Standard & Poor's downgraded The Great Atlantic & Pacific Tea Co. Inc. and maintained a negative outlook. Ratings lowered include A&P's $200 million 7.7% senior notes due 2004, $200 million 9.375% senior unsecured notes due 2039, $275 million 9.125% senior notes due 2011 and $300 million 7.75% notes due 2007, cut to B+ from BB-, and its $425 million senior secured revolving credit facility due 2003, cut to BB- from BB.
S&P said it lowered A&P because of its deteriorating operating performance and diminished cash flow protection.
The weak earnings are only partially mitigated by A&P's satisfactory market shares in its major operating areas, S&P said.
Most of A&P's markets are experiencing increased promotional activity from both traditional supermarkets and nontraditional channels of distribution, as operators fight for market share in a soft consumer spending climate, S&P added. Trading down to lower-margin products by consumers and deflation in certain product categories are compounding the challenges in the sector.
Moreover, A&P has had difficulties in executing its store format effectively, and is burdened by a high cost structure.
A&P's operating profitability has declined significantly over the past two quarters, following two years of very inconsistent results, S&P said. Although same-store sales rose 0.1% in the third quarter ended Nov. 30, 2002, EBITDA fell to $41 million from $92 million in the prior year. This followed a 20% drop in EBITDA in the second quarter. Third quarter gross margins fell as A&P struggled to hold onto market share.
Combined with high operating expenses relative to sales, this reduced the EBITDA margin by 190 basis points, S&P said. Lease-adjusted EBITDA coverage of interest expense fell to 1.7x for the quarter from 2.4x in the year-ago period while total debt grew by $44 million. Management is considering several steps to improve performance and reduce debt, including reducing costs companywide, better managing working capital, and potential asset sales.
Moody's Investors Service downgraded Penhall Acquisition Corp. including cutting its $100 million 12% senior notes due March 2006 to Caa3 from B3 and its $30 million senior secured revolving credit facility due 2004 and $17 million senior secured term loan due 2004 to Caa1 from B2. The outlook is negative.
Moody's said the downgrade reflects the sharp decline in Penhall's operating performance as a result of contracting construction spending, and its constrained financial flexibility and weakened credit profile.
The ratings also reflect the company's high leverage and weak balance sheet, Moody's added.
The negative rating outlook reflects Moody's expectation of continuing weak public construction funding given the state and local governments' constrained fiscal budgets, as well as the company's possible violations of bank covenants in the coming quarters.
For the 12 months to Sept. 30, 2002, revenues declined about 10% from fiscal 2001 while EBITDA dropped 36%. This, combined with a higher debt load, increased Penhall's EBITDA leverage to about 4.9 times from 3.1 times in fiscal 2001, Moody's said. Cash flow has also turned negative. In the quarter ended September 30, 2002, the company's free cash flow was a negative $4.3 million, despite a substantial reduction in capital spending. Capital expenditure in the 12 month period was cut to $8.6 million from $18.5 million in fiscal 2001, far below the $17 million or so in depreciation.
Moody's is also concerned that Penhall's deteriorating performance may soon result in bank covenant violations. As of Sept. 30, 2002, the company reported that it had $2 million cash on hand and
Standard & Poor's said Solutia Inc.'s ratings are unchanged including its corporate credit rating at BB with a negative outlook on the company's announcement that its fourth-quarter 2002 earnings will be lower than analysts' expectations.
The earnings shortfall is primarily the result of weak demand, higher feedstock and energy costs, and a four cent per share charge related to a write-down of assets at the Flexsys joint venture, S&P said.
While not a significant ratings factor, given that some uncertainty concerning economic conditions is already factored into Solutia's ratings, the announcement underscores the exposure of many chemical companies to rising oil and gas prices, S&P said.
Solutia's agreement to sell its resins, additives, and adhesives businesses to UCB SA for $500 million will strengthen the company's balance sheet and liquidity, S&P added. However, despite the anticipated debt reduction, credit protection measures will remain subpar for the ratings and leverage will remain elevated. Accordingly, meaningful progress toward strengthening the balance sheet is expected to continue.
Standard & Poor's assigned a B rating to Banco Votorantim SA's new $50 million 7% short-term notes due 2003.
| S&P said Banco Votorantim's ratings benefit from the implicit support of the Votorantim Group (foreign currency B+, negative outlook), its strong brand-name recognition, the bank's experienced management and efficient decision-making processes.
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| In addition, Banco Votorantim shows better-than-average asset quality, S&P said.
