting increased debt-financed investment and acquisition activity, Moody's said. Given the magnitude of CVRD's strategic investment plans over the next several years, Moody's does not expect to see a significant reduction in this ratio. CVRD's cash generation and strong cash position (US$1.3 billion at March 31, 2003) continue to be favorable factors.

Fitch rates Indianapolis Power & Light bonds BBB

Fitch Ratings assigned a BBB rating to Indianapolis Power & Light Company's new issue of $110 million of first mortgage bonds maturing in July 2013 and confirmed the company's existing ratings including its first mortgage bonds at BBB, senior unsecured debt at BBB- and preferred stock at BB+. The outlook is stable.

S&P cuts RFS/CNL Rose

Standard & Poor's downgraded RFS Hotel Investors Inc. - now known as CNL Rose Acquisition Corp. - including cutting CNL Rose Acquisition OP LP's $125 million 9.75% senior unsecured notes due 2012 to B- from B+. The outlook is negative.

S&P said the action reflects the weaker credit profile of CNL Rose following its purchase by CNL Hospitality primarily due to CNL Hospitality's plans to add up to $220 million of additional CMBS debt to CNL Rose's current capital structure.

The outlook is negative reflecting weak pro forma credit measures for the rating and the weak lodging environment.

CNL Hospitality financed the transaction with cash on hand, and borrowings under a secured bridge loan from Bank of America, S&P said. Following the closure of the transaction, CNL Rose plans to refinance its bridge loan with up to $220 million of CMBS debt. This debt will likely be supported by cash flows generated from assets held at or below the CNL Rose level. As a result, credit measures for CNL Rose are anticipated to weaken materially with debt leverage, as measured by total debt to EBITDA, increasing to the high-5x area.

On a pro forma consolidated basis, CNL Hospitality's credit measures will also weaken given that it financed a majority of the RFS acquisition with debt and has acquired several other assets recently, S&P added. While the overall business profile of the consolidated parent will be better than the business profile of CNL Rose, credit measures for the consolidated entity are not anticipated to be materially stronger.

In addition, CNL Hospitality has been very acquisitive over the past few years and S&P said it does not anticipate this strategy to change in the near term given the view that the lodging cycle is near the bottom.

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