S&P puts CMS on watch

Standard & Poor's put CMS Energy Corp. on CreditWatch with negative implications. Ratings affected include CMS' senior unsecured debt and bank loans at BB and preferred stock at B.

S&P said its action is in response to heightened uncertainty related to the company's "round-trip" electricity trades.

The trades have caused the resignation of Bill McCormick, long-time chairman and CEO of CMS Energy, an SEC investigation, plans to restate 2000 and 2001 financial statements, the establishment of a special committee by CMS Energy's Board of Directors to investigate matters surrounding the trades, and shareholder class action lawsuits, S&P noted.

S&P said it will resolve the CreditWatch after examining the full effect of the round-trip trade issue on CMS' credit quality.

Moody's cuts Gap outlook

Moody's Investors Service lowered its outlook on Gap Inc. to negative from stable and confirmed its existing ratings including its senior unsecured notes and convertible notes at Ba3.

Moody's said its action was in response to Gap's continuing negative comparable store sales, concern Gap may not meet Moody's profit expectations in 2002 and the possibility, in Moody's opinion, that the new chief executive officer could make changes that might require currently unanticipated expenditures, charges or revisions in operations.

Total comparable store sales have been negative since May 2000, and same store sales are still profoundly negative in the two largest concepts, Moody's said. Comparable store sales in the first two weeks of May, however, were better than the first quarter's -17%.

Mickey Drexler, the company's current CEO, has announced his intention to retire as soon as the board appoints his replacement. There is thus the possibility that the new CEO could launch initiatives or execute changes that adjust the timing or the magnitude of currently expected returns, Moody's said.

Nonetheless, Gap is still making efforts to boost sales and profits in Gap domestic and Old Navy, and has a solid cash position and access to bank funding, Moody's noted.

Moody's raises International Game outlook

Moody's Investors Service raised its outlook on International Game Technology and confirmed the company's ratings including its senior unsecured debt at Ba1.

Moody's said it raised International Game Technology's outlook because of the positive performance of the company's gaming operations and product sales segments, strong internal cash flow generation, improving debt protection measures, as well as the positive momentum and widening acceptance of coinless technology that is likely to drive future revenue and earnings growth.

International Game Technology EZ Pay coin-less technology is gaining greater acceptance with casino patrons and operators, and so demand for this technology is expected to drive replacement demand for the next 3 to 5 years, Moody's said.

Additionally demand for slot machines may increase over the next few years from regulatory changes, such as the introduction of gaming to new jurisdictions or adding positions within existing markets as states turn to gaming taxes to help close projected budget shortfalls, the rating agency commented.

Machine shipments remain stable and the installed base of revenue-sharing games remains at an all time high. Further, product sales and gross profit margins continue to improve as a result of improvement in production efficiencies, Moody's said.

An upgrade will depend on the consistency of International Game Technology financial policies including share repurchase activity that is funded from internally generated cash flow, deployment of current high cash balances in financially prudent manner, as well as the company's ability to continue to successfully introduce new games, and keep its game pipeline full, Moody's said.

S&P rates IESI notes B-

Standard & Poor's assigned a B- rating to IESI Corp.'s planned offering of $150 million senior subordinated notes due 2012 and a B+ rating to its $222.5 million senior secured revolving credit facility maturing Aug. 31, 2004. The outlook is stable.

S&P said its ratings on IESI reflect a relatively narrow scope of activities (annualized revenues about $200 million), a below-average financial profile stemming from a substantial debt load and risks associated with an active growth strategy that includes debt-financed acquisitions.

Those factors more than offset IESI's position as a major solid waste services company in selected regional markets, efficient operations and favorable overall industry characteristics, S&P said.

IESI has expanded rapidly in the past two years, primarily through acquisitions, taking advantage of the fragmented nature of its local and regional markets, although internal growth also has been a meaningful contributor, S&P noted.

The growth has been financed by a combination of debt and preferred stock. A similar strategy is likely to be followed in the intermediate term, as the firm aims to improve its competitive position and integration of services to increase operating efficiency, S&P said.

