S&P keeps Smithfield on watch

Standard & Poor's said Smithfield Foods Inc. remains on CreditWatch negative including its senior secured notes at BB+, senior unsecured notes at BB and subordinated notes at BB-.

The initial CreditWatch placement on July 15 followed Smithfield's announcement that it had agreed to acquire substantially all of the assets and certain liabilities of Farmland Industries Inc.'s pork production and processing business for an initial price of about $363.5 million.

The continuing CreditWatch update follows the announcement that the company has signed a definitive agreement to sell its wholly-owned Canadian subsidiary Schneider Corp. to Maple Leaf Foods Inc. for $378 million, including the assumption of Schneider's outstanding debt.

The proceeds from the sale should help mitigate the negative financial impact on credit measures if Smithfield is the winning bidder for Farmlands' pork production, S&P said.

S&P said it expects that the Farmland transaction will be financed with a combination of debt and equity in a manner that will not hurt Smithfield's credit protection measures for the current rating.

If Smithfield is the winning bidder, it is expected to use a sizable equity offering to help fund the acquisition, in which case the ratings on the company would be confirmed, S&P said. Failure to complete an offering in a timely manner would potentially result in a company downgrade.

Fitch says Levi Strauss unchanged

Fitch Ratings said Levi Strauss & Co.'s announcement to close its remaining five North American manufacturing plants and reduce headcount by approximately 2,000 does not affect its ratings including its $1.7 billion senior unsecured debt at B, its $650 million asset-based loan at BB and its $500 million term loan at BB-.

While the announced plans are expected to require restructuring charges, these charges, combined with its previously announced headcount reduction in the U.S. and Europe, are expected to generate significant cost savings as well, Fitch said. The restructuring plans and cost savings were factored into Fitch's affirmation of the senior unsecured debt and assignment of new bank facility ratings on Sept. 12.

S&P lowers Portola outlook

Standard & Poor's revised its outlook on Portola Packaging Inc. to negative from stable including its senior unsecured debt at B.

S&P said the revision follows Portola's announced acquisition of Tech Industries Inc. and the expected decline in its liquidity position that will likely result.

S&P said it expects that the transaction will be funded with borrowings under the company's committed revolving credit facility.

The outlook revision reflects S&P's concerns related to the decreased financial flexibility following the acquisition and integration challenges faced by management. These factors more than offset the improved business profile and earnings contribution associated with the addition of Tech Industries.

The acquisition provides a complementary addition to Portola's existing closures business and diversifies its end markets and customer base, S&P noted. A key to the success of the acquisition will be Portola's ability to leverage its international operations across Tech Industries' high volume customers which will allow the combined company to benefit from increased economies of scale and target new markets.

Pro forma for the Tech Industries acquisition, which was completed September 2003 and expected to be debt-financed, credit measures will deteriorate somewhat, but remain in line with expectations for the rating, S&P said. Adjusted EBITDA interest coverage is approximately 2x to 2.5x and funds from operation to total debt (adjusted for capitalized operating leases) is expected to remain in the 10% to 15% range.

Moody's confirms Precision Castparts

Moody's Investors Service confirmed Precision Castparts Corp.'s long-term debt at Baa3. The outlook is negative.

Moody's said the confirmation completes the review for possible downgrade begun after the company announced a definitive agreement to acquire SPS Technologies, Inc.

The company plans to finance about half of the $575 million purchase price with PCP common equity. The cash portion of the transaction and the repayment/refinancing of ST's debt will be funded at closing with a combination of a new bank credit facility and term loan, and new senior notes.

Moody's said the confirmation is based on the potential benefits of the ST transaction; as ST will build on Precision Castparts's leading position as a supplier of complex metal products and components to the aerospace and industrial gas turbine markets by adding high value-added aerospace and engineered fasteners, as well as specialty materials and magnetic products; the expectation of significant operating synergies (Precision Castparts expects $20-25 million in the first 12 to 15 months), margin improvement at ST, and revenue opportunities resulting from the combination of two companies with complimentary products; the company's commitment to maintaining a conservative financial profile and the expectation that its earnings and cash flow generation should allow for a near- to intermediate-term reduction in acquisition debt and improvement in credit metrics; and Precision Castparts's healthy long-term business outlook, well-diversified business portfolio, leading market positions, and growing market share.

The negative outlook reflects the increased debt levels and assimilation risks associated with such a large transaction and concerns that additional pressure in the already-weak aerospace and power generation markets could suppress Precision Castparts's operating and cash flow performance, and potentially delay the expected reduction of acquisition debt.

