S&P cuts Tenet

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

S&P said the downgrade reflects even weaker-than-expected profitability and, as a result, possibly weaker liquidity at Tenet. These issues, in addition to other rating concerns of yet undetermined magnitude, indicate a credit profile more reflective of the lower rating.

A key factor contributing to further declines in Tenet's profitability is a large increase in its bad debts, S&P noted. The company announced that it expects to take a charge of $200 million to $225 million to write down accounts receivable and it will incur $240 million to $290 million in additional bad debt expense.

Increasing bad debts is recognized as a growing issue in the hospital sector, one that is usually considered at some reasonable level in the ratings of other hospital companies. In Tenet's particular case, however, the bad debt expenses include receivables from managed-care companies, which may indicate that renegotiations between Tenet and these payors over pricing may be more severe than anticipated.

Although the portion of the write-off attributed to managed care is not large, and by itself would not be a concern, future earnings and cash flow may be weaker as the resultant "rebasing" of managed-care contracts rates may be lower than expected.

It is also unclear what impact the company's announced cost reduction efforts will have on operating results. EBITDA coverage of interest expense will likely fall to levels well below previous estimates of about 5x, S&P said.

Moreover, Tenet expects to need a bank amendment because the charge for accounts receivable, as well as weaker earnings, will likely result in a violation of its required 2.5x leverage ratio covenant.

S&P said it fully expects the company to attain an amendment. However, with lower near-term earnings, and more uncertainty regarding future prospects, leverage may very well increase to higher-than-anticipated levels. It is possible that even with an amended covenant, and despite the expected use of asset sales proceeds to repay debt, leverage may increase beyond previously anticipated levels.

In addition, the company is currently subject to ongoing litigation and a formal SEC investigation regarding its business practices, S&P said. The rating anticipates that these items will linger, possibly resulting in an adverse judgment against the company, but not in the near term.

S&P puts Allegheny Technologies on watch

Standard & Poor's put Allegheny Technologies Inc. on CreditWatch negative including its $300 million 8.375% senior unsecured notes due 2011 at BB and Allegheny Ludlum Corp.'s $150 million 6.95% debentures due 2025 at BB.

S&P said the action reflects Allegheny Technologies's continuing weak financial performance and heightened concerns that lackluster demand from key markets and increased global competitive pressures and high input (scrap, nickel and energy) costs will continue to more than offset management's efforts to improve its weak credit measures.

Allegheny is one of the largest specialty steel and alloy manufacturers in North America. The majority of its revenues are derived from its highly cyclical, commodity flat-rolled stainless steel products segment, which has been significantly affected by declining market demand because of the sluggish economic environment, S&P noted.

Conditions in this segment have been further exacerbated by the addition of new, lower-cost production that has contributed to excess supply levels and weakened Allegheny's competitive position.

In response to these challenging conditions management continues to implement plans to reduce its cost structure. The company also is re-evaluating its business segments, products and operating strategies in an attempt to bolster its market position and its profitability levels.

Despite these actions and without a meaningful rebound in the company's key industrial markets, S&P expects Allegheny will be challenged to realize significant improvement in its weak credit measures.

Moody's lowers Jack in the Box outlook

Moody's Investors Service lowered its outlook on Jack in the Box, Inc. to negative from stable and confirmed its ratings including its $350 million secured bank facility at Ba2 and $125 million 8 3/8% senior subordinated notes due 2008 at Ba3.

Moody's said the revision was prompted by the modest deterioration in average unit volumes, restaurant margins and lease-adjusted leverage over the previous six quarters as the competitive environment has intensified. The action also reflects the challenges in stabilizing financial measures while carrying out an extensive capital investment program.

While Jack in the Box restaurants achieve high average unit volumes and good cash flow margins, the ratings consider the declines in the company's previously stable operating and financial performance and the long-term pressures on the hamburger segment of the quick-service restaurant industry, Moody's said. Additionally, over the next several years the company intends to roll out the combination unit (combines a restaurant, a convenience store, and gas pumps), undertake an extensive store remodel program, rapidly grow the Qdoba fast casual concept and refranchise a meaningful fraction of company-operated stores.

