S&P cuts HealthSouth, on watch

Standard & Poor’s downgraded HealthSouth Corp. and kept it on CreditWatch with negative implications. Ratings lowered include HealthSouth’s $1 billion 7.625% notes due 2012, $1.25 billion senior unsecured revolving credit facility due 2007, $200 million 7.375% senior notes due 2006, $250 million 6.875% senior notes due 2005, $250 million 7% senior notes due 2008, $375 million 8.5% senior unsecured notes due 2008 and $400 million 8.375% senior notes due 2011, cut to B- from BB-, and $350 million senior subordinated notes due 2008 and $568 million 3.25% convertible subordinated debentures due 2003, cut to CCC from B.

S&P said the downgrade reflects uncertainty about HealthSouth’s true historical and future profitability, as well as its financial position after the U.S. Securities and Exchange Commission charged both the company and the CEO with accounting fraud. The large alleged earnings overstatement related to the fraud also places into doubt the company’s future profit-generating potential.

In addition, S&P said there is lack of clarity over senior management direction; unclear prospects for ongoing liquidity as the company pursues a bank amendment to revise covenants to help avoid a possible covenant violation; questions about how responsive the company’s bank group will be should it need their assistance in refinancing an estimated $345 million of convertible notes due April 1, 2003 given the recent allegations of fraud and overstated earnings; and the possible adverse implications on the company’s future financial position should the allegations of fraud be proven true.

The CreditWatch placement reflects the company’s uncertain liquidity position as it seeks an amendment on its bank facility as well as the possible negative fallout on the company related to these serious allegations, S&P said.

Moody’s cuts HealthSouth, still on review

Moody’s Investors Service downgraded HealthSouth Corp., affecting $3 billion of debt, including lowering its senior unsecured notes to Caa1 from Ba3 and senior subordinated notes to Caa3 from B2. The ratings remain on review for further possible downgrade.

Moody’s said the action is based on the filing of a Complaint for Injunctive and Other Relief by the Securities and Exchange Commission which claims that the company has overstated earnings and assets and has engaged in other fraudulent activity with the intent to improve earnings.

The downgrade to Caa1 also reflects Moody’s concern that the company may not, as a result of this development, be able to make timely payment on its debt obligations, including the April 1, 2003 maturity of its convertible notes.

Although the company has a $1.25 billion revolving credit facility in place, Moody’s believes that the availability of this facility is in question due to representations and warranties that must be met at time of borrowing, Moody’s said. Further, Moody’s notes that the existence of a negative pledge under this facility and the bond indenture may be a complicating factor, limiting the ability of the company to provide security to its lenders.

Moody’s cuts Fleming multiple notches

Moody’s Investors Service downgraded Fleming Cos., Inc., affecting $2.2 billion of debt including its $800 million secured credit facility to B2 from Ba3, $355 million 10 1/8% senior notes due 2008 and $200 million 9¼% senior notes due 2010 to Caa2 from B2, $400 million 10 5/8% senior subordinated notes due 2007, $150 million 5¼% convertible senior subordinated notes due 2009 and $260 million 9 7/8% senior subordinated notes due 2012 to Ca from B3 and its speculative-grade liquidity rating to SGL-4 from SGL-3. The outlook is negative. The action concludes a review begun on Jan. 29.

Moody’s said the action was prompted by Fleming’s constrained liquidity position and concerns about its ability to quickly and sharply reduce expenses following the abrupt loss of the Kmart volume, to improve wholesale efficiency despite significant volume declines, and to complete the retail divestiture in a timely manner.

The immediate need for bank covenant relief, as well as the small cushion for operating cash flow to cover minimal obligations, caused downward revision of the speculative-grade liquidity rating, Moody’s added. The rating agency noted that Fleming intends to obtain a new or amended bank facility before the end of the first quarter of 2003.

The negative outlook reflects Moody’s opinions that substantial challenges remain in adjusting the company’s cost structure for a smaller revenue base and that liquidity will remain pressured over the intermediate term.

Moody’s said it does not believe that sustainable leverage and fixed charge coverage improvements can reliably be expected over the intermediate term.

S&P cuts RGA

Standard & Poor’s downgraded RGA Reinsurance Co. including lowering Reinsurance Group of America, Inc.’s $225 million 5.75% trust preferred income equity redeemable securities to BBB from BBB+ and notes to A- from A. The outlook is stable.

S&P said the action is because of RGA Re’s strategic importance within the MetLife Inc. group of companies and the application of S&P’s group methodology criteria, whereby ratings support to strategically important subsidiaries is capped at one notch below the group rating.

RGA’s ratings reflect its strategic importance to MetLife, very strong business position, very strong operating performance, and improved capitalization, S&P said.

Partially offsetting these strengths are the challenges associated with earnings volatility, which is primarily related to potential market pressures and the company’s continued international expansion.

S&P rates Alaska Air convert B+

Standard & Poor’s assigned a B+ rating to Alaska Air Group Inc.’s $150 million floating rate senior convertible notes due 2023 and put the issue on negative watch.

S&P put Alaska Air’s ratings, and 11 other airlines, on negative watch Tuesday due to the impending war in Iraq.

Fitch rates Zenith convert BBB-

Fitch Ratings assigned a BBB- rating to Zenith National Insurance Corp.’s new $110 million of convertible senior notes.

Fitch affirmed its other ratings, but revised the outlook to negative from stable.

Fitch is concerned with increasing claims severity trends, driven mainly by higher medical inflation rates, that have resulted in unfavorable prior year reserve development for accident years 2000 and 2001.

For Zenith to maintain the current ratings, Fitch expects any additional adverse prior year reserve development to be minimal and a continued improvement in the combined ratio to around 100% in 2003.

Moody’s cuts Toys ‘R’ Us outlook to negative

Moody’s Investors Service confirmed the Baa3 long term debt ratings of Toys ‘R’ Us Inc. but changed the outlook to negative.

The outlook reflects operating performance in 2002 below Moody’s expectations, as well as the risk that repositioning efforts may not result in a significant improvement over the next 12 months.

Through a combination of debt and equity issuance, Toys ‘R’ Us has improved its cash position to just over $1 billion at Feb. 1.

Liquidity is further enhanced by the $685 million long-term component of the bank credit facility, which matures in 2006.

Upcoming maturities are limited to the $300 million 364-day portion of the bank credit facility in August, a $342 million Swiss Franc issue in January and a eurobond issue in February.

Moody’s believes Toys ‘R’ Us has sufficient liquidity to accommodate these upcoming maturities, plus fund working capital needs.

S&P rates Duke mortgage bonds A

Standard & Poor’s assigned an A senior rating to Duke Energy Corp.’s $200 million first and refunding mortgage bonds due 2010.

Duke Energy plans to use the debt proceeds primarily to reduce outstanding commercial paper, S&P noted.

The outlook is negative, reflecting the company’s need to review progress on the sale strategy, as well as updated financial projections to determine the likelihood and timing of financial improvement.

Duke Energy will need to improve funds from operations interest coverage and FFO to total debt beyond 4x and 16%, respectively, to maintain current ratings.

Investigations of energy traders also continue to be an overhang.

Moody’s cuts AXA ratings

Moody’s Investors Service lowered the debt ratings of AXA senior debt to A2 from A1 and subordinated debt to A3 from A2, reflecting a revision in the agency’s notching practice for European insurance groups.

The outlook is now stable.

Moody’s said the downgrade was primarily driven by the rating agency’s decision to increase to two notches the between financial strength ratings on operating companies and AXA’s debt rating.

The rating agency’s change in its insurance rating methodology was disclosed Dec. 17.

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