S&P cuts AK Steel

Standard & Poor's downgraded AK Steel Corp. including cutting its $250 million senior secured notes due 2004, $450 million 7.875% senior notes due 2009 and $550 million 7.75% senior unsecured notes due 2012 and Armco Inc.'s $150 million 9% senior notes due 2007 and $75 million 8.875% senior notes due 2008 to BB- from BB. The outlook is negative.

S&P said the downgrade reflects AK Steel's weakening financial profile resulting from its substantial and growing legacy liabilities (pension and retiree medical benefits) and concerns about the company's competitive position versus its main rivals who have shed significant legacy liabilities and obtained union agreements that reduce labor costs.

The ratings on AK Steel reflect its challenged business position as a mid-size, value-added, integrated steelmaker, with high exposure to the automotive market, and burdensome legacy costs, S&P added.

The company sells the majority of its products under multiyear contracts to automakers and appliance customers who demand high quality and specification for its product mix. This has served the company well over the past several years and has reduced the volatility in its earnings relative to its peers, S&P noted.

However, recent events within the U.S. steel industry will pose meaningful challenges to AK, including the re-emergence of idled steel capacity that continues to contribute to excess supply. Also, competitors International Steel Group Inc., which recently acquired Bethlehem Steel Corp. and LTV Corp., and United States Steel Corp., which recently won approval to acquire the assets of National Steel Corp., have reduced their overall cost profiles.

Through the bankruptcy process, the acquired entities shed their onerous legacy liabilities, which will lower these companies' costs relative to AK Steel. Both ISG and U.S. Steel have also obtained new agreements with their unions that include additional cost savings from headcount reductions and shared benefit expenses.

Unless it obtains a similar agreement with its unions in the near term, AK Steel will have an uncompetitive cost position compared with these major competitors, S&P said. Although it will likely take some time for the competition to integrate operations, increase value-added production, and achieve qualified status with key automakers (specifically ISG), competition in these markets is likely to intensify as competitors are likely to use their lower cost structures to underbid AK in an effort take market share.

S&P rates Royal Caribbean notes BB+

Standard & Poor's assigned a BB+ rating to Royal Caribbean Cruises Ltd.'s new $250 million senior notes due 2010 and confirmed its existing ratings including its senior unsecured debt at BB+. The outlook is negative.

S&P said Royal Caribbean's ratings reflect its position as the world's second largest cruise company, its strong brands, a relatively young and high-quality fleet of ships, and an experienced management team.

These factors are offset by high debt leverage for the rating, a difficult operating environment resulting from slow economic growth, and challenges associated with the absorption of increased industry capacity over the intermediate term.

The cruise industry recovered well in 2002 after the September 2001 terrorist attacks, despite the slow economy. Royal Caribbean experienced 9% growth in revenue during 2002, driven by a 15% increase in ship capacity. EBITDA increased by 18% during the year.

However, beginning in the fourth quarter of 2002, cruise bookings began to slow, partially stemming from concerns about global political events. Bookings remained soft throughout the first quarter due to the war in Iraq and slow economic growth. While some improvement is expected now that the war has ended, S&P said it believes that the weak economic environment will limit the pace of improvement in the near term.

During its first quarter ended March 31, 2003, RCL reported 10% growth in revenue driven by an 11.5% increase in ship capacity. Net revenue yields rose by 3.9% during this period. EBITDA increased only modestly, by 4%, due to higher operating costs (primarily fuel and insurance).

Still, given relatively flat debt levels, total debt to EBITDA (adjusted for operating leases) improved slightly to 6.3x from 6.4x at Dec. 31, 2002, S&P said. While this level remains weak for the ratings, S&P said it expects Royal Caribbean's credit measures will improve meaningfully beyond the second quarter of 2004, when the company's current fleet expansion program comes to an end.

Moody's rates Royal Caribbean notes Ba2

Moody's Investors Service assigned a Ba2 rating to Royal Caribbean's $250 million senior unsecured notes and confirmed its senior unsecured debt at Ba2. The outlook is stable.

Moody's said the confirmation and stable rating outlook reflect its expectation that Royal Caribbean's leverage will begin to decline in 2003 due to growth in earnings primarily from capacity expansion, that recent weakness in cruise pricing due to geo-political event risk will stabilized over the next few quarters, and that the company has sufficient liquidity to meet its capital spending, and dividend requirements.

If the industry pricing environment does not stabilize, and begin to improve and results in the company's borrowing needs increasing faster than its growth in earnings, the rating outlook could be pressured.

Royal Caribbean's ratings reflect the company's increased scale, its strong market position in the volume and premium segments of the cruise industry, and its brand equity, as well as the company's sensitivity to consumer spending and economic downturns, Moody's said.

The cruise industry had been negatively impacted by the war in Iraq that has caused a weak price environment to worsen; however, Moody's expects that with cessation of military action in Iraq, cruise pricing will begin to stabilize. Moody's notes, however, that industry pricing is still below peak levels reached in 1999.

Given continued industry wide capacity expansion, a weak economy, as well as geo-political event risk, Moody's expects that the operating environment of the industry will remain challenging. Additionally, the booking window has narrowed, limiting earnings visibility for 2003.

Royal Caribbean is nearing the end of its aggressive ship building program that commenced several years ago and Moody's expects leverage (net debt/EBITDA) which peaked in 2002 at approximately 6.5x, to begin improving in 2003 and beyond.

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