Moody's rates Omnicare loan Ba1, notes Ba2, convertibles Ba3

Moody's Investors Service assigned a Ba1 rating to Omnicare, Inc.'s planned $500 million senior unsecured revolving credit facility due 2007 and $250 million senior unsecured term loan A due 2007, a Ba2 to its planned $250 million senior subordinated notes due 2013 and a Ba3 to its planned $250 million contingent convertible trust preferreds due 2033. Moody's confirmed its existing ratings including its $375 million 8.125% senior subordinated notes due 2011 at Ba2. The outlook remains stable. The confirmation concludes a review for downgrade begun on Dec. 17, 2002.

Moody's said that the rating confirmation reflects the company's positive operating trends and consistent cash flow generation, tempered by the increase in leverage and integration issues related to the recent acquisition of NCS Healthcare, Inc.

Moody's said the ratings reflect the continued improvement in the company's operating trends, its ability to generate consistent cash flow and overall positive trends for the institutional pharmacy industry.

The acquisition of NCS expands Omnicare's coverage and penetration nationally and strengthens its already leading market position.

Furthermore, the company's size, broad service offerings, financial stability and operating efficiencies provide it with competitive advantages over many competitors in the industry.

Factors tempering the ratings include the company's leverage, the ongoing issues plaguing the long-term care sector (and the impact these issues may have on Omnicare's customer base), the competitive nature of the industry and uncertainty regarding potential regulatory efforts to control drug prices.

Moody's said that although it anticipates Omnicare will focus on integrating NCS over the near term without making additional sizable acquisitions it remains concerned over the company's interest in acquisitions and the potential impact this may have on leverage going forward.

Notwithstanding this concern, the company's proposal to use equity to fund a portion of the NCS acquisition is a supportive and stabilizing sign of management's overriding focus on maintaining ratings going forward.

S&P upgrades Houston Exploration, rates notes B+

Standard & Poor's upgraded The Houston Exploration Co. including raising its $150 million revolving credit facility to BB from BB- and $150 million 8.625% senior subordinated notes due 2008 to B+ from B and assigned a B+ rating to its planned $150 million senior subordinated notes due 2013. The outlook is stable.

S&P said the action reflects Houston Exploration's demonstrated ability to make noticeable improvements in its capital structure while at the same time producing strong cash flow credit protection measures.

The company's financial profile has improved due to continued strength in commodity prices, which has enabled the company to utilize free cash flow to materially reduce debt and improve its liquidity position, S&P noted. Also, the company's financial profile provides a platform to improve its business profile by using surplus needed funds to continue to diversify its production and slowly lengthening its reserve life.

Houston Exploration is expected to maintain moderate debt leverage to compensate for its short reserve life and the accompanying need for aggressive capital spending, S&P said. Due in part to the strong commodity price environment, the company has managed to materially reduce long-term debt resulting in a debt-to-capital ratio of about 25%.

S&P rates Tower Automotive notes B

Standard & Poor's assigned a B rating to R.J. Tower Corp.'s proposed $250 million senior notes due 2013 and a BB- rating to its proposed $240 million senior secured term loan and confirmed parent Tower Automotive Inc.'s ratings including its senior unsecured debt at B, subordinated debt at B and preferred stock at B-.

S&P said the proposed financings will relieve near-term financial stress by extending debt maturities. In addition, bank financial covenant requirements will be relaxed.

Nevertheless, Tower remains highly leveraged, with total debt to EBITDA of about 4x, and cash flow protection is thin, with funds from operations to debt less than 20%, S&P said.

Weak current operating results have resulted from a decline in industry demand, with North American automotive production expected to fall 10% during the second quarter of 2003 from the year-earlier level, S&P said. Soft retail sales and high inventory levels will lead to further production cuts in the second half of 2003.

Tower has a healthy net new business backlog, totaling $900 million, which should result in stronger sales and earnings beginning in 2004, S&P said. In addition, Tower's currently high capital spending should begin to taper off in 2004.