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| S&P says Westar unchanged
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| Standard & Poor's said Westar Energy Inc.'s ratings are unchanged including its corporate credit rating at BB+ on CreditWatch with negative implications on news that it will sell Oneok Inc. a portion of Oneok series A convertible preferred stock and exchange its remaining shares for new shares of Oneok series D non-convertible preferred stock.
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| S&P said it views this announcement as a positive development since the proceeds of up to $250 million will be used to reduce Westar's onerous debt burden but cautioned that additional substantial measures are still needed to stabilize current ratings.
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| Fitch cuts PDVSA Finance to junk, on watch
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| Fitch Ratings downgraded PDVSA Finance to junk, lowering its ratings to BB- from BBB, and put it on Rating Watch Negative.
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| Fitch said the downgrade is due to the deterioration in performance of the transaction caused by the prolonged strike in Venezuela and the downgrade of the sovereign's foreign currency obligations.
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| The downgrade follows Fitch's downgrade of the foreign currency obligations of the Bolivarian Republic of Venezuela to CCC+ from B.
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| The negative watch reflects the uncertainties surrounding the resumption of oil production and exports.
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| While Fitch believes the current environment in Venezuela is not sustainable, is said the risks impacting the securitization have significantly increased.
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| The prolonged strike, disruptions in exports, and the operational disruptions within PDVSA's traditional trading and accounting operations have contributed to this increase in risk. While the government continues to attempt to increase production, Fitch estimates current production is well below the official 1.2 million barrels per day. Fitch estimates December total exports from PDVSA could be as low as $100-$150 million, which is less than 10% of historical levels.
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| In a worst case scenario, the Feb. 15 payment may have to be covered by the liquidity reserve and then the May 15 payment would come under question, Fitch said. Furthermore, if the liquidity reserve is used, it must be replenished within seven business days from the February 15 date in order to prevent a technical default.
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| The more likely scenario would be that PDVSA or PDVSA Finance makes a direct payment to the fiscal agent on Feb. 15. Although not confirmed, company officials have stated that offshore collections amounting to more than $300 million have been set aside and would be used to make the upcoming February payment. Using these collections or any other PDVSA funds would extend the event horizon at least another 3-6 months, which would allow considerable breathing room for the effects of the strike to dissipate.
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| S&P lowers United Stationers outlook
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| Standard & Poor's lowered its outlook on United Stationers Supply Co. to negative from positive. Ratings affected include United Stationers' senior secured bank loan at BB and subordinated debt at B+.
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| S&P said the outlook change is based on United Stationers' revised earnings guidance for the fourth quarter of 2002 and the rating agency's expectations that the company's performance for the full year will be well below 2001.
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| Weakness in the office products industry has resulted in a shift to lower margin consumable product sales and has negatively impacted the company's ability to take advantage of vendor allowances, S&P said. As a result, S&P expects United Stationers' EBITDA for 2002 will be well below 2001 levels. Although the company's expected 2002 credit measures and liquidity are well in line with the existing ratings, continued weakness in the office products sector could further pressure these measures and eventually result in a ratings downgrade.
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| Lease-adjusted operating margins are expected to decline to about 5% in 2002 from 6.4% in 2001, S&P said. The company's EBITDA coverage of interest expense is expected to be in the low 4x area in 2002 down from the low 5x in 2001. Total debt to EBITDA expected to be in the high 2x area for fiscal 2002 compared with the mid-2x in 2001 (figures include the effect of certain off-balance-sheet financing activities, such as accounts receivable securitization and operating leases).
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| Fitch cuts Citgo, PDV America, on watch
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| Fitch Ratings downgraded Citgo Petroleum Corp.'s senior unsecured debt to BB- from BBB- and PDV America, Inc.'s senior notes to B- from BB+. Both remain on Rating Watch Negative.
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| Fitch said the downgrades reflect its heightened concerns about the financial flexibility of both Citgo and PDV America due to the general strike in Venezuela, which has severely disrupted the country's oil exports.
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| As a result of the strike, Citgo has been forced to find alternate sources for much of the crude supplied by PDVSA, Fitch noted. Citgo typically purchases approximately 50% of its crude needs from PDVSA under long-term contracts. Citgo has been successful acquiring alternate crudes and other feedstocks to maintain refinery operations. However, spot market terms have increased working capital requirements and given the lowered credit ratings of Citgo related entities, additional working capital requirements are possible.
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| Near term obligations as well as a rating trigger in the company's trade accounts receivable program could significantly reduce Citgo's liquidity, Fitch said.
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| Unless Citgo achieves a waiver, Fitch's downgrade will result in termination of the accounts receivable program.
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| In mid-December, Citgo entered into a new $520 million credit facility, split into a $260 million three-year facility and a $260 million 364-day revolver. Concerns over the situation in Venezuela, however, have limited Citgo's ability to enter the capital markets for a planned bond issuance in the fourth quarter of 2002.
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| The Citgo downgrade and the more severe downgrade to the senior notes of PDV America are also based on the deteriorating creditworthiness of PDVSA and Venezuela. The $500 million of senior notes mature in August 2003 and are supported by mirror notes issued by PDVSA and held by PDV America. The senior notes and mirror notes have identical terms and conditions such that the interest income PDV America receives from PDVSA on the mirror notes pays the interest on the senior notes. In an absence of a return to normal oil operations, Fitch has significant concerns with the ultimate parent's ability and willingness to pay the maturity of the notes.
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| S&P raises Avado
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| Standard & Poor's upgraded Avado Brands Inc.'s $100 million 11.75% senior subordinated notes due 2009 to C from D and its corporate credit rating to CC from SD. The outlook is negative.
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| S&P said the action follows Avado's payment of interest on the notes. The interest payment was originally due on Dec. 15.
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| Avado's financial flexibility continues to be limited, S&P added. On Dec. 27, the company executed an amendment to its $75 million credit facility whereby its lenders agreed to forbear from exercising their remedies with respect to existing events of default until May 31, 2003. The amendment also revised certain financial covenants and requires the company to reduce its obligations under the facility to zero by May 25, 2003.
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| At Sept. 29, 2002, Avado had $36 million of cash borrowings and $15 million of letters of credit outstanding under the credit facility, S&P said. During the third quarter of 2002, the company fell out of compliance with certain EBITDA requirements contained in its credit facility and master equipment lease.
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| Fitch cuts heavy oil projects
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| Fitch Ratings downgraded the senior secured debt of four Venezuelan heavy oil projects to B from BB+ including cutting Petrozuata Finance Inc.'s $300 million series A bonds due 2009, $625 million series B bonds due 2017 and $75 million series C bonds due 2022, Cerro Negro Finance, Ltd.'s $200 million bonds due 2009, $350 million bonds due 2020 and $50 million bonds due 2028, Sincrudos de Oriente Sincor, CA's $1.2 billion senior bank loans and Petrolera Hamaca, SA's $627.8 million senior agency loan due 2018 and $470 million senior bank loan due 2015. The ratings remain on Rating Watch Negative.
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| Fitch said the downgrade follows the recent rating downgrade of the Bolivarian Republic of Venezuela's foreign currency rating to CCC+ from B.
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| The rating actions reflect the inability of the four heavy oil projects to maintain normal operations due to the disruption of activities in Venezuela's oil sector, Fitch said.
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| Since early December, the prolonged national strike has significantly curtailed operations of Petroleos de Venezuela SA. Operations at the four strategic associations rely exclusively on critical raw material inputs from PDVSA.
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| Due to the lack of gas supply from PDVSA and interruptions to Venezuela's oil exports, the four heavy oil projects have been shutdown since mid-December, Fitch said. As a result, the projects have been unable to export and generate oil revenues for approximately a full month period.
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| If the current situation remains unchanged and no revenues are generated, each project's liquidity position required to cover fixed operating expenses will deteriorate in the coming months, Fitch added. However, the projects should be able to continue meeting scheduled debt service obligations over the next several months with funds available under their respective debt service reserve accounts.
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| Fitch cuts PDVSA, EDC
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| Fitch Ratings downgraded the senior unsecured foreign currency ratings of Petroleos de Venezuela SA (PDVSA) and CA La Electricidad de Caracas SA (EDC) to CCC+ from B. The outlooks are negative.
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| Fitch said the actions follow its downgrade of the Bolivarian Republic of Venezuela's long-term foreign currency rating to CCC+ from B.
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| S&P says Graftech unchanged
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| Standard & Poor's said GrafTech International Ltd.'s ratings are unchanged including its corporate credit rating at B+ with a stable outlook after the announcement of a $14 million restructuring charge related to organizational changes and workforce reductions.
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| The estimated benefits of these actions are expected to save $6 million in 2003 and $12 million in both 2004 and 2005, S&P noted.
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| The actions are part of Graftech's $80 million in annual cost savings plan. Graftech expects to achieve recurring cost savings of $30 million, $60 million, and $80 million from 2003 through 2005 respectively, S&P said.
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| However, if current weak end market conditions do not improve in the near term, a "step-up" of covenants under the bank facility in September could result in covenant violations, S&P cautioned. This is somewhat concerning considering that during the nine month period ending Sept. 30, 2002, Graftech was unable to generate positive funds from operations while free cash flow was a negative $76 million.
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| S&P cuts PDVSA Finance
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| Standard & Poor's downgraded PDVSA Finance Ltd. and kept it on CreditWatch with negative implications including its $3.598 billion and €200 million senior unsecured notes.
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| S&P said the downgrade reflects the heightened risk of default due to the ongoing strike that has crippled the oil industry in Venezuela and PDVSA Finance's ability to service its debt.
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| The current rating on the notes reflects the funded liquidity account available to protect investors at least through the company's next debt service payment on Feb. 16, 2003. While the liquidity account, which is fully funded for the amount of this payment and under control of the New York Fiscal Agent, is available to cover that payment and structural enhancements are still in place to prevent sovereign or corporate interference with that payment, both the ability to generate and export oil and PDVSA's willingness to allow much needed export revenues to be trapped offshore have been severely affected by the strikes, S&P said.
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| The rating agency added that it is concerned with the ability and willingness of PDVSA Finance to make subsequent debt service payments as long as PDVSA's operations remain hampered by its striking workers.
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| After the February payment, PDVSA Finance's next debt service payment is in May 2003. While
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| PDVSA Finance has indicated that is has adequate funds in its collection account for the February payment, these funds are not restricted and could be distributed to PDVSA assuming that various covenants are not breached, S&P added.
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| S&P puts Rural Cellular on watch
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| Standard & Poor's put Rural Cellular Corp. on CreditWatch with negative implications including its $125 million 9.625% senior subordinated notes due 2008 and $300 million 9.75% senior subordinated notes due 2010 at B-, $237.5 million senior secured 8.5 year term loan B, $237.5 million senior secured 9 year term loan C, $275 million senior secured 8 year reducing revolver and $450 million senior secured 8 year amortizing term loan at B+ and its $100 million senior exchangeable preferred stock redeemable 2010, $140 million junior exchangeable preferred stock and $25 million senior exchangeable preferred stock at CCC+.
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| S&P said the CreditWatch placement reflects the impact of lower roaming yield on revenue growth, the tight debt leverage bank covenant in the fourth quarter of 2003, and overall slower industry growth.
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| In addition, the payment of cash dividends on the company's senior exchangeable preferred stock commencing August 2003 could impact the growth of the company's free cash flow position, S&P said.
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| In the third quarter of 2002, total revenue was relatively flat compared with the same period in 2001 and slightly higher compared with the second quarter of 2002, reflecting slower subscriber growth and relatively flat roaming revenue, S&P noted.
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| Roaming revenue has been impacted by the decline in roaming yield, offset somewhat by higher roaming minutes. Roaming minutes have increased in part due to the activation of additional cell sites and a new roaming agreement with Cingular Wireless that is effective through January 2008.
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| Although the company's free cash flow position has improved steadily, the payment of cash dividends on its senior exchangeable preferred stock commencing in August 2003 and on its junior exchangeable preferred commencing February 2005 will likely impact growth in free cash flow, S&P said.
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| S&P said resolution of the CreditWatch is dependent upon its review of the company's strategy to meet bank covenants and debt maturities and maintain a competitive position.
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| S&P cuts Telesystem International
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| Standard & Poor's downgraded Telesystem International Wireless Inc. including cutting its $220 million 14% notes due 2003 to CCC+ from B-. The outlook is negative.
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| S&P said the downgrade reflects the refinancing risk of the notes, which mature in December
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| 2003 and the structural subordination of the debt at the corporate level.
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| Telesystem International has taken recent actions to reduce debt at the corporate level, and the performance at its Mobifon subsidiary has been solid.
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| Still, the most significant challenge facing the company is the refinancing of its $220 million notes.
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| Even if Telesystem International is successful in selling its Brazilian and Indian assets, the expected proceeds, coupled with estimated distributions from Mobifon, would not be sufficient to repay the notes in December, S&P cautioned.
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| The prospects for refinancing the notes should improve following repayment of Telesystem International's $47.5 million corporate credit facility.
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| Fitch cuts Durango
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| Fitch Ratings downgraded Corporacion Durango's unsecured foreign currency ratings to C from B+ including its senior unsecured notes due in 2003, 2006, 2008 and 2009. It remains on Rating Watch Negative.
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| The C rating indicates a default is imminent, Fitch said.
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| During December 2002, Durango ceased to make interest and principal payments with banks and HG Estates, Fitch said. On Dec. 18, the aggregate amount of these payments exceeded $25 million. At this time, those lenders have not delivered a notice of acceleration of their loans to Durango. If they did, it could lead to an event of default for the notes.
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| On Jan. 15 interest payments totaling approximately $12 million come due on the 2009 notes and on Feb. 1 approximately $21 million of interest payments come due on the 2003, 2006, and 2008 notes.
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| While the company has not commented on whether it will make these payments, Fitch said it believes that it will not be able to make payment on the notes and that it will not cure this situation within the 30-day grace period. As a result, an event of default is likely to be triggered on Feb. 15, 2003.
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| Durango finished the period ended Sept. 30, 2002 with $835 million of total debt, $30 million of cash and marketable securities and $133 million of short-term debt. During the first nine months of 2002, the company generated $95 million of EBITDA, a drop from $122 million during a similar period in 2001. Durango's weak financial performance during 2002 was a result of lower prices for its products and stagnant demand, Fitch said.
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| To counteract these problems and to reduce its debt, Durango has sought to divest more than $150 million of assets. To date, the company has not been successful in selling any of its asset sales, Fitch added. Given the distressed nature of the company at this time, it is not likely that the company will achieve its target during 2003 either.
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| Durango has retained Rothschild Inc. and PricewaterhouseCoopers to advise it about debt restructuring alternatives. Holders of the notes, which are at the holding company, are currently subordinate to about $160 million of secured debt or debt at operating companies. Consequently, they face the risk of a reduction in principal amount and a lowering of the coupon, Fitch said.
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| Fitch puts Allmerica on positive watch
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| Fitch Ratings revised its Rating Watch on Allmerica Financial Corp. to positive from negative including its senior debt at BB, capital securities at B+ and Allmerica Global Funding LLC's $2 billion global debt program at BB-.
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| Fitch said the change in the watch reflects the significant increase in statutory capitalization for Allmerica's life operations as a result of the execution of several fourth quarter transactions, including the definitive agreement to sell its interest in a $650 million block of universal life insurance to John Hancock Life Insurance Co., the retirement of $551 million in funding agreement liabilities below face value through open market purchase/ tender offer and the implementation of a new guaranteed minimum death benefit mortality reinsurance program.
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| Fitch also believes that uncertainty regarding regulatory action has been reduced due to an improvement in AFLIAC's risked based capital at year-end 2002 to an estimated 235% from 133% at the end of the third quarter coupled with AFC's fourth quarter 2002 agreement with the Massachusetts Commissioner of Insurance to maintain AFLIAC's RBC ratio at a minimum of 100%. This replaced an original commitment to maintain FAFLIC's RBC at 225%.
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| Fitch said it plans to resolve its Rating Watch after a review of fourth quarter results and discussions with management concerning capital management plans and cash flow development for AFC and operating results at its property casualty operations.
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| S&P cuts TMM, TFM
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| Standard & Poor's downgraded Grupo TMM SA including cutting Grupo TMM's $200 million 10% notes due 2006 and $200 million 9.25% notes due 2003 to CC from B+ and TFM SA de CV's $150 million 10.25% notes due 2007 and $443.5 million 11.75% senior unsecured debentures due 2009 to B+ from BB-. TMM's ratings were removed from CreditWatch with negative implications; The outlook is negative. TFM's ratings were given a negative outlook.
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| S&P said it lowered TMM because of the company's reduced liquidity and weak financial performance.
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| The rating action also considers the company's announcement that it launched an exchange offer of its outstanding 9½% notes due 2003 and 10¼% notes due 2006, for 10¾% senior notes due 2010 for a combination of about $380 million in new securities, S&P said.
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| TMM has stated that its existing cash reserves and cash flow generation will not be sufficient to repay the 2003 notes at maturity and meet other obligations, if it is unable to complete the exchange, S&P said. In addition, the company has indicated that if the exchange offer for the 2003 notes is not completed, it would need to find a source of refinancing to repay the 2003 notes or sell assets to generate cash to satisfy its obligations.
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| S&P said it views the transaction as a distressed exchange under its corporate criteria and so on completion will be treated as a default.
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| S&P said it cut TFM because of the company's link with TMM resulting from a shared management and common long-term strategic objectives. However, TFM is partially isolated from TMM's liquidity situation because of Kansas City Southern Industries Inc.'s 49% voting stake in TFM's holding company, Grupo TFM SA de CV, and the existing covenants in TFM's bond indentures, which currently limit dividend payments to TMM.
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