Moody's cuts Union Carbide to junk

Moody's Investors Service downgraded Union Carbide Corp. to junk including cutting its senior unsecured debt to B1 from Baa2. The outlook is negative.

Moody's said the downgrade reflects the absence of a guarantee from Union Carbide's parent company The Dow Chemical Co., uncertainty over the financial impact of asbestos-related liabilities, lack of access to credit from any independent source and the substantial reduction in Carbide's operating assets.

The ratings incorporate limited support from Dow, a better and more diversified product portfolio than most olefin producers, the improving fundamental in several downstream ethylene derivative markets and the anticipation of increased dividends from its Equate and Optimal joint ventures, Moody's added. These ventures have access to low cost feedstocks and Optimal is well placed to take advantage of the tightening supply/demand balance for ethylene glycol in Asia.

The negative outlook reflects limited visibility with regard to the company's asbestos liabilities and the concern that lawsuits and settlement payments could significantly increase over the next few years, Moody's said. In addition, it reflects uncertainty over Dow's willingness to continue to support Carbide if these liabilities increase significantly or if insurance reimbursements fail to materialize.

Moody's believes that the size of Carbide's asbestos liability relative to its operating assets is a significant concern. While these liabilities are largely offset by a large insurance receivable, the lack of detailed information on the nature and terms of the insurance reimbursements raises uncertainty over the timing of cash receipts from insurance relative to settlement payments.

Moody's puts Dillard's on review

Moody's Investors Service put Dillard's, Inc. on review for possible downgrade including its senior unsecured debt at Ba2 and subordinated debt and trust preferreds at B2.

Moody's said the review is because of Dillard's inability to sustain the performance improvements gained during the last fiscal year.

Gross margins have been squeezed, as have those of other competitors, but inventory levels were still at undesirable levels through the end of the second quarter. Comparable-store performance through the current fiscal year has under-performed competitors, renewing concerns about Dillard's competitive position, Moody's added.

S&P takes Atlantic Coast off watch

Standard & Poor's removed Atlantic Coast Airlines Holdings Inc. from CreditWatch negative and confirmed its ratings including its corporate credit at B- and $23.333 million 8.75% passthrough certificates series 1997-1C due 2007 at B, $24.734 million 7.35% passthrough certificates series 1997-1B due 2011 at B+ and $57.714 million 7.2% passthrough certificates series 1997-A due 2014 at BBB-. The outlook is negative.

S&P said the confirmation is based on the agreement Atlantic Coast recently reached with United Air Lines Inc., its major airline partner, regarding 2003 fee-per-departure rates.

While the agreement eliminates uncertainty regarding how much Atlantic Coast will be paid by United over the near term, ratings on Atlantic Coast reflect the significant risks associated with its plan to end its relationship with United when that airline exits bankruptcy, and instead become a low-fare regional airline based at Washington Dulles Airport.

S&P added that Atlantic Coast's ratings reflect its relatively small size within the high-risk U.S. airline industry and substantial operating lease burden, mitigated to some extent by revenue stability that has been provided by fee-per-departure contracts with major airline partners.

The transition to a low-fare independent airline from a regional feeder airline for a large network carrier would entail significant risks, S&P noted. While the company does benefit from its large market presence at Dulles, where there is presently no low-fare competition, it could find itself competing against other low-fare carriers at relatively nearby airports (e.g. Southwest Airlines Co. at Baltimore), and potential replacement United Express partners at Dulles. In addition, there will be less stability in the company's revenues and cash flow than it enjoyed under the fee-per-departure agreement it had with United.

Moody's cuts Tembec

Moody's Investors Service downgraded Tembec Inc. including cutting its senior unsecured notes and debentures to Ba3 from Ba1. The outlook is negative.

Moody's said the downgrade is in response to Tembec's weakened performance as a result of low newsprint and lumber pricing, the adverse impact of a strengthened Canadian dollar on cash generation, and the limited prospects for a meaningful near-term recovery.

Factors supporting the rating include its diverse operations, recovering pricing trends in newsprint and lumber, adequate financial liquidity, and potential upside from consolidation of its lumber business. Tembec recently announced that it would contribute its lumber operations to a 50% owned joint venture, and will also acquire two additional sawmills. The anticipated synergies from these transactions total $40-50 million.

The ratings also consider Tembec's ability to generate substantially higher earnings and cashflow at the peak of a pricing cycle.

Tembec's financial performance is likely to remain under pressure from the effects of the strong Canadian dollar, weak newsprint prices and low lumber prices, Moody's said. Through the first nine months of fiscal 2003, EBITDA fell about 80% to $43 million and Moody's expects limited improvement in the fourth quarter.

Moody's notes that newsprint prices have increased over the course of 2003 and that in recent months lumber prices have recovered. However, for 2004, even with additional price increases and with the capture of anticipated synergies from the sawmill joint venture, EBITDA is not likely to exceed $200 million, leaving Tembec with leverage (TD/EBITDA) of about 9-10 times, and insufficient cash flow to fund interest expense of $150 million and capex ($110 million in 2003).

The negative outlook indicates that Tembec needs to generate substantial improvement in operating results and credit metrics to support the current rating, Moody's added.

Moody's cuts Desert Ridge

Moody's Investors Service downgraded Desert Ridge Resort, LLC's senior secured floating-rate notes due 2007 and 7.90% senior secured notes due 2007 to Ba1 from Baa3.

Moody's said the rating is based on the reinsurance agreement provided by Royal Indemnity Co. whose insurance financial strength rating was downgraded by Moody's to Ba1 on Sept. 4.

Moody's puts Atlantic Mutual on review

Moody's Investors Service put Atlantic Mutual Cos. on review for possible downgrade including its $100 million surplus notes due 2028 at Ba1.

Moody's said its review will evaluate the impact of possible reinsurance contract commutations under consideration by Atlantic Mutual. In addition, the longer-term implications of other actions under consideration by the company will be evaluated by the rating agency. These actions include possible capital-raising initiatives and placing some business into runoff.

With limited other capital sources, due to its mutual company form, beginning in 2001 Atlantic Mutual increased its reliance on reinsurance to support its capital base in the face of a prolonged soft market, losses from the terrorist attacks of Sept. 11, 2001 and deteriorating equity markets.

Atlantic Mutual is now considering unwinding some of these reinsurance contracts as part of a broader plan to replace soft capital with more permanent forms of capitalization. The reinsurance commutations, in isolation, would have the effect of reducing statutory surplus and related solvency ratios. However, the company is actively pursuing a number of strategic and operational initiatives whose purpose is to offset this capital depletion. These metrics have increased meaning for surplus note issuers because they can influence the decisions by insurance regulators about whether to permit the company to make interest payments on the notes, Moody's said.

But Moody's added that it expects Atlantic Mutual's NAIC risk-based capital ratios to remain strong.

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