Although the solid waste management industry is mature and competitive, earnings prospects for IESI are supported by the essential nature of its services, modest volume gains, some pricing flexibility, and expected benefits from acquisitions, S&P added. Stability of results is enhanced by exclusive municipal long-term franchise contracts in the South region, which contribute a material portion of revenues and cash flow, and presence in several growth markets.

Challenges include management of an active expansion strategy; a difficult regulatory environment in the Northeast that could affect the expansion of landfill disposal capacity; price caps in New York City; a competitive landscape that includes the presence of the industry leaders, Waste Management Inc. and Allied Waste Industries Inc., in the New York market; and selected cost pressures, S&P said.

S&P rates TransDigm notes B-

Standard & Poor's assigned a B- rating to TransDigm Inc.'s new $75 million add-on to its 10 3/8% senior subordinated notes due 2008 and confirmed the company's corporate credit rating at B+. The outlook is negative.

S&P said TransDigm's ratings reflect a relatively modest scale of operations (2001 revenues about $200 million), cyclical and competitive pressures in the aerospace industry, and a highly leveraged balance sheet, but incorporate the firm's leading positions in niche markets and very strong profit margins.

TransDigm is a well-established supplier of highly engineered aircraft components for use on nearly all commercial and military airplanes, S&P noted.

The company has expanded its product offering through several acquisitions, including the mid-2001 major purchase of Champion Aviation, the world's largest manufacturer of igniters for turbine engines, and spark plugs and oil filters for piston engines.

Following the events of Sept. 11, 2001, intermediate-term business prospects for commercial aerospace (about 80% of TransDigm's fiscal 2001 revenues) deteriorated significantly in terms of orders for new planes (one-third of the company's commercial aerospace revenues) and the related aftermarket demand for products and services (two-thirds), S&P said. In response, the firm has reduced its employment level by about 20%.

TransDigm's other operations have mixed outlooks, with regional and business jets less adversely affected (compared with large jetliners) and the military business (20%-25% of revenues) having potential for modest strengthening, S&P said.

The company's consolidated results should be partly cushioned by successful new product development, the proprietary nature of almost 90% of its components, 70%-75% of business derived from sole-source contracts, and a growing installed product base, leading to a recurring aftermarket revenue stream, S&P said.

Moody's rates TransDigm B3

Moody's Investors Service assigned a B3 rating to TransDigm Inc.'s proposed $75 million add-on to its senior subordinated notes due 2008 and confirmed its existing ratings including its credit facility at B1 and its $125 million senior subordinated notes due 2008 at B3. The outlook remains stable.

Moody's said the ratings continue to reflect TransDigm's high leverage and weak balance sheet, the modest revenue base in both absolute terms and relative to debt outstanding, the high level of intangibles and the negative net worth at TransDigm Holding Co. resulting from the 1998 recapitalization.

The ratings also consider the company's sensitivity to the general economic conditions, the number of flight hours put on by their customers and their level of profitability, and the cyclical aircraft OEM build rate, Moody's said.

Moody's also noted that the company would like to pursue future acquisitions and expects to be granted broadened terms within the bank credit agreement, thus possibly further increasing leverage and exposing the company to integration risk.

Positives include TransDigm's continued strong financial performance and free cash flow generation despite the substantial weakness in the commercial aerospace market. The company has been able to maintain, and even grow, margins despite revenue decline, Moody's said.

The ratings benefit from the large installed product base and the leading #1 or #2 market position held by most of TransDigm's product lines, typically sole source and with strong trade name recognition, Moody's added.

S&P cuts Callahan

Standard & Poor's downgraded Callahan Nordrhein-Westfalen GmbH and kept it on CreditWatch with negative implications.

Ratings affected include Callahan's $400 million 14% notes due 2010, €225 million 14% notes due 2010, $325 million discount notes due 2010 and €300 million 14.125% bonds due 2011, all cut to CC from CCC+, and Kabel NRW GmbH's €2.9 billion bank loan due 2009, cut to CCC from B.

S&P said the downgrade reflects Callahan's extremely weak funding position, given the occurrence of an event of default under its bank facility and the group's reduced headroom under bank covenants.

