S&P cuts Tenet to junk

Standard & Poor's downgraded Tenet Healthcare Corp. to junk including cutting its senior unsecured debt to BB from BBB-. The outlook is negative.

S&P said the downgrade reflects weaker profitability and cash flow expectations at Tenet. These issues, in addition to a growing list of other concerns of uncertain magnitude, has resulted in a credit profile more reflective of a speculative-grade rating.

A key factor contributing to Tenet's weaker profitability is a major change in its managed care pricing, S&P said. Tenet is renegotiating many contracts after previously employing aggressive pricing practices. This is resulting in far weaker pricing trends, including actual reductions in certain cases.

The weak trend will likely continue for the next couple of years as contracts are renegotiated on an ongoing basis. Subsequent rate increases will also probably be smaller than in the past. In addition, weak Medicaid reimbursement is also expected to affect future profitability.

These issues are occurring just as the company is experiencing significant ongoing cost pressures that have hurt margins. S&P said it is not certain that the company's announced cost-reduction efforts will successfully soften the impact of reduced revenue, due to the recent history of problems with management controls.

S&P said it expects that these issues will lead to a reduction in EBITDA coverage of interest expense to about 5x from 8x in 2002, and it is not expected that this measure will soon improve.

In addition, the company is currently subject to ongoing litigation and a formal SEC investigation. The rating anticipates that these items will linger, however the rating also assumes that there will not be a significant adverse judgment against the company in the near term.

S&P puts TECO on watch

Standard & Poor's put TECO Energy Inc. on CreditWatch negative including its senior unsecured debt at BB+ and preferred stock at BB.

S&P said the watch placement is in response to an IRS announcement creating potential complications related to the company's sale of interests in its synthetic fuel production facilities. The IRS announcement stated it will suspend issuing new Private Letter Rulings for plants producing synthetic fuels.

The CreditWatch listing for the TECO family reflects the uncertainties regarding the company's ability to sell interests in its synfuel production facilities to raise cash in order to halt the erosion of the company's weakened financial profile.

TECO has closed a sale that has a Private Letter Ruling as a condition of sale for a 49% interest in its synfuel production facilities and had anticipated selling an additional 40% interest in its facilities. The sale of these interests is expected to contribute about $70 million in cash flow in 2003 and $90 million to cash flow annually in 2004 through 2007. An unfavorable outcome, which either halts or significantly delays the sales or ultimately affects cash flow, could lead to lower credit ratings, S&P said.

TECO's ratings reflect continued exposure to power plant projects that are being severely affected by a weak power price environment, ongoing asset sale execution risk, and the paramount importance of continuing to execute planned strategic initiatives to arrest the company's weakening credit quality, S&P said. The company's attempt to refocus its business strategy to rationalize its merchant power exposure and focus primarily on its utility (about 70% of cash flow) and coal (about 20% of cash flow) businesses will create a lower-risk consolidated business mix that is expected to produce a steady cash flow stream.

Ratings are dependent on the company completing potential asset sales (synfuel production facilities, TECO Transport, the Hardee power station, Guatemalan assets, and other assets) to reduce debt leverage, S&P said. Absent such sales and the ability to achieve capital spending reductions, TECO may need to externally finance its obligations, which could further negatively affect the company's credit quality.

S&P upgrades Chesapeake Energy, rates loan BBB-

Standard & Poor's upgraded Chesapeake Energy Corp. including raising its senior notes to BB- from B+, convertible preferred stock to B- from CCC+ and assigned a BBB- rating to its new $350 million revolving credit facility due 2007. The outlook is stable.

S&P said it upgraded Chesapeake in response to deleveraging achieved through management's decision to finance acquisitions during the past year to a significant degree with common equity and securities with high equity content, which helps to improve the company's financial profile to a level consistent with a BB- rating; management's decision to exploit high natural gas prices to materially hedge 2003 and 2004 production at attractive prices, reducing the company's commodity risk exposure; expectations for improved natural gas fundamentals (and hence strong cash flow for Chesapeake and other industry participants) over the intermediate term as a result of supply constraints and continue demand growth; good liquidity as a result of light debt maturities until 2011.