S&P said it expects Tower to generate moderately stronger cash flow beginning in 2004 and gradually reduce debt leverage over the next few years. Over the course of the business cycle, funds from operations to total debt is expected to average 15%-20%, and debt to EBITDA is expected to average about 3.5x.

For the bank loan, S&P said it expects lenders will realize only mediocre recovery of principal in the event of default or bankruptcy.

Moody's rates Constellation Brands liquidity SGL-1

Moody's Investors Service assigned an SGL-1 speculative-grade liquidity rating to Constellation Brands, Inc.

Moody's said the rating denotes very good liquidity driven primarily by the strength and stability of Constellation's consolidated cash flow which amply covers working capital and capital expenditures.

The liquidity rating reflects effective availability under the $400 million revolver which is anticipated to be approximately $300 million on average throughout the fiscal year, and the company is expected to maintain cushion under financial covenants. Required bank term amortization over the next twelve months is acceptable relative to the expected consolidated cash flow pro-forma for the recent $1.4 billion acquisition of BRL Hardy Ltd.

Moody's rates LodgeNet notes B3, cuts existing ratings

Moody's Investors Service assigned a B3 rating to LodgeNet Entertainment Corp.'s proposed senior subordinated notes due 2013 and lowered its existing ratings including cutting its $75 million senior secured revolver due 2008 and $150 million senior secured term loan due 2008 to B1 from Ba3. The outlook remains negative.

Moody's said the ratings reflect LodgeNet's high financial leverage and moderate coverage of fixed charges; tight (albeit improving) liquidity profile and negative free cash flow position given still heavy planned capital spending; low historical returns on assets; and significant exposure to the seasonality, cyclicality and volatility inherent in the lodging industry and the domestic economy more broadly.

The ratings also incorporate certain benefits associated with the company's large and growing installed room base; reasonably good prospects for increased revenue and cash flow as contracted rooms, in general, and digital rooms, in particular, grow; the discretionary and variable nature of at least a portion of the capital investments being made; and the exclusivity and high renewal rates associated with its medium-term contracts with hotel chains.

Moody's said the downgrade specifically reflect its concerns about the company's inability to fully cover capital expenditures and interest with operating profit. Moody's noted that considerable amounts of capital have been spent in order to grow the installed room base over the past few years, but relatively little economic benefit has been realized in terms of incremental returns generated on that invested capital. Much of the underperformance relative to prior management projections and Moody's own expectations is attributable to the lingering adverse effects of the Sept. 11, 2001 terrorist attacks and general economic weakness more broadly.

Indeed, management is to be commended for having taken certain necessary but proactive steps to contain spending, preserve liquidity and maintain modest revenue and profit growth under very difficult operating conditions, Moody's added.

S&P rates Omnicare loan BBB-, notes BB+, convertible BB, off watch

Standard & Poor's assigned a BBB- rating to Omnicare Inc.'s new $500 million revolving credit facility due 2007 and $250 million term A loan due 2007, a BB+ to its planned $250 million senior subordinated notes due 2013 and a BB to its proposed $250 million convertible trust preferreds due 2033 and confirmed its $375 million 8.125% senior subordinated notes due 2011 at BB+.

The ratings were removed from CreditWatch negative where they were originally placed after Omnicare announced that it would acquire rival institutional pharmacy provider NCS Healthcare Inc. The outlook is stable.

S&P said low investment-grade ratings on Omnicare reflect its growing market position, with a strong presence in diverse regional markets, and its ability to aggressively expand while retaining credit protection measures consistent with the rating category.

Due to the realization of synergies from a prior Omnicare acquisition and a moderate financial policy that includes the use of both debt and equity to finance growth, the company's credit protection measures have remained consistent for several years, with 2002 lease-adjusted debt to capitalization of 39% and debt to EBITDA of 2.4x, S&P said.