Moody's rates Videotron notes Ba3

Moody's Investors Service assigned a Ba3 rating to Videotron Ltee.'s planned $325 million senior unsecured bond issue, upgraded Quebecor Media Inc.'s senior implied rating to Ba3 from B1 and CF Cable Inc.'s senior secured rating to Ba3 from B1 and confirmed Quebecor Media's senior unsecured debt at B2, Sun Media Corp.'s senior secured rating at Ba2 and Sun Media's senior unsecured rating at Ba3. The outlook for all ratings is stable.

Moody's said the assignment of the senior unsecured rating at Videotron Ltee. reflects settlement of the long strike, which is expected to result in a stabilization of Videotron's subscriber base, and improved operating results; the significant lowering of leverage this year; and increased room under proposed changes to bank covenants, which had previously been tight.

The rating is constrained by Moody's expectation that all excess cash flow, except for a reduced bank loan amortization requirement, will be upstreamed to Quebecor, structural subordination to secured bank debt, potential for Videotron to upstream an additional C$200 million to Quebecor, thereby increasing leverage, in Moody's opinion, a possible need to increase capital expenditures and the execution risk to sustained improvement following the recent strike settlement.

The upgrade of Quebecor's senior implied rating reflects positive free cash flow within the consolidated entity, settlement of the strike at Videotron, continuing superior operating performance at Sun Media and additional financial flexibility within Quebecor provided by the proposed debt refinancing at Videotron.

Quebecor's rating is constrained by the level of debt in relation to consolidated free cash flow and execution risk at Videotron.

The upgrade of CF Cable reflects the decrease in Videotron's senior secured leverage, as CF supports the associated debt through a limited guarantee on a pari passu basis to CF's rated bonds (up to the 5.5x EBITDA limit of CF's bond indenture), and the secured nature of this debt.

Quebecor's ratings are supported by adequate liquidity through dividends from Sun, Videotron and its Leisure and Entertainment group, as well as its own cash, access to its own revolver, and access to a portion of the revolver at Sun and Videotron, and the fact that its debt isn't due until 2011, which postpones refinancing risk. QMI's own ratings are constrained by the structural subordination of its debt to the debt and other liabilities in its operating companies.

S&P raises Pogo outlook

Standard & Poor's raised its outlook on Pogo Producing Co. to positive from stable and confirmed its ratings including its subordinated debt at BB and preferred stock at B+.

S&P said the revised outlook on Pogo reflects expectations for continued improvement in credit quality as the company benefits from elevated oil and natural gas prices and production volumes.

An upgrade could occur with further expected deleveraging, which would provide the company with a substantial financial cushion for weathering periods of adverse pricing and for likely investments that will strengthen the company's business risk profile.

Pogo has positioned itself well in 2003 with nearly $350 million of debt reduction largely funded from excess cash flow, S&P noted.

As a result, the company now has an average financial profile. Nevertheless, S&P said it remains hesitant about assigning an investment-grade rating to Pogo's debt until the company makes further progress deleveraging and lengthens its short reserve life.

Pogo has improved its capital structure and financial flexibility by using cash flow and the issuance of common equity to deleverage over the last 18 months. Total debt to total book capital has been reduced to about 30% as of June 30, 2003, from 47% as of year-end 2001. Over time, the company is expected to operate with total debt to capital between 40% and 45%, S&P said.

S&P raises Premier Foods outlook

Standard & Poor's raised its outlook on Premier Foods plc to stable from negative and confirmed its ratings including its corporate credit at B+.

S&P said the action follows an improvement in the company's financial profile through debt reduction, underpinned by the improvement of its profitability and free cash flow generation.

The stable outlook also reflects Premier's ability to meet its debt repayments in the near term, S&P added.

The outlook assumes that the company will continue to grow cash flows to meet its increasingly demanding debt amortization schedule over the medium term through the evolution of its sales mix, the ongoing restructuring of its manufacturing operations and the moderation of its cash outflows, S&P said.

S&P confirms Salem, off watch

Standard & Poor's confirmed Salem Communications Corp. including its $150 million senior secured notes due 2007 at BB- and $150 million 9% senior subordinated notes due 2011 and $100 million 7.75% senior subordinated notes due 2010 at B-, removed it from CreditWatch negative and assigned a negative outlook.

S&P said the rating actions incorporate expectations that Salem will maintain covenant compliance in the near term, due to the less restrictive leverage covenant included in its proposed credit agreement.

