Moody's lowers Smithfield outlook

Moody's Investors Service lowered its outlook on Smithfield Foods Inc. to negative from stable and confirmed its existing ratings including its $300 million 8% senior unsecured notes due 2009 at Ba2 and $200 million 7.625% senior subordinated notes due 2008 at Ba3.

Moody's said the outlook change reflects a weaker and longer hog market down-cycle than expected, as well as an over-supply of competing proteins in the market, which has pressured fresh meat prices.

As a result, Smithfield's earnings are materially lower than expected, the company has increased reliance on its revolving credit facility to fund capex and bridge shortfalls in operating cash flow, and its financial leverage is at a level that is quite high for the rating, Moody's said.

The negative outlook reflects uncertainty about the pace and extent of recovery in hog and fresh meat markets, and Smithfield's consequent ability to restore financial measurements to more appropriate levels for the rating over the near term. The outlook also incorporates potential acquisition event risk relating to Smithfield's interest in acquiring Farmland's pork business.

At present, leverage measures are cyclically high (total debt/LTM EBITDA of 5.1x) , and coverage cyclically low (LTM EBIT/interest of 1.7x), Moody's said.

S&P puts Quintiles on watch

Standard & Poor's put Quintiles Transnational Corp. on CreditWatch with negative implications including its corporate credit at BBB-.

S&P said the action follows Quintiles' agreement to be sold to a group headed by its chairman and founder for about $1.7 billion.

This largely debt-financed transaction weakens lease-adjusted credit measures dramatically, with total debt to EBITDA rising to 4.7x from 1.0x and funds from operations to total debt falling to 17% from 85%, S&P said. Accordingly, the rating could fall into the B category. Alternatively, if the entire transaction is funded privately, the rating could be withdrawn.

Fitch raises Yum! outlook

Fitch Ratings raised its outlook on Yum! Brands, Inc. to positive and confirmed its senior unsecured notes and unsecured $1.2 billion bank credit facility at BB+.

Fitch said the confirmation reflects Yum's steady operating performance, continued growth in international markets, and stable leverage.

The outlook change reflects the expectation for continued success with Yum's multibranding initiative, and for improved leverage as debt levels are reduced from cash flow.

Same-store sales in the U.S. grew 2% on a blended basis in 2002 (not including Long John Silver's and A&W). Taco Bell had the strongest same-store sales of all Yum's brands in 2002. The first quarter of 2003 was slightly negative, but this is compared to 8% growth in the same quarter in 2001, Fitch noted.

Same-store sales have declined at KFC for the past two quarters due to a challenging comparison with the prior year and minimal promotional news. The intensified competition in the pizza category has also caused same-store sales to decline at Pizza Hut in the first quarter of 2003. Internationally, Yum should continue to generate good growth from its expansion of KFC and Pizza Hut in markets such as the U.K., China, Korea and Mexico.

Yum has generated solid performance to-date from multibranding with recently-acquired Yorkshire BrandsGlobal Restaurants' Long John Silver's and A&W restaurants. In 2002, almost half of Yum's multibranding included one of these two brands and Fitch said it expects this number to increase significantly in 2003. The continuation of multibranding is an important component of Yum's strategy for the saturated and highly competitive U.S. market. Given the strong initial results, Fitch expects Yum will be able to sustain modest same-store sales growth in the near-to-immediate term

Financial leverage was steady in 2002 despite the cash acquisition of Yorkshire for $320 million. Adjusted leverage (defined as debt plus eight times rent divided by EBITDA plus rent) remained at 3.0 times in 2002, the same as in 2001. Fitch expects leverage will decline in 2003, as free cash flow is directed toward a mix of debt reduction and share repurchases, Fitch said.

Moody's lowers Bluewater outlook

Moody's Investors Service lowered its outlook on Bluewater Finance Ltd. to negative from stable affecting its $260 million 10.25% senior notes due 2012 at B1 and $600 million amortizing RCF syndicated loan due 2009 at Ba1.

Moody's said it revised Bluewater's outlook because of the considerable topside conversion capex overrun on company's Glas Dowr vessel and the uncertainties the company still faces in ensuring the vessel becomes fully operational in the coming months, the delay in cash flows from the estimated six-month delay in bringing the vessel on contract, the uncertainty surrounding the redeployment of one of the company's other four operational FPSO's, the Munin, which is expected to be out of contract within the next 12 months and the potential capex spend and down time required to re-conform this vessel to match any new contract specifications.

However as positives Moody's mentioned the successful operational deployment of the Glas Dowr (which has now left the South African construction yard and has been safely moored at its contracted field) by the end of June 2003, the steep improvement (which is a dynamic of the FPSO industry) in the company's cash flow in the second half of 2003 as a result of the Glas Dowr's contracted daily rate income adding to the revenues generated by the company's other vessels, the de-leveraging of the company's debt levels in the second half of 2003, to levels at the end of 2003 somewhat below those at the end of 2002, the release of details of the successful re-contracting of the Munin vessel, with acceptable estimated capex level requirements.

S&P raises American Greetings outlook

Standard & Poor's raised its outlook on American Greetings Corp. to stable from negative and confirmed its ratings including its senior secured debt at BBB- and subordinated debt at BB+.

S&P said the outlook change reflects American Greetings' significantly improved liquidity position and planned near-term strengthening of the capital structure.

Revenues have been adversely affected by store losses resulting from account losses and store closings, as well as the soft retail climate, S&P noted. However, earnings and cash flow have improved, reflecting American Greetings' major restructuring and other actions implemented during the fiscal year ended February 2002 and ongoing productivity and cost initiatives.

During this past fiscal 2003, the company also funded its $143 million corporate-owned life insurance net tax liability. Cash at February 2003 was $208 million, up from $101 million a year earlier, S&P said. As a result of this cash position, American Greetings will be repaying its outstanding $118 million term loan B in this current fiscal 2004 first quarter.

Adjusted for operating leases, debt to EBITDA is in the low-3x area and EBITDA to interest in the mid-3x area, S&P said. Pro forma for the term loan repayment, debt to EBITDA is in the high-2x area. With capital expenditures at manageable levels, the company generates meaningful levels of free operating cash flow and is expected to continue to build its cash balances.

Fitch raises Rogers Wireless outlook

Fitch Ratings raised its outlook on Rogers Wireless Inc. to stable from negative. Fitch rates Rogers Wireless' senior secured debt at BBB- and senior subordinated debt at BB.

Fitch said the stable outlook reflects its view that favorable financial and operating trends will continue over the near future based on the positive momentum created from the solid operating results in 2002.

Moreover, Rogers Wireless'credit protection measures strengthened considerably during 2002, better than initial expectations, with debt-to-EBITDA of 4.7 times compared with 5.9x in 2001, Fitch said.

Rogers Wireless maintains a solid liquidity position with only $149 million drawn on a $700 million revolver at the end of 2002. Rogers Wireless' has additional financial flexibility with the potential monetization of the Rogers campus building. Additionally, Rogers Wireless' does not have any debt maturing until 2006.

Fitch's said it expects Rogers Wireless to improve credit protection measures further in 2003, with debt-to-EBITDA approximating 4.0x. With the expected increase in cash flow and the reduced capital spending in 2003, cash flow from operations less capex should improve by at least $200 million over 2002 and potentially achieve a break-even result, absent any considerations from working capital changes.

Fitch cuts Goodyear, rates loan B+

Fitch Ratings downgraded the senior unsecured debt of The Goodyear Tire & Rubber Co. to B from B+ and assigned a rating of B+ to its senior secured bank facilities. The ratings were removed from Rating Watch Negative and a negative outlook assigned.

Fitch said the rating action is based on continued erosion of operating fundamentals in Goodyear's core North American Tire operations which continue to face major challenges, onerous pension obligations funding, and execution risk to the operating turn-around plan in the midst of weak industry demand and intense competition.

The downgrade of the senior unsecured debt also reflects the weaker position of unsecured creditors under the recent bank agreement which granted security interest to the bank creditors, Fitch added.

While cash holdings and the restructured financing arrangements afford near-term liquidity, lack of significant operating improvements in the next 9 to 15 months could jeopardize availability of these funding sources due to covenant violations, Fitch said.

With the restructuring and new financing arrangements, Goodyear replaces $2.9 billion of unsecured and receivables based financing arrangements with $3.3 billion of financing arrangements, all of which are secured. Of the various financial covenants and terms of the credit arrangements, Fitch said it believes that the 2.25:1 consolidated EBITDA-to-interest expense covenant is most vulnerable to violation in the forthcoming periods in light of expected operating challenges.

S&P lowers Central Garden outlook, rates loan BB+

Standard & Poor's assigned a BB+ to Central Garden & Pet Co.'s proposed $200 million senior secured credit facility, confirmed its existing ratings including its subordinated debt at B+ and revised the outlook to negative.

S&P said the outlook revision reflects concerns about Central Garden's increased debt levels, as well as the possibility that with its proposed refinancing and increased borrowing ability, Central Garden will pursue a more aggressive financial policy. The company's ratings could be lowered during the outlook period if it is unable to maintain EBITDA coverage of interest in the 3.0 to 3.5x range and total debt to EBITDA below 3.5x.

The bank loan is rated one notch higher than the corporate credit rating, S&P added. The facilities will be guaranteed by all of Central Garden's existing and future domestic subsidiaries, and secured by substantially all of the existing and future assets of Central Garden and its guarantors. As a result, lenders can expect to recover more than a typical unsecured creditor in the event of default or bankruptcy. If a payment default were to occur, S&P said it expects that the collateral value would be sufficient to fully cover the bank debt.

Moody's puts Kansas City Southern on review

Moody's Investors Service put Kansas City Southern Railway on review for possible downgrade including its senior unsecured notes at Ba2 and senior secured term loan at Ba1.

Moody's said the review was prompted by the railroad's ongoing weak operating performance, only breakeven free cash flow with high debt and the potentially significant funding requirement later in the year if the Government of Mexico exercises its put to KCS of shares it currently holds in TFM, Mexico's northeast freight railway.

Moody's said it is also concerned about any potentially negative developments affecting the value of KCS' minority investment in TFM given the liquidity problems at Grupo TMM. TMM is the controlling partner in TFM and has a significant bond maturing in May 2003.

Moody's cuts Ipalco

Moody's Investors Service downgraded Ipalco Enterprises, Inc. including cutting its senior secured debt to Ba1 from Baa1 and Indianapolis Power & Light's senior secured debt to Baa2 from A3 and preferred stock to Ba2 from Baa3. The outlook is stable. The action ends a review begun on Oct. 31, 2002.

Moody's said the downgrade reflects concern that the issuers could be adversely impacted by the credit weakness of Ipalco's owner, weak credit measures at Ipalco, and significant capital spending needs.

Moody's said it expects that certain key leverage measures at Ipalco will trend downward over the next several years as cash from operations is utilized for higher levels of capital spending mainly related to Indianapolis Power's environmental compliance.

Moody's notes Ipalco has made large dividend payments to AES Corp. in 2001 and 2002 and a high pay-out from funds available to shareholders after utility operating needs are met is likely to continue.

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