Moody's rates LifePoint convertible B3, raises outlook

Moody's assigned a B3 rating to LifePoint Hospitals Inc.'s $250 million of 4.5% convertible subordinated notes due 2009 and raised the outlook to positive from stable.

The ratings reflect moderate leverage and good coverage, limited competition and positive operating trends, Moody's said.

Offsetting factors include increased leverage following the convertible, a more aggressive acquisition strategy and the concentration of revenues within certain states and facilities.

The positive outlook reflects that despite the material increase in debt, Moody's believes LifePoint will keep leverage at moderate levels.

Moody's anticipates continued strong execution of its business strategy and positive performance will enable LifePoint to generate relatively good cash flow.

While cash flow will not be sufficient to fund maintenance capital expenditure, expansion projects and acquisitions, it will enable the company to contain the increase in debt.

If the company continues to perform as it has since its inception and keeps acquisition activity at a moderate level, the ratings may be upgraded within a year to two years.

Conversely, should the credit profile deteriorate materially from current levels, as a result of significant acquisitions, problems integrating and improving new facilities and/or an industry downturn, a downward revision to the outlook or ratings may be warranted.

As a result of the convertible, non-revolver debt will increase significantly, rising to $250 million from $150 million.

Based on last 12 months EBITDA of roughly $140 million at March 31, leverage will increase to about 1.8 times from 1.0 times.

EBITDA to interest coverage of 8.8 times for the last 12 months at March 31 will not change significantly given the low coupon payments on the new notes.

Moody's noted the company's credit metrics are strong for the given rating category.

However, Moody's had anticipated an increase in leverage given the acquisitive strategy and remain concerned that leverage may still increase.

While LifePoint has engaged in limited transactions in the past, Moody's believes the company will be more acquisitive going forward.

Operational issues faced upon its spin-off have been corrected and the company now has significant amounts of cash on hand, $170 million, and availability under its revolver, $200 million.

Moreover, as the company continues to grow, it will have to engage in larger or more numerous transactions to achieve the same percentage revenue growth.

Mitigating this concern, Moody's noted the company has thus far been successful in its strategy of acquiring and improving rural facilities that have not been performing up to the potential of the market.

Operating metrics have been positive at a majority of the company's hospitals.

As a result, LifePoint has experienced moderate growth in overall revenues, up 16% from Dec. 31 to March 31, 32% growth in EBITDA and 34% growth in cash flow.

At the same time, the company has managed to reduce leverage to 2.7 times from 1.0 times, in part due to its performance and in part due to a $100 million equity offering in 2001.

Additionally, Moody's said that while there are risks inherent in LifePoint's strategy, over time, the company will benefit from a more diversified revenue base.

Currently, a significant portion of its EBITDA is generated by several facilities.

S&P ups L-3 senior to BB-

Standard & Poor's raised the senior subordinated rating for L-3 Communications Corp. to BB- from B+ and the corporate credit rating to BB+ from BB after the defense company priced 14 million shares of common stock. The outlook is stable.

The estimated $880 million net proceeds from the sale, including the 15% greenshoe, plus a concurrent private placement of $750 million in subordinated notes, are expected to be used to refinance and pay down debt related to the recent $1.1 billion purchase of Raytheon Corp.'s aircraft integration services division.

That will improve the company's financial profile, S&P said.

L-3's total debt to equity will decline to under 50% from over 65% at March 31.

Ratings reflect a slightly below-average business risk profile and somewhat elevated debt levels, but credit quality benefits from an increasingly diverse program base and efficient operations.

Acquisitions are very important for revenue growth and the balance sheet has periodically become highly leveraged because of debt-financed transactions.

However, management has a good record of restoring financial flexibility by issuing equity.

The company's revenues have grown rapidly through numerous acquisitions and the latest positions it to better compete in the growing intelligence, surveillance and reconnaissance market.

Some well-supported programs, with a high percentage of sole-source contracts, mitigate exposure to a challenging competitive environment.

L-3 acquired most of AIS on March 11 for $1.1 billion cash.

That deal, which followed a series of smaller acquisitions in late 2001 and early 2002, substantially consumed L-3's debt capacity prior to the equity offering.

After the equity sale, L-3 will have the flexibility to pursue debt-financed acquisitions almost as large as AIS and will have over $400 million in cash and some $600 million in available borrowings under its credit facility.

