Moody's upgrades New World Restaurant, rates notes B3

Moody's Investors Service assigned a provisional B3 rating to New World Restaurant Group, Inc.'s proposed $160 million senior secured notes and upgraded its existing ratings including its senior implied to B3 from Caa2 and $140 million 18% senior secured notes due June 15, 2003 to B3 from Caa2, the latter rating to be withdrawn on completion of the refinancing. The outlook, assuming completion of the transaction, will be stable instead of negative.

Moody's said the ratings reflect New World Restaurant's apparent post-acquisition operating progress, in spite of the many distractions from restating financial results for 2000 and 2001 and replacing its national distributor, and the underlying assumption that the currently untenable capital structure will be successfully refinanced.

If the refinancing fails to take place in a timely manner and a default becomes imminent, then the ratings would be lowered to reflect Moody's belief that creditors would likely suffer meaningful losses.

Ratings would also be lowered if the company fails to show meaningful reductions in overhead costs, revenue from new and existing stores does not grow, or liquidity becomes tight. Financial difficulties at a substantial proportion of franchisees or a materially adverse outcome to the SEC investigation also would place downward pressure on the ratings.

However, ratings could be increased over the intermediate term if the company is able to demonstrate operating and cash flow improvements that lead to increased financial and operational flexibility, Moody's said.

The ratings recognize the company's limited liquidity resources beyond operating cash flow and a small revolving credit facility, its highly leveraged financial condition, and Moody's opinion that the company must establish that the many recent "one-time charges" are not an ongoing cost of doing business.

The direct and indirect competition with much larger quick-service restaurant operators, the challenges in staying current with shifting consumer tastes, and potential effects of the SEC investigation also impact Moody's view of the risks facing the company. Moody's observes that balance sheet complications could arise over a longer term than considered in this rating analysis, depending upon exit strategies for the Series F PIK preferred stock.

However, the ratings also consider potential scale advantages from the company's position as the clear leader in the bagel segment, the possibility for incremental revenue and better leveraging of fixed costs as a result of growing the lunch and other non-breakfast dayparts, the progress that management has made at achieving post-merger cost savings in spite of the distractions, and management's increased ability to focus on operations after refinancing the 2003 notes, Moody's said. While the company's lack of owned real estate minimizes the potential liquidity sources from mortgages or sales/leaseback transactions, given enough time the company could raise funds from selling company operated stores to franchisees.

S&P changes New World Restaurant watch to developing, rates notes B-

Standard & Poor's changed its CreditWatch on New World Restaurant Group Inc. to developing from stable including its $140 million senior secured notes due 2003 at CCC-. S&P also assigned a B- rating to New World's proposed $160 million senior secured notes.

S&P said the revision follows New World's announcement that it plans to offer $160 million of senior secured notes maturing in 2010.

On completion of the deal, S&P will raise the corporate credit rating to B- from CCC- as it will eliminate the significant near-term refinancing risk facing the company.

A material adverse outcome of the SEC and the Department of Justice investigations is not factored into the rating, S&P noted. However, if the company is unable to refinance its existing debt or obtain cash from other sources it could result in a default.

The ratings reflect the risks associated with the company's relatively small size in the highly competitive restaurant industry, its reliance on a single primary product and day part, weak cash flow protection measures, and highly leveraged capital structure, S&P said.

Pro forma for the refinancing transaction, the company is highly leveraged with total debt to EBITDA of more than 5.5x; preferred shares are treated as equity. Cash flow protection measures are weak and highly variable due to the company's small EBITDA base, with EBITDA coverage of interest of about 1.5x. EBITDA coverage could improve in 2003 due to the absence of non-recurring expenses, S&P said.

Moody's puts Tranz Rail on upgrade review

Moody's Investors Service put Tranz Rail Ltd. in review for upgrade including Tranz Rail Finance Ltd.'s passthrough certificates series 1996 at Caa1.

Moody's said the review follows the announcement that RailAmerica Inc. (Ba3, positive outlook) will commence a tender offer for 100% of Tranz Rail's equity securities.

RailAmerica announced that it intends to offer NZ$0.75 cash for each ordinary share of Tranz Rail at a total consideration of $90 million (NZ$157.5 million) and will assume or refinance around $135 million (NZ$236 million) of Tranz Rail's existing lease obligations and outstanding debt as at Dec. 31, 2002, Moody's said.

If the acquisition materializes, the review will focus on the improvement in the liquidity position of Tranz Rail; the degree of financial support to be provided by RailAmerica to Tranz Rail; and the future strategy of RailAmerica on the operating and financial profile of Tranz Rail, Moody's said.

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