Fitch cuts Fleming, on watch

Fitch Ratings downgraded Fleming Cos., Inc. and put it on Rating Watch Negative. Ratings lowered include Fleming's senior unsecured debt, cut to B+ from BB-, and senior subordinated debt, cut to B- from B. Fitch also confirmed Fleming's bank facility at BB, reflecting the significant asset protection provided by the facility to the lenders.

Fitch said the downgrade is in response to weakness in Fleming's operating performance, a reduction in anticipated proceeds from its retail divestitures and the termination of its existing supply agreement with Kmart Corp.

Fleming's recently reported 2002 results reflected a 17% increase in its distribution revenues due to new business from acquisitions and some significant new customers, Fitch noted. However, its operating profitability softened due to a heightened competitive environment, weak economy and rising overhead costs, particularly pensions and health care.

As a result of these factors, operating margins weakened in 2002 from prior year levels and the improvement in credit protection measures Fitch had anticipated has not materialized.

In addition, in Sept. 2002 Fleming announced plans to divest its retail business and apply the expected $450 million in proceeds to debt reduction. Subsequently, Fleming lowered its forecasted proceeds. While this reduction is partially offset by a higher retention of the distribution business from sold stores, proceeds available for debt reduction in 2003 will be lower than initially expected, which will limit Fleming's ability to strengthen its credit measures, Fitch said.

The announcement of the termination of Fleming's agreement with Kmart is likely to result in significant one-time costs, along with the loss of about $3 billion in revenues to Fleming. However, the termination also eliminates a significant uncertainty surrounding Fleming's ability to profitably service the low-margin Kmart business and resolves whether its ties to the troubled retailer were in Fleming's best interest over the longer term, Fitch said.

Fleming has some financial flexibility to work through the significant changes to its business as it has no debt maturities until 2007. However, Fleming is currently re-negotiating its secured bank agreement, which is not slated to mature until 2007, Fitch said. The new or amended facility is expected to have covenant levels based, in part, on the assets of Fleming that will provide the company with more flexibility. Fitch anticipates that Fleming will be successful in this negotiation.

S&P raises BSkyB outlook

Standard & Poor's raised its outlook on British Sky Broadcasting Group plc to positive from stable and confirmed its ratings including its bank loan and senior unsecured debt at BB+.

S&P said the revision reflects BSkyB's improved competitive position that has reinforced S&P's belief that the company will continue to improve its financial profile by paying down debt from rising free cash generation.

If sufficient progress is made over the next 1-2 years, the ratings on the company could merit a return to investment grade, S&P added. However the rating agency added that it would need clarification of the company's dividend policy.

S&P said BSkyB's ratings reflect its market position as the largest pay-TV program provider and pay-TV retailer in the U.K. offset by the company's sub-investment grade financial ratios and by its limited business and geographical diversification. The ratings are also tempered by BSkyB's opportunist management strategies.

The company's predominantly fixed-cost base means that there is a quarterly trend of net cash inflow now that critical mass of subscribers has been achieved and rising revenues translate into improved margins, S&P said. BSkyB has a high proportion of monthly subscription revenues combined with low customer churn. On the cost side, subscriber acquisition and customer service overheads are declining while inflation of programming costs has reduced.

Fitch cuts Trenwick to C

Fitch Ratings downgraded Trenwick Group Ltd. and its subsidiaries including cutting the senior debt to C from CC. The capital securities and preferred stock remain at C.

Fitch said the action follows Trenwick's announcement that it is taking a $107 million reserve charge.

Fitch said it believes that Trenwick's business prospects and financial flexibility are very limited and that the company will be unable to refinance its senior debt. In addition, Fitch believes that Trenwick's ability to remain a going-concern is heavily dependent on financing provided by an existing letter-of-credit facility. The LOC facility's covenants include a provision that Trenwick refinance its outstanding senior debt by March 1, 2003. As a result, Fitch believes that senior debt holders may be forced to consider accepting some form of payment-in-kind arrangement.

S&P says Sierra Pacific unchanged

Standard & Poor's said Sierra Pacific Resources' ratings remain unchanged including its corporate credit rating at B+ on CreditWatch with negative implications following the company's announcement that it will accelerate the conversion of about 30% or $105 million of its premium income equity securities through the issue of 13.6 million shares.

Sierra Pacific will save about $26 million in interest over the original November 2005 term to maturity, S&P noted.

But it said Sierra Pacific remains on CreditWatch due to the risk that it may be unable to refinance its upcoming $200 million debt maturity in April 2003.

S&P says Perry Ellis unchanged

Standard & Poor's said Perry Ellis International Inc.'s ratings are unchanged including its corporate credit at B+ with a stable outlook on news that it will acquire Salant Corp. for $91 million.

The purchase price includes approximately $52 million in cash with the balance in newly issued Perry Ellis International common stock.

Salant is the company's largest licensee of Perry Ellis branded apparel and had estimated 2002 sales of about $250 million, of which $170 million was from Perry Ellis products.

This transaction will provide Perry Ellis International with complete control of the brand and is expected to be immediately accretive, S&P said.

