S&P raises some Rite Aid ratings, confirms others, rates loan BB

Standard & Poor's upgraded some of Rite Aid Corp.'s ratings, confirmed others and assigned a BB rating to its new $2 billion senior secured credit facility. S&P upgraded Rite Aid's corporate credit rating to B+ from B, senior secured credit facility to BB from BB- and second-lien secured notes to B+ from B-. S&P confirmed Rite Aid's senior unsecured debt at B- and Rite Aid Lease Management Co.'s preferred stock at CCC+. The outlook is stable.

S&P said the actions reflect Rite Aid's improved operating performance during the past three years and the strengthening of its balance sheet as a result of the company's $2.0 billion credit facility and the recent $360 million notes offering. The new capital structure lengthens significant maturities to 2008 and improves the company's liquidity.

The senior credit agreement is rated two notches higher than the corporate credit rating, reflecting the facility's collateral coverage of 1.6x, tight structure, and S&P's belief that Rite Aid's collateral is of high quality. The security interest in the collateral, coupled with the borrowing base limitation for amounts outstanding under the revolving credit facility, suggests very strong prospects for full recovery of principal.

The senior secured notes are rated the same as the corporate credit rating. The notes have subordinated guarantees from the assets guaranteeing the senior credit facility. S&P said it believes that there is enough intrinsic value in the collateral to indicate that prospects for significant recovery of principal are highly likely if a payment default were to occur.

The senior unsecured notes are rated two notches below the corporate credit rating, as S&P believes the notes are disadvantaged by the large portion of secured debt, relative to Rite Aid's total assets.

Rite Aid's ratings reflect the challenges the company faces in improving operations at its drug stores amidst intense competition. The ratings also reflect the company's significant debt burden and thin cash flow protection.

Although Rite Aid is a dominant player in the drug store chain industry, ranking third in terms of units, credit protection and profitability measures are weak due to previous management's poor execution of a rapid growth strategy, S&P said. The company's operating performance has been improving since fiscal 2000 due to strategies put in place by new management.

Rite Aid's recurring EBITDA margin increased to 7.6% in fiscal 2003 ended March 1, 2003 from 6.6% in fiscal 2002, and 4.0% in fiscal 2001, S&P said.

Credit protection measures have strengthened due to the improved operating results, S&P noted. EBITDA coverage of interest rose to 1.4x in fiscal 2003, up from 1.0x in fiscal 2001 and 0.4x in fiscal 2000. Nevertheless, leverage is high with total debt to EBITDA at 7.8x, so that any operating difficulties could quickly diminish credit protection measures.

Fitch cuts Northwestern

Fitch Ratings downgraded Northwestern Corp.'s including cutting its senior secured debt to BB from BBB-; senior unsecured notes and pollution control bonds to B+ from BB+ and trust preferred securities and preferred stock to B- from BB. The outlook remains negative.

Fitch said the action follows its review of Northwestern's current and prospective credit profile including the impact of pre-tax charges totaling $878.5 million recorded at year-end 2002.

The charges primarily relate to the impairment of goodwill at Northwestern'a two non-regulated businesses, Expanets and Blue Dot, and the discontinued operations of Cornerstone Propane Partners, LP.

Fitch also considered Northwestern's previously announced plans to dispose of its investments in Blue Dot and Expanets and focus on core electric and gas utility operations going forward.

The revised rating levels reflect the continued deterioration in Northwestern's credit profile combined with limited opportunities to reduce debt in the near future, Fitch said. Given the magnitude of the year-end 2002 asset writedowns and the disclosure of operational deficiencies at Expanets, Fitch believes that it will be less likely that Northwestern will generate material net cash proceeds from the sale of its non-regulated investments.

Although the performance of Northwestern's electric and gas utility division should remain stable, consolidated credit protection measures will remain extremely weak for the foreseeable future absent meaningful reduction in Northwestern's debt load. Fitch said it expects total debt to utility based EBITDA (including trust preferred securities) to remain in excess of 7.5 times over the next several years.

S&P cuts H&E

Standard & Poor's downgraded H&E Equipment Services LLC removed it from CreditWatch with negative implications and assigned a negative outlook. Ratings lowered include H&E's $150 million revolving credit facility due 2007, cut to BB- from BB, and $200 million 11.125% secured notes due 2012, cut to B- from B.

S&P said the downgrade reflects H&E's weaker-than-expected performance, stemming from weak operating conditions in construction and industrial markets in the U.S. Because of the prolonged slowdown in the construction industry the company appears unlikely to delever in the near-term to meet S&P's previous expectations.

Demand for rental equipment slowed considerably beginning in 2001 and continues into 2003 because of declines in construction spending and excess rental equipment, S&P said. In a key end-market, non-residential construction, spending declined 16% in 2002, with a more modest decline likely in 2003. The equipment-rental industry will remain challenging through 2003, with near-term rental revenue expected to remain relatively flat. Longer term, growth is possible from the continued outsourcing trends and efforts by customers to reduce fixed-capital investments.

Combined sales for H&E were off by 16% in 2002, compared with the prior year, mainly because of declines in new and used equipment sales, while revenues for equipment rentals were off by 4%, S&P said. Weakness in the Gulf Coast region due to reduced petrochemical spending and the slowdown in new and used equipment sales, especially cranes, accounted for the decline. EBITDA for the company on a combined basis for the 12 months ended Dec. 31, 2002, was $80 million, or 14% below comparable 2001 EBITDA.

As a result of the 2002 merger, H&E Equipment is highly leveraged, with total debt to EBITDA at about 4.7x (based on S&P's operating lease adjustment) on a pro forma combined basis as of Dec. 31, 2002, S&P said. EBITDA interest coverage is 1.8x (based on S&P's operating lease adjustment).

Moody's rates Jafra notes B3, loan B1

Moody's Investors Service assigned a B3 rating to the $175 million senior subordinated notes and a B1 rating to the $100 million senior secured credit facilities of Distribuidora Comercial Jafra, SA de CV and Jafra Cosmetics International, Inc. The outlook remains positive.

Moody's said the ratings reflect the significant increase in leverage that will result from the proposed recapitalization but also incorporate the company's proven ability to reduce debt, its continued progress in implementing merchandising initiatives that have resulted in strong organic growth and its plans to focus exclusively on its profitable core operating markets.

Proceeds from the new term loan and subordinated notes will be used, along with $22 million of cash balances, to fund a $154 million distribution to affiliates of equity sponsor Clayton, Dubilier & Rice and to repay Jafra's existing bank credit facilities and senior subordinated notes, currently rated B1 and B3, respectively.

As a result of the transaction, Jafra's leverage will increase from around 1.2x debt to EBITDA at December 2002 to 3.3x on a pro forma basis, Moody's said.

The ratings recognize the material increase in debt without any change in enterprise value, but also recognizes the limits that the leverage places on the company making material strategic changes until debt has been significantly paid down, Moody's said. Jafra's ratings were historically constrained relative to its credit statistics by the risk, in Moody's view, that the company might make significant changes in its strategic direction that could have altered the size or scope of its business.

The positive ratings outlook reflects Moody's expectation that Jafra's current operating strategies will enable the company to sustain current performance levels and to reduce debt, Moody's added. Plans to exit unprofitable operations in South America and Thailand, to further internet-based purchases, and to continue its successful bifurcated U.S. marketing efforts are anticipated to support cash flows despite increased currency volatility and capital expenditures relative to recent years.

Fitch confirms CMS, off watch

Fitch Ratings confirmed CMS Energy Corp. and its primary subsidiary, Consumers Energy Co. and removed the ratings from Rating Watch Negative. Ratings affected include CMS' senior unsecured debt at B+ and preferred stock and trust preferred securities at CCC+ and Consumers Energy's senior secured debt at BB+, senior unsecured debt at BB and preferred stock and trust preferred securities at B. Fitch also assigned a senior secured rating of BB- to CMS' $925 million of secured bank facilities. The outlook for CMS is negative and stable for Consumers Energy.

Fitch said the confirmations follow recent positive actions taken by CMS to improve its liquidity and business position. These include a definitive agreement to sell the Panhandle Companies to Southern Union Co. for $1.828 billion, the successful refinancing of $1.465 billion of bank facilities and the release of audited annual financial restatements.

Importantly, the bank agreements reduce near-term liquidity pressures on CMS, and should enable the company to meet all its debt maturities through October 2004, Fitch said.

The negative outlook for CMS takes into consideration the continuing uncertainty surrounding the company's projected business strategy, Fitch added. CMS is reliant upon the timing and execution of its remaining asset sale program to pay down debt beyond the required maturities and improve credit metrics.

Although with the successful completion of the Panhandle transaction, as well as those domestic asset sales already announced and in an advanced stage of realization, CMS will have completed the bulk of its 2003 plan, the company still faces a difficult economic and market environment for the sale of its international assets, primarily in Latin America, the Middle East and Asia, slated for disposal by late 2004, Fitch said.

Additional rating concerns include the potential financial impact of ongoing regulatory and governmental investigations related to wash-trades conducted by CMS' trading business, which is in the process of wind-downing operations, in 2000-2001.

On a standalone basis, Consumers' credit profile is solid relative to the current ratings which reflect constraint due to ownership linkage to CMS, Fitch said. Despite an increasing investment burden over the next few years, the regulated utility benefits from more stable cash flows and electric and gas monopoly distribution franchises.

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