S&P noted that ratings stability depends on Chesapeake maintaining a stable capital structure. Following recent acquisition activity (the purchase of $220 million of Midcontinent properties that include Oxley Petroleum Corp.), Chesapeake has limited flexibility at the BB- rating level for acquisitions that further increase the company's debt leverage.

S&P said the rating on the bank credit facility is three notches above the corporate credit rating because of the high probability for recovery of all principal and accrued interest if Chesapeake were to default on its obligations.

Despite its improvement in book leverage and likely strong near-term financial measures due to cyclical peak pricing, Chesapeake's unhedged, midcycle metrics remain weak. S&P said it expects that Chesapeake's total debt to EBITDA will fall to approximately 2.0x in 2003 (as a result of peak commodity pricing) and deteriorate to about 4.0x in 2004, assuming the company's most recently posted hedge position and NYMEX prices of $3.00 per million Btu for natural gas and $20 per barrel of oil.

Moody's rates U.S. Can notes B3

Moody's Investors Service assigned a B3 rating to United States Can Co.'s proposed $125 million second lien notes due 2010 and a B2 to its $25 million tranche C first lien credit facility maturing 2006, confirmed its existing ratings including its $175 million 12.375% senior subordinated notes due 2010 at Caa1 and $284 million first lien credit facility maturing 2006 at B2 and maintained a negative outlook.

Moody's said the ratings reflect high financial leverage and weak free cash flow primarily resulting from continued operating difficulties throughout the European businesses which overshadow the realization of benefits from cost containment initiatives and improvements in the domestic aerosol business.

The ratings incorporate enhanced liquidity pro forma for the recently closed bank amendment, the proposed secured note issuance and the subsequent use of proceeds to permanently reduce term debt and to pay down revolver outstandings.

The negative ratings outlook reflects the absence of cushion under existing credit statistics for deterioration in financials at the current ratings levels.

The ratings continue to reflect the severe impairment of U.S. Can's balance sheet, the absence of operating stability due primarily to prolonged restructuring efforts and the ever-present challenges inherent in its core businesses (i.e. susceptibility to rising steel and resin costs, price competition, legacy pension expenses associated with plant closings, and product mix issues) - all of which continue to pressure margins and profitability, Moody's said.

The ratings reflect Moody's expectation of modest improvement in financials achieved through continued cost rationalization, further business restructurings and to a lesser extent, price increases and/or better volume.

Pro forma for the proposed transactions for the 12 months to March 31, 2003, financial leverage is high with total debt of approximately $549 million to EBITDA of approximately $84 million at 6.6 times, Moody's said.

S&P keeps Frontier Oil on watch

Standard & Poor's said Frontier Oil Corp. remains on CreditWatch positive including its senior unsecured debt at B.

After the merger between Frontier and Holly Corp. is completed, expected in August, the corporate credit rating will be raised to BB- from B+, the senior unsecured debt to BB- from B and all ratings will be removed from CreditWatch.

S&P said the upgrade will reflect the improved diversity of operations (three new refineries and related markets), likely cost savings and other synergies resulting from a larger refinery network without jeopardizing Frontier's "small refinery" status, and a strengthened financial profile.

These credit strengths are tempered by aggressive debt leverage, a management team that is likely to pursue additional acquisitions, high capital expense requirements and the volatile, cyclical, and fiercely competitive nature of earnings in the refining and marketing sector.

The senior unsecured debt will be increased two notches due to the elimination of cash flow restrictions that existed in Frontier's old credit facility, S&P said. The new credit facility will allow cash to move freely between the operating subsidiaries and parent, as well as the ability to have upstream and downstream guarantees.

Frontier's financial profile should improve at both the top and bottom of the refining cycle from the addition of Holly's refineries, although still remaining aggressively indebted. S&P said it expects that Frontier's lease-adjusted debt leverage will fall to 55% by year's end from 63% at March 31, 2003, largely due to the Holly transaction. S&P expects that Frontier's EBIT interest coverage will be between 1.5x and 2.5x, while EBITDA interest coverage should average between 2.5x to 3.5x. (The low end of each range reflects the assumption of 2002 margins, with the upper-range midcycle margins. As a result of prudent acquisition prices, Frontier remains remarkably profitable even at the bottom of an industry cycle.)

If Frontier executes planned debt reduction, S&P said it believes that midcycle EBIT and EBITDA interest coverage could improve to 3x and 4.5x, respectively.

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