S&P cuts MEPC, still on watch

Standard & Poor's downgraded MEPC Ltd. and kept it on CreditWatch negative including cutting its £150 million 12% bonds due 2006, £150 million 8.75% bonds due 2006 and £75 million 9.875% bonds due 2004 to BB- from BB and MEPC International Capital LP's $215 million 9.125% Quips series A to B- from B+.

S&P said the action follows a review concerning the company's weakening financial profile and announcement that there will be significant management changes.

MEPC's financial profile has been weakened by dividend payments and loans to the company's owners, S&P.

Four current directors of MEPC will retire from June 30, 2003, and will be replaced by representatives of Hermes. This creates uncertainty regarding MEPC's operational and financial strategies.

The ratings will remain on watch while a new business plan is prepared by the new management and is presented to S&P.

Fitch rates Gerdau B

Fitch Ratings assigned a B foreign-currency rating to Gerdau SA with a positive outlook and a BBB- local currency rating with a stable outlook.

Fitch said the investment-grade local currency rating of Gerdau is supported by the company's dominant market position in Brazil, its ability to generate strong cash flow throughout the price cycle for steel and its solid financial profile.

The foreign currency rating is constrained by Fitch's B rating of Brazil, which also has a positive outlook.

Gerdau operates 24 steel mills throughout Brazil, the United States, Canada, Chile, Uruguay, and Argentina. In Brazil, Gerdau is the leading producer of long steel products, with an estimated market share of approximately 48%. Brazil is the company's most important market, accounting for 57% of consolidated revenues and 79% of cash operating profits (EBITDA). The company's North American operations are less profitable, accounting for 38% of revenues and 16% of EBITDA.

Gerdau generated consolidated sales of BRL9.2 billion ($2.6 billion) and EBITDA of BRL2.1 billion ($740 million) during 2002, Fitch said. With total consolidated debt of BRL7.4 billion ($2.1 billion) and cash of BRL1.4 billion ($400 million) at the end of 2002, Gerdau's leverage, as measured by net debt-to-EBITDA, was 2.8 times.

During 2003, Fitch expects the company to generate about US$825 million of EBITDA on a consolidated basis. The increase vis-a-vis 2002 is expected to come from increased exports and higher average prices for exports, Fitch said.

Moody's raises Deutsche Telekom, Voicestream outlook

Moody's Investors Service raised its outlook on Deutsche Telekom AG, its guaranteed subsidiary Deutsche Telekom Finance BV and VoiceStream Wireless Corp. to positive from stable. Ratings affected include Deutsche Telekom and Deutsche Telekom Finance's long-term debt at Baa3 and VoiceStream's long-term debt at Ba3.

Moody's said the outlook changes are based on its view that Deutsche Telekom is successfully making significant steps to reduce its very high debt burden.

Moody's believes that Deutsche Telekom's management is committed to reducing cost and improving operating performance, whilst continuing to deliver growth from key operations including T-Mobile USA. The steps to successfully execute these objectives, together with ongoing asset sales, have been evidenced in the results of the past two quarters. While financial risk remains high for Deutsche Telekom, the evidence of recent results shows managements commitment to reduce debt. The improving performance of T-Mobile USA is helping to reduce the continuing negative cash flow impact this business has upon Deutsche Telekom.

Factoring pensions, as well as other off-balance sheet liabilities such as operating lease adjustments Moody's expects Deutsche Telekom's total pensions adjusted debt of approximately €87 billion at the end of 2002 to fall to circa €76 billion by the end of 2003.

Furthermore Moody's believes that this will be achieved by an improvement in underlying operating cash flow, in part due to a stronger than expected operating performance at T-Mobile USA (the second largest revenue contributor to T-Mobile after its domestic German operator), in the first quarter of 2003.

Moody's rates Avondale Mills notes B3

Moody's Investors Service assigned a B3 rating to Avondale Mills, Inc.'s proposed $150 million issue of senior subordinated notes due 2013 and confirmed the existing ratings of Avondale Mills and its parent company Avondale Inc. including Avondale Mills' $125 million 10.25% senior subordinated notes due 2006 at B3. The outlook remains stable.

Moody's said the ratings reflect the decrease in cash from operations, significant leverage on a free cash flow basis (defined as total debt, plus the off-balance sheet accounts receivable securitization program, to cash from operations less capital spending and dividends), weak though improving return on assets and a steady dividend program (currently at 8% of EBIT).

Moody's notes that lower selling prices and intensified foreign competition resulted in a sizable declines in Avondale's revenues over the last four years. Extraordinary declines in inventory in fiscal 2001, together with lower cost absorption from volume declines in the current period, contributed to a decline in the level of cash flow from operations in the trailing 12 month period.

However, the ratings are supported by the company's market position as a leading domestic, integrated supplier of apparel textiles, its improved product mix, and recent increase in profitability margins as a result of on-going cost control measures, internalization of yarn production and plant rationalization program initiated in fiscal 2002 which is contributing to improved EBIT return on average assets, Moody's said.

Further, the ratings reflect strong financial and operational management.

The stable outlook reflects Moody's opinion that Avondale's cost and operational rationalization programs should provide sufficient profit margins and cash levels in the near term.

Fitch rates MDM Bank notes B

Fitch Ratings assigned a B rating to MDM Bank OAO's $300 million program for the issuance of loan participation notes via Bayerische Hypo- und Vereinsbank AG.

Fitch also assigned a B rating to the debut $50 million 5.75% issue due June 24 under the program.

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