The company's earnings in 2002 will benefit from the elimination of goodwill amortization due to recent changes in accounting rules.

L-3's satisfactory financial profile, bolstered by the recent equity offering, will allow it to continue to pursue moderate-sized debt-financed acquisitions. Revenue and profit growth is expected to continue due to further acquisitions and increased defense spending.

S&P cuts Terayon outlook to negative

Standard & Poor's revised its outlook on Terayon Communications Systems Inc. to negative from stable after Terayon warned of significantly lower revenues for the quarter ending June 2002 than previously expected.

S&P affirmed the B- corporate credit rating and CCC subordinated debt rating, including for the 5% convertible notes due 2007.

Terayon lowered its revenue expectations following a drop in sales of proprietary cable products. The company also faces cable modem pricing pressures and customer financial difficulties.

The ratings reflect significant industry competition, a concentrated customer base and long-term uncertainties regarding Terayon's ability to manage the industry's ongoing technology evolution.

The cable Internet access equipment industry is moving from proprietary to standardized products and the company faces large competitors such as Cisco Systems Inc. and Motorola Inc.

Terayon has not been successful in its attempts to make some key products qualify for new equipment standardization rules. The company is now largely focused on positioning its next-generation standardized products for market.

Revenues for the June 2002 quarter are expected to be between $21 million and $30 million, compared with $57 million in the March 2002 quarter.

Since the company's inception, it has failed to achieve operating profitability because it is burdened by slim gross margins, high product development expenses, lengthy sales cycles and substantial customer support costs.

While Terayon intends to resize operating expenditures to reflect current conditions, it is not expected to achieve positive cash flow in the intermediate term.

At the current quarterly cash usage rate, Terayon is using about $100 million annualized. Cash balances, at $310 million as of March, are adequate to fund operating losses for now.

Failure to reduce cash burn rates and restore a competitive position could result in lower ratings.

Moody's cuts Motorola senior to Baa2

Moody's downgraded the ratings of Motorola Inc., including senior unsecured debt to Baa2 from A3 and subordinated debt to Baa3 from Baa1. The outlook for all ratings is negative.

The downgrade reflects pressure on operating performance in virtually every segment of Motorola's diverse business and an expectation that recovery will be protracted and that returns will remain constrained.

It also reflects sizable exposures to Nextel and the developing market in China, an elevated gross debt load and frequent restructuring and other charges.

The concentration of customers in a number of its segments and an historical penchant for taking risk in its investment and vendor financing portfolios also are factors.

The Baa2 rating incorporates success in managing cash flow, through working capital and capital spending contraction, and substantial balance sheet liquidity.

Rebalancing of the debt profile and significant progress in reducing cost structure also were factored into the ratings.

Moody's expects continued success in cost reduction efforts, but believes that the benefits from working capital and capital spending reductions are likely to be less going forward. As a result, free cash flow will be modest for the next several years.

The negative outlook reflects uncertainties regarding the future performance of many of Motorola's operating segments and the sizable overhang of pending lawsuits related to Iridium.

Further deterioration in operating performance or unfavorable litigation outcomes could result in additional downgrades.

Motorola's credit profile has traditionally benefited from a much more diverse business mix than many other technology oriented companies.

However, in the past year and a half, downturns in the semiconductor business, wireless infrastructure and handset sales, North American broadband spending and a generally weaker global economy have converged to neutralize the benefits of diversity.

While the timing and size of a recovery in the semiconductor market are uncertain, Motorola's performance will benefit from its cost reduction efforts including its "asset light" strategy.

In addition, it has shown early success in its strategy to license its technology and provide products to traditional competitors of other units.

However, Moody's expects returns to remain below industry norms.

Motorola is taking a number of steps to improve its operating performance, including a one third reduction in work force and substantial reduction in manufacturing capacity, mainly in the semiconductor operations.

However, Moody's expects returns on a consolidated basis will remain substandard.

In addition to the operating risk, Motorola has a substantial exposure to China, an economic market that is still evolving by Western standards, which represented 13% of 2001 revenues.

While China does represent a market of enormous potential and has the world's largest mobile subscriber base, this type of risk taking is typical at Motorola. It has written off a number of exposures ranging from vendor financing (Telsim) to its investment in Iridium.

While further write-offs of vendor finance exposure are likely, unfunded commitments are only $186 million. Further expansion of vendor financing would be viewed as a negative development.

The company has been addressing its fundamental weaknesses for a number of years, resulting in a steady stream of write-offs and special charges.

Gross debt is well above historical levels, although this is partially offset by a sizable cash position.

Balance sheet debt needs to be adjusted to include receivable financings and guarantees, which totaled about $500 million at March 31.

The company includes $1.2 billion in mandatory convertible debt on its balance sheet, although Moody's views this security as having considerable equity-like characteristics.

Motorola has benefitted in the past from a sizable portfolio of investments and non-strategic operations, which provided meaningful flexibility.

However, the most identifiable of these have been sold, most notably the international wireless carriers and U.S. defense business, and the others have suffered reduced valuations, in line with the rest of the technology industry.

The company took prudent steps over the last 18 months to lengthen debt maturities and reduce reliance on commercial paper, which is currently about $500 million, versus peak usage in excess of $6 billion.

With the exception of the $825 million in putable notes, which the company may be able to remarket, current maturities over the next four years are moderate, with a peak in 2004 of $527 million.

Cash on the balance sheet is nearly $6 billion, which provides significant short term flexibility.

Moody's noted that most of these funds are overseas and some may be subject to taxes if repatriated to the U.S.

Motorola recently renegotiated its credit facilities in a reduced amount of $1.8 billion, split evenly between a three-year and 364 day facility.

In addition to traditional financial covenants, these agreements contain a springing lien on domestic inventory and receivables, which would be triggered by a Baa3 rating by Moody's or BBB- rating by S&P, and provide for next day rather than same day committed availability.

While the latter clause is mitigated by the significant liquidity, the springing lien would create structural subordination for the public debt which would magnify the impact to public debt of any future downgrade.

If its ratings fall to speculative grade, the company would not be able to sell into its accounts receivable financing programs, which provided about $350 million in financings at March 31.

Fitch rates Community Health convertible at B+

Fitch Ratings assigned a B+ rating to Community Health Systems Inc.'s convertible subordinated notes due 2008. The outlook is stable.

Also, Fitch assigned a BB rating to the new $1.25 billion senior secured bank facility of CHS/Community Health Systems Inc., the operating subsidiary.

The facility consists of a six-year, $450 million revolver and $800 million, eight-year term loan. It is secured by a perfected first priority security interest in the capital stock of CHS/Community and all subsidiaries.

While the company is not expected to immediately draw on the revolver, proceeds from the term loan will be used to refinance existing debt and fund 2002 acquisitions.

Fitch anticipates leverage to remain relatively stable as cash from operations will fund acquisitions and capital expenditures, limiting significant increases in borrowing but, conversely, also limiting debt reduction.

Additional equity issues are possible.

For the 12 months ended March 31, EBITDA/interest was 3.9 times with total debt-to-EBITDA of 3.4 times.

Total debt at March 31 was about $1 billion and lease-adjusted debt-to-adjusted capital was around 56%.

Community is the largest for-profit, rural hospital management company in terms of facilities in the U.S., and third largest in terms of acute care hospitals behind HCA and Tenet.

The rating reflects the validity of its business model and leading market presence, experienced management and positive industry dynamics.

Offsetting factors are the modestly high leverage and acquisition-associated risks.

The rating also reflects an improved capital structure and rebalanced maturity schedule.

Community has grown though acquisitions and Fitch anticipates it will continue to grow by adding 2 to 4 non-profit community hospitals per year.

Favorable industry dynamics further support Community's rating.

Reimbursement levels have improved from recent years. Medicare reimbursement is back in-line with traditional levels and third-party payor rates remain favorable.

Reimbursement trends will remain favorable for at least the near-to-intermediate term as Medicare rates are essentially established for 2003 and are in-line with industry expectations and the majority of managed care contracts have been signed covering the next fiscal year.

Additionally, the legislative environment vis-a-vis health care reimbursement is markedly more favorable than recent experience.

Cost pressures may strain Community's margin enhancement efforts.

Labor costs, although somewhat abated in recent quarters, will continue to be a source of concern and Community may encounter challenges in recruiting nurses to rural markets amid a nationwide skilled-nurse shortage.

Other cost pressures stem from increasing pharmaceutical and supply costs and rising insurance premiums.

Fitch rates Vornado convertible preferreds BBB-

Fitch Ratings assigned a BBB- rating to Vornado Realty Trust's convertible preferred stock. The outlook is stable. Also, Fitch assigned a BBB rating to the recent offering of $500 million 5.625% senior unsecured notes due 2007 by Vornado Realty LP, the operating partnership.

Proceeds from the offering will be used to repay mortgage debt, adding several assets and as much as $100 million of EBITDA to Vornado's pool of unencumbered assets.

The rating is supported by Vornado's high quality unencumbered asset pool, which contributes significant EBITDA from its core office portfolio, and an experienced management team, which has a track record of investing opportunistically in several different real estate business lines.

Fitch looks positively on Vornado's full availability under its $1 billion unsecured line of credit, which enhances liquidity, as well as its demonstrated access to capital both internally and externally sourced.

Vornado has a manageable development and redevelopment pipeline with significant preleasing on its largest development, the Alexander's site at 59th and Lexington Avenue in New York.

Current ratings balance these strengths against the risks inherent in Vornado's heavy concentration of office space in the markets of New York and Washington D.C.

Additional concerns center on the rising vacancy in the U.S. office market due to anemic tenant demand, tenant failures and overall weakness in the economy.

Fitch currently maintains a negative outlook for the office sector as a whole, although Vornado's diversified investment strategy mitigates some of the sector risk.

Vornado's consolidated EBITDA has historically covered total interest in the mid to high 2.0 times range and Fitch expects this measure to improve over time. The coverage ratio gives effect to a full consolidation of 100% of Alexander's Inc.

Fitch believes this is an appropriate method to account for this 33.1% investment in that Vornado essentially controls this company.

Depending on which mortgages Vornado pays down with the proceeds from this offering, unsecured interest coverage could be as high as 9.4 times.

Further, Fitch estimates that if Vornado were to draw down $700 million on its unsecured line and convert to a term loan, unencumbered EBITDA coverage of total unsecured interest expense would be reduced to 4.5 times.

Additionally, based on the heavy concentration of unsecured EBITDA in the New York City office market, Fitch stressed coverage levels to assume certain percentages of loss of EBITDA from this portfolio.

Fitch believes that, like many other companies in the REIT industry today, Vornado is taking advantage of the low interest rate environment offered to unsecured issuers with over $5.2 billion in unsecured notes issued as of June 21.

Additionally, Vornado is opportunistically tapping a new source of capital that serves to enhance its financial flexibility.

Finally, following the events of Sept. 11 and subsequent terrorist's threats, Fitch believes that many traditional secured lenders have requirements for levels of terrorism insurance that REITs have not been able to obtain and therefore are turning more toward the unsecured market.

Typical REIT bond indentures do not have insurance requirements.

That said, Fitch does recognize the efforts of Vornado's management in attempting to obtain as much terrorism insurance as is available to them.

While Fitch recognizes that Vornado's covenant package for this offering differs from typical REIT unsecured bond covenants and offers less protection for the bond investor, Fitch expects the company will operate well in excess of these covenants.

If the performance of Vornado erodes to the point of testing the covenant levels, the current ratings would be negatively impacted.

Moody's confirms First Union Real Estate

Moody's Investors Service confirmed First Union Real Estate Equity & Mortgage Investments' senior unsecured debt at B2 and preferred stock at B3.

First Union Real Estate is merging with Gotham Golf Corp., a private company located in Hershey, Pennsylvania and its obligations will become obligations of the enlarged Gotham Golf. The outlook is stable.

Subsequent to the merger, Gotham Golf, which acquires, owns and manages 25 golf courses in the Mid-Atlantic and Southeastern United States, plans to apply for listing on the American Stock Exchange or NASDAQ, but is not currently listed on any exchange, Moody's noted.

The existing 8.875% unsecured notes of First Union (which are due in September 2003) will remain outstanding and become obligations of Gotham Golf after the transaction closes. Additionally, each First Union convertible preferred share will be converted into the right to receive a Gotham Golf Corp. convertible preferred share that has substantially identical rights and preferences to those of the First Union convertible preferred shares, Moody's said.

Moody's said that the combined entity will most likely have a relatively highly leveraged balance sheet. First Union currently has only two remaining property assets (an office building and a regional mall) and approximately $114 million in cash and cash equivalents on its balance sheet at the end of the first quarter of 2002. Pro forma the company expects there will be approximately $47 million remaining on the balance sheet of the combined entity. The cash position is a plus, and is significant in relation to the REIT's $12.5 million of unsecured debt and $24.6 million of preferred stock outstanding.

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