The negative outlook reflects Moody's opinion that ratings will remain pressured until the company demonstrates the success of the new capital-intensive strategic initiatives, average unit volumes and restaurant margins at new and existing Jack in the Box stores improve, and the Qdoba concept meaningfully contributes to cash flow.

Debt protection measures, which had been very stable for several years, have mildly deteriorated over the past year. Fixed charge coverage slightly declined to 2.6 times for the 12 months ending July 2003 compared to 2.9 times in September 2002, lease adjusted leverage has modestly climbed to 4.2 times from 3.9 times, and return on assets (EBIT to Assets) has fallen to 13.1% from 15.4% over the same period, Moody's said.

Moody's rates O'Charley's notes Ba3, loan Ba1

Moody's Investors Service assigned a Ba3 rating to O'Charley's, Inc.'s proposed $125 million senior subordinated notes and a Ba1 rating to its proposed $125 million four-year secured revolving credit facility. The outlook is stable.

Moody's said that together with proceeds from the sale & leaseback of fee-owned real estate, the new debt will principally be used to retire the existing bank loan and to provide liquidity for a potential $25 million stock repurchase program.

While both O'Charley's and Ninety-Nine achieve above-average operating margins and have solid track records of developing new stores, the ratings recognize the larger scale of several national casual dining competitors and the company's expected use of most free cash flow for new store development.

Constraining the ratings are the projected use of almost all free cash flow for new store development, the degree of financial leverage (especially when adjusted for operating lease obligations), and the company's smaller scale relative to several other national casual dining chains, Moody's said.

However, the ratings recognize the medium-term scalability of the new store development program, a consistent history of opening profitable new stores, and the good margins and average unit volumes at both O'Charley's and Ninety-Nine. The success at maintaining good performance levels at Ninety-Nine following the January 2003 acquisition, the positive contribution to corporate overhead from all stores, and expectations for customer traffic increases at casual dining restaurants also benefit the ratings.

With restaurant EBITDAR margins of 24% and 27% at O'Charley's and Ninety-Nine, respectively, and average unit volumes of about $2.8 million at both concepts, the company's operations compare favorably with most casual dining peers. Pro forma for this financing transaction and for a full-year of the Ninety-Nine acquisition, lease adjusted debt will equal about 3.5 times EBITDAR and EBITDA likely will cover cash interest expense and net capital expenditures, Moody's said.

S&P says aaiPharma unchanged

Standard & Poor's said aaiPharma Inc.'s ratings are unchanged including its corporate credit at B+ with a stable outlook in response to the announcement that it intends to acquire four pain medications from Elan Corp. plc for $100 million in cash.

In 2002, the products generated $59.8 million in sales, though future sales are expected to decline in the near term due to generic competition.

aaiPharma's ratings already anticipate moderate-sized product acquisitions, which would be consistent with the company's current credit profile, S&P said.

S&P said Land O'Lakes unchanged

Standard & Poor's said Land O'Lakes Inc.'s ratings are unchanged including its corporate credit at B with a negative outlook after the company's announcement that it was lowering its full-year EBITDA forecast and that it would seek modest relief under its bank covenants.

The revised EBITDA forecast and the probability of bank covenant violations are factored into the current rating and outlook, S&P said.

Moody's puts Michael Foods on review

Moody's Investors Service put Michael Foods on review for possible downgrade including its $200 million 11¾% senior subordinated notes due 2011 at B2 and $100 million revolving credit facility maturing 2007, $61 million term loan A maturing 2007 and $204 million term loan B maturing 2007 at Ba3.

Moody's said the review follows the company's announcement that the current owners of Michael Foods have agreed to sell the company to Thomas H. Lee Partners for about $1.05 billion.

Moody's believes the transaction funding could result in leverage that may be high for the current rating.

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