Although pending acquisitions could cause leverage to modestly increase, proposed covenants incorporate a narrow cushion to absorb station acquisitions and related start-up losses.

While Salem has reversed its historical discretionary cash flow deficits for the first six months of 2003, meaningful free cash flow for debt repayment is not likely in the near term, S&P said. Credit ratios are somewhat weak for the rating and cannot accommodate the historical pace of debt-financed acquisitions.

Still, Salem benefits from the relative stability afforded by its block programming time sales, which helps shield its revenues from lingering war-related softness in advertising.

Salem's EBITDA margin is below average, at 25.7% for the 12 months ended June 30, 2003, due to the relatively high percentage of acquired developing stations in the company's portfolio. New stations, all of which are reformatted to religious programming, initially contribute little or no cash flow, and can take two to three years to reach maturity, S&P noted. The company's station purchases have substantially increased the company's market reach but have elevated debt levels.

S&P said it expects the company's appetite for tuck-in station acquisitions to moderate in the near term. For the 12 months ended June 30, 2003, EBITDA coverage of interest was around 1.6x. Pro forma for pending acquisitions, debt divided by EBITDA was high at about 7.9x at the end of second quarter of 2003. Key credit ratios remain at the weaker end of the range for the rating.

S&P keeps TNP on watch

Standard & Poor's said TNP Enterprises Inc. and its subsidiaries, Texas-New Mexico Power Co. and First Choice Power remain on CreditWatch with negative implications including TNP's senior unsecured debt and subordinated debt at BB+ and preferred stock at BB and Texas-New Mexico Power Co.'s senior unsecured debt at BBB-.

S&P put the companies on watch on May 23 after news that First Choice Power would report losses in 2003. The reason for the losses - exposure to the gas price spike in February - indicated a lack of internal controls and a greater degree of business risk than the current ratings reflected.

Subsequently, management has taken steps to strengthen the business profile of First Choice Power, improved risk management policies and procedures, completed financings at TNP Enterprises and Texas-New Mexico Power to provide plenty of liquidity for the foreseeable future, S&P said.

And in January 2004, Texas-New Mexico Power will begin the regulatory process for recovering about $275 million of stranded costs.

However, the credit rating will remain on CreditWatch with negative implications until it is clear that management has succeeded in reducing overall business risk to a minimum, S&P said.

S&P puts Tupperware on watch

Standard & Poor's put Tupperware Corp. on CreditWatch Negative including its $100 million 364-day revolving credit facility and $150 million revolving credit facility due 2005 at BBB- and Tupperware Finance Co. BV's senior unsecured debt at BBB-.

S&P said the CreditWatch listing follows Tupperware's announcement that recovery in the United States, one of its key markets, will take longer than previously expected.

The listing also reflects S&P's concern about how soon the company will be able to stabilize its operating margins and maintain credit protection measures above those for the rating median. The core food storage party business, which represents a substantial amount of the company's revenues, has been affected by the company's efforts to diversify its distribution channels.

Fitch takes Goodyear off watch

Fitch Ratings removed Goodyear Tire & Rubber Co. from Rating Watch Negative and kept its senior secured debt at B+ and senior unsecured debt at B. The outlook is negative.

The United Steelworkers of America union which represents workers at nearly all of Goodyear's North American tire plants recently ratified a new 3 year contract after several months of negotiations, Fitch noted. Forging a new contract with greater flexibility for cost reduction was crucial in Goodyear's plan to effect a turnaround in its struggling North American Tire operations.

While the contract does incorporate some much needed cost reduction measures, particularly in the area of pensions and healthcare, the majority of the company's near term projected impact is represented in cost avoidance, Fitch added.

Actual reduction in structural costs may be limited in the short term and as a result, can only serve as one element of the turnaround in North American Tire operations.

Of equal or greater importance now are the company's plans to increase productivity and utilization, improvement in market share, rebuilding brands and pricing integrity and restoring distribution channels, Fitch said.

While the new contract allows the company to import tires from offshore sources based upon various conditions which must be satisfied concerning production levels in the protected union plants, in the near term, the company may not be able to significantly increase the sale of imported tires which was to make them more competitive in the low end of the market.

The new labor agreement also requires that Goodyear raise $325 million of new financing ($250 million of debt and $75 million of equity or equity linked securities) by December 2003 and launch a refinancing of the U.S. bank facilities by December 2004, months in advance of the April 2005 maturity date, Fitch said. These requirements could result in further increases in financing costs and further compresses the tight timeframe under which Goodyear will need to show improvement in its operations.

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