Moody's rates Rite Aid notes B3

Moody's Investors Service assigned a B3 rating to Rite Aid Corp.'s $200 million senior secured notes due 2011 and confirmed its existing ratings including its $1.9 billion secured bank facility at B2, $2.0 billion of senior notes in 10 at Caa3, $20 million 7% redeemable preferred stock at C and speculative grade liquidity rating at SGL-3. The outlook is stable.

Increasing cash flow and more efficient asset management, which has modestly improved the company's ability to cover fixed charges and necessary investment over the next year, support the rating, Moody's said.

But it added that an upgrade of the fundamental ratings is unlikely unless the company makes further progress at refinancing the debt due between 2005 and 2007.

Moody's said the ratings continue to reflect its opinion that Rite Aid's current level of operating performance will not support a $4 billion debt burden over the long term.

Given weak market sentiment for providing capital to highly leveraged retailers, the need for material operating improvement over the next 18 months continues to pressure the company, Moody's added.

Moody's believes that store repair and maintenance should at least equal depreciation over the longer term, so the company must soon demonstrate the ability to support all obligations from internally generated cash flow, including a normal level of capital investment.

S&P rates Rite Aid notes B-

Standard & Poor's assigned a B- rating to Rite Aid Corp.'s proposed $200 million senior secured notes due 2011 and confirmed its existing ratings including its senior secured debt at BB-, senior unsecured debt at B- and subordinated debt at CCC+. The outlook is positive.

The senior secured notes are rated one notch below the corporate credit rating because the issue is secured by a second priority lien on inventory, accounts receivable, and other assets of Rite Aid's operating subsidiaries, S&P said, adding that it does not see enough intrinsic value in this collateral to indicate that this debt would receive materially better protection than unsecured senior debt.

Rite Aid's ratings reflect the challenges it faces in improving operations at its drug stores amidst intense competition, S&P said. The ratings also reflect the company's significant debt burden and thin cash flow protection.

Although Rite Aid is a dominant player in the drug store chain industry, ranking second in terms of units, credit protection and profitability measures are weak due to previous management's poor execution of a rapid growth strategy, S&P added.

The company's operating performance has been improving since fiscal 2000 due to strategies put in place by new management.

Rite Aid's recurring EBITDA margin increased to 6.1% in fiscal 2002 (ended March 2, 2002) from 5.7% in fiscal 2001, and to 7.1% in the first nine months of fiscal 2003 from 6.0% in the first nine months of fiscal 2002, S&P said. Still, Rite Aid needs to continue taking aggressive steps to improve store execution and operating efficiencies, as its profitability measures remain significantly below those of its chief rivals, Walgreen Co. and CVS Corp. Walgreen's EBITDA margin was 9.1% for fiscal 2002 (ended August 2002), and CVS's margin was 9.3% for the nine months ended Sept. 31, 2002.

Rite Aid's credit protection measures are currently adequate for the rating category. EBITDA coverage of interest was about 1.7x in the first nine months of fiscal 2003, up from less than 1.0x during fiscal 2001, S&P said. Nevertheless, leverage is high with total debt to EBITDA at 6.4x so that any operating difficulties could quickly diminish credit protection measures.

S&P says Massey Energy unchanged

Standard & Poor's said Massey Energy Co.'s ratings are unchanged including its corporate credit at BB with a developing outlook on the company's fourth-quarter earnings announcement.

But S&P said it remains concerned about the key issue of refinancing risk associated with the company's maturing bank lines in November 2003.

In light of the company's recent inability to refinance its bank credit facilities, Massey faces uncertainty regarding its access to capital markets necessary in order to meet this maturity, S&P explained. As a result, Massey is trying to reduce its exposure by establishing an accounts receivable securitization facility and has transacted sale leasebacks. S&P said it does not expect that free cash flow will be sufficient to meet these maturities.

S&P confirms AirGate, keeps iPCS on watch

Standard & Poor's confirmed AirGate PCS, Inc.'s ratings including its subordinated debt at CC and removed it from CreditWatch with negative implications. The outlook is negative. But S&P kept iPCS Inc. on watch including its unsecured debt at CC and iPCS Wireless Inc.'s secured debt at CC.

S&P put Airgate on watch after the company defaulted on its bank loan and indenture for senior subordinated discount notes by not filing its annual report on Form 10-K on Dec. 31, 2002.

The removal from CreditWatch is due to the company curing its default under both the bank credit agreement and bond indenture by filing its annual report in January 2003, S&P said.

iPCS remains on watch due to substantial likelihood of a bankruptcy filing in the near term, violation of certain covenants under its bank credit agreement and notes as of Dec. 31, 2002, and rapidly dwindling liquidity, S&P said.

The rating on Airgate reflects the company's weak liquidity and potential for violating bank covenants, S&P added. At the end of September 2002, the company had about $4.9 million of cash and $12 million in availability under its bank credit facility. With weak free cash flow prospects, this level of liquidity provides little safety margin against execution missteps stemming from competition, the weak economy, and management being distracted by ongoing difficulