Moody's cuts R.J. Reynolds

Moody's Investors Service downgraded R.J. Reynolds Tobacco Holdings, Inc., affecting $1.8 billion of securities including its senior debt guaranteed by RJR Tobacco to Ba2 from Ba1, senior debt not guaranteed to B2 from Ba2 and Nabisco Group Holdings Corp.'s $98 million defeased junior debentures due 2047 to Baa2 from Baa1. The outlook remains negative.

Moody's said the downgrades were prompted by recently released second quarter 2003 results reflecting the effects of severe competitive pressures affecting RJR's performance.

For the first 6 months of 2003, excluding one-time items (a $55 million restructuring charge and a $54 million reserve reversal tied to a change in the return policy towards terms more favorable to RJR), operating income was at $275 million, 59% lower than the first 6 months of 2002.

The costs paid by RJR and other large manufacturers related to the settlement of past litigation with the states are significantly higher than the cash outlays required of smaller manufacturers, Moody's noted. This difference translates into a significant gap in retail prices, which has fueled the growth of a "deep-discount" segment to an approximate 10% share of the US cigarette market. While some data indicate a recent slowdown in the growth of the deep-discount segment, it is likely due to the significant additional promotional expenses incurred by Philip Morris, which have forced RJR to follow suit, resulting in a lowering of the company's net sales prices and strong pressure on its operating profit.

Also, RJR's sales volume dropped by 12% in the first six months of 2003. While some of this decrease may be attributable to normal in-store inventory fluctuations, most of this decrease could be related to consumption decrease driven by additional excise taxes passed by many states over 2002 and the first half of 2003; loss in market share; or a combination of both.

Moody's said it expects that the company will announce a comprehensive restructuring plan in the third or fourth quarter of 2003. While this plan is still being defined, Moody's believes that it is likely to be extensive and may lead to significant charges.

The downgrades further reflect the effects of rating triggers that in turn have caused the company to provide collateral. RJR's revolving credit facility is a $531 million line maturing in November 2004. This facility is now secured with all of the assets of the company and pledges of all subsidiary stocks.

Moody's raises Per-Se outlook, rates loan B

Moody's Investors Service assigned a B2 rating to Per-Se Technologies, Inc.'s $125 million guaranteed senior secured term loan B and $50 million revolving credit facility and revised its outlook to positive from stable. Existing ratings including its $175 million 9.5% guaranteed senior notes due 2005 at B3, were confirmed.

Moody's said the outlook change is due to the reduction in the company's debt level, as Per-Se applies the net proceeds of a recent divestiture and cash on hand to debt repayment, and Moody's expectation of modest future growth in its revenues and profitability.

The rating action also incorporates Moody's belief that Per-Se faces challenges in accelerating growth above a mid-single digit rate.

Per-Se intends to use the proceeds from the term loan B, together with cash on hand and the proceeds from its recent sale of its Patient1 division, to retire the $160 million outstanding under its $175 million 9.5% guaranteed senior notes due 2005.

The transaction will, in Moody's opinion, contribute to an immediate improvement in the company's credit metrics. EBITDAR-Capex/Interest Expense+Rental should rise from 1.6x for the 12 months ending in the second quarter of Q2003 to about 2.4x in 2003 and about 4.7x in 2004. Likewise, Total Debt+Rental/EBITDAR should fall from 4.2x for 12 months to the second quarter of 2003 to about 2.6x in 2003 and about 2.0 in 2004.

The bulk of the improvement will come from the reduction in debt levels and lower interest rates, Moody's said. Accelerated growth in revenues, which will flow through to stronger profits and cash flows, will be harder to achieve, in Moody's view.

Moody's rates Alaska Communications notes B2, loan Ba3

Moody's Investors Service assigned a B2 rating to Alaska Communications Systems Holdings, Inc.'s proposed $175 million senior unsecured notes and a Ba3 to its proposed $50 million senior secured revolving credit facility due 2008 and $200 million senior secured tranche B term loan due 2010. The existing loan was confirmed at B1 and the existing $150 million senior subordinated notes due 2009 confirmed at B3. The outlook is negative.

The rating reflects the company's significant leverage, its slow top line growth, the concentration of its business in a relatively small and isolated geographic market, and the competitive pressure that continues to seriously erode Alaska Communications' retail access line count, Moody's said. Ratings are supported, however, by Alaska Communications' incumbent strength, the dependability of its state-regulated local service revenues, and the contribution of its wireless business.

At the end of June 2003, pro-forma for the proposed financings, the company recorded total liquidity of $154 million, including cash of $104 million and undrawn revolver availability estimated at $50 million. In Moody's opinion, these liquid resources supplement Alaska Communications' negative free cash flow to produce adequate near-term liquidity.

The proposed credit facilities are notched above the senior implied rating in recognition of the superior asset protection metrics afforded to senior secured debt holders. The senior unsecured notes are notched below the senior implied rating in recognition of their effective subordination to a substantial amount of senior secured debt, but also in consideration of its senior ranking to the existing Alaska Communications subordinated debt.

Although Alaska Communications significantly deleveraged its balance sheet from the proceeds of the May 2003 IPO of its directory business, it is expected to increase its total leverage to slightly over 5 times following the proposed refinancing, with a gradual reduction thereafter. However, this increase in leverage is largely offset by a substantial build up of Alaska Communications' cash balances. Adjusting for cash on hand, net leverage increases to 3.9 times from 3.8 times following the proposed refinancing, Moody's said.

Post-closing, Alaska Communications' cash balances are expected to increase to very high levels. Although this provides support to Alaska Communications' liquidity position, the rationale for such a large cash position prompts Moody's to question the likelihood of a significant acquisition or restricted payment in the near future. Ratings would likely be pressured, and could be downgraded, if Alaska Communications depletes its liquid resources or weakens its credit protection metrics through a significant cash deployment.

The negative outlook continues to incorporate Moody's ongoing concern regarding competitive pressure in Alaska, and the regulatory environment which has forced the company to provide unbundled network loops to its competitors at what management deems to be uneconomic rates.

Moody's cuts Interpool

Moody's Investors Service downgraded Interpool, Inc. and affiliates including cutting its senior unsecured debt to B1 from Ba3 and left the ratings on review for possible further downgrade.

Moody's said the actions follows Interpool's announcement on July 18 that it would further delay the release of its audited financial statements for 2002 , as well as its restatements for the 2001 and 2000 financial years, and quarterly reports for the periods ended March 31 and June 30, 2003.

At the same time, Interpool announced that a special outside counsel had been engaged by the company's audit committee to conduct an inquiry into the causes of the incorrect accounting treatment that required the restatement of past financial results.

Moody's said its action is prompted by concerns regarding Interpool's ability to complete its restatements in time to avoid a default under the covenants governing its financing facilities.

As a result of the delayed filing of its 2002 audited results, absent the waiver of the extension of the time to file, Interpool would have been technically in default of covenants governing the filing of timely audited financial statements with its financing agreements. The company has, however, obtained extensions from its lenders to its existing waivers to prevent the default that would have arisen from Interpool's failure to release its audited 2002 annual results on time. The previous waivers given by these lenders expired on July 31, 2003. A covenant default of the kind that nearly occurred could have led to the cross default of a number of Interpool's debt obligations.

Although Interpool has announced that it expects to complete the restatement and to file its audited results by October 31, 2003, Moody's believes that some uncertainty still exists regarding the extent of the restatement and of the company's ability to complete the restatement within the anticipated timeframe.

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