Furthermore, the bond indentures contain cross-default provisions that would be triggered by a default on the bank facility resulting in acceleration of repayment, S&P said.

In addition, the rating agency said the company's cash position is very weak and the group faces a coupon payment of €69 million due July 15 in addition to ongoing significant cash requirements.

Moody's rates Norske Skog Canada bank loan Ba1

Moody's Investors Service assigned a Ba1 rating to the proposed C$300 million revolving credit facility of Norske Skog Canada, downgraded its existing bank debt to Ba1 and its senior implied rating to Ba2, and confirmed the senior unsecured notes at Ba2.

Moody's said the downgrades reflect the weak near term outlook for Norske Skog Canada's core products of newsprint, pulp, and coated papers, and low expected cash generation through the end of 2002.

The ratings also incorporate the reduction in debt which will occur following completion of a recent equity offering, Moody's said.

Supporting the ratings are Norske Skog Canada's solid position in newsprint and directory papers, its increasing production of higher margin coated groundwood papers, its relationship with Norske Skog

AS (31% ownership), and its acceptable level of debt, Moody's said.

S&P rates Herbalife bank loan BB-, notes B

Standard & Poor's assigned a BB- corporate credit rating to Herbalife International Inc. and to the company's planned $190 million senior secured credit facilities and a B rating to WH Acquisition Corp.'s proposed $220 million senior subordinated notes due 2010.

Proceeds of the offerings will partially finance the acquisition of Herbalife by WH Acquisition. On consummation of the acquisition, WH Acquisition will merge with and into Herbalife, and Herbalife will survive the merger and assume the obligation under the notes. Pro forma for the transaction, Herbalife will have about $436 million in lease-adjusted debt.

S&P said the ratings on Herbalife reflect the risks associated with its network marketing business model; intense competition in the weight management, nutritional supplements and personal care products industries; and high debt leverage.

Partially offsetting the negatives are Herbalife's relatively stable cash flow generation and the geographic diversity of its operations, S&P said.

Operating margins are expected to improve slightly from current levels due to the recently implemented dual-sourcing product strategy, which allowed Herbalife to achieve better pricing, and cost controls, S&P said.

Pro forma 2001 operating lease-adjusted debt leverage will be high at about 3.8 times, with EBITDA interest coverage at about 3.2x, S&P added. Historically, Herbalife has consistently generated moderate levels of free cash flow. However, required debt service is expected to absorb most of its discretionary cash flow.

Moody's rates Herbalife's loan B1; notes B3

Moody's Investors Service rated Herbalife International Inc.'s $25 million senior secured revolver due 2007 and $165 million senior secured term loan due 2008 at B1; $220 million senior subordinated notes due 2010 at B3; senior implied at B1 and issuer rating at B2. The proposed debt ratings are associated with Herbalife's intended leveraged buyout by Whitney & Co. and Golden Gate Capital. The rating outlook is stable.

The bank loans will be guaranteed by certain direct and indirect subsidiaries, except for foreign subsidiaries where guarantees would result in adverse tax or other consequences. The loan is secured by a first-priority pledge of certain assets and all capital stock of borrowers and guarantors, and by a 66% stock pledge of non-guarantor foreign subsidiaries, according to Moody's.

Ratings reflect high leverage with pro forma negative tangible book equity, meaningful product concentration, relatively short track record of the new management team, substantial operating risks in selling weight management, nutritional and other products through an independent multi-level marketing distributor network, regulatory, legal and publicity risks and intense competition, Moody's said.

Positive influences on the ratings include "demographic trends underlying demand for the company's products and recruiting efforts, as well as by Herbalife's record of strong cash flow generation," Moody's said.

The stable outlook is based on improving operating performance.

For the twelve months ended March 31, EBITA cash interest coverage was 3.1 times, debt leverage was 3.8 times EBITA and retained cash flow to debt was approximately 11%.

S&P cuts Pentacon

Standard & Poor's downgraded Pentacon, Inc.'s corporate credit rating to D from SD after the company announced it had filed for protection under Chapter 11 of the bankruptcy code.

Pentacon's secured credit facility was lowered to D from CC.

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