Nevertheless, the uncertainty of future government reimbursement remains the predominant risk, as the company derives more than half of its revenues from Medicaid and Medicare, S&P noted. An extended economic downturn could affect both of these kinds of funding to nursing homes, curtailing their ability to make payments to Omnicare. Medicare recently reduced its payment to nursing homes in October 2002.

S&P said the stable outlook incorporates the expectation that benefits to Omnicare from its acquisitions will contribute to further growth in the company's return on capital, which has increased to 14%, in line with its current rating.

Fitch raises Tyco outlook

Fitch Ratings raised its outlook on Tyco International Ltd. to stable from negative and confirmed its ratings including its senior unsecured debt at BB.

Fitch said the outlook change reflects Tyco's progress with respect to reestablishing access to capital, addressing its liability structure, implementing steps to improve operating performance and demonstrating cash generation despite a difficult economic environment in a number of key end-markets.

The impact of fundamental favorable changes in Tyco's financial policies and profile since late fiscal 2002 is constrained by economic weakness in its markets, potential legal liabilities related to shareholder lawsuits and SEC investigations, and the possibility, although reduced, of further accounting charges and adjustments, Fitch said.

The ratings could improve over time as Tyco demonstrates more consistent results and that it has put behind it the accounting concerns that have obscured the transparency of its financial reporting in the past.

Liquidity, while improving, remains a constraining factor in the ratings, S&P said. At March 31, 2003, Tyco's debt totaled $21.8 billion. Projected free cash flow, along with planned debt retirement of $4.5 billion (assuming $2.5 billion of convertible debt is put by the holders in November), would leave the company with debt of $17.3 billion and cash balances of $464 million as of Dec. 31, 2003.

While this cash level is well below Tyco's historical levels, additional liquidity is available under a $1.5 billion bank facility expiring Jan. 30, 2004 that is currently undrawn. In addition, Tyco could consider issuing modest amounts of new debt given its improved access to capital.

Despite modest debt reduction during the past 12 months, weak operating earnings have had a negative impact on leverage as measured by debt/EBITDA of 4.0 times at March 31, 2003, Fitch said. A small rebound in margins since the fiscal fourth quarter of 2002 may signal an improving trend in EBITDA and cash flow that would have a positive effect on the ratings if borne out in future periods.

Moody's rates Houston Exploration B2

Moody's Investors Service assigned a B2 rating to Houston Exploration's new $150 million senior subordinated notes due 2013 and confirmed its existing ratings including its $100 million existing senior subordinated notes due 2008 at B2. The outlook is stable.

Moody's said the ratings are supported by Houston Exploration's favorable annual production trends achieved with conservative leverage aided by up-cycle cash flows; and a large percentage of operated properties. The ratings are tempered by a very short proved developed (PD) reserve life; a high total unit cost structure due to quite high finding and development (F&D) costs; and a fairly high combined percentage of proved undeveloped (PUD) and proved developed non-producing (PDNP) reserves with attendant capital and risk needed to take to production.

The new indenture contains a carve-out for up to $300 million of new debt for the potential stock buyback of KeySpan Corp.'s 56% ownership of Houston Exploration. Moody's said it recognizes the overhang of KeySpan's ownership and its publicly stated comments that its holdings in Houston Exploration is not a core asset. Moody's expects KeySpan to divest its Houston Exploration holdings at a time that is in line with KeySpan's objectives. However, until that occurs, Houston's ability to use equity as currency for growth opportunities is hampered.

While there might be a long-term benefit to Houston Exploration's repurchasing the KeySpan stock, the immediate effect of potentially adding the permitted $300 million of new debt without the benefit of incremental production or cash flows would put the outlook and possibly the ratings under pressure, Moody's cautioned. Based on Houston Exploration's current stock price, KeySpan's holdings are worth approximately $540 million, the $300 million carve-out implies that Houston would also need approximately $240 million of equity to take out KeySpan's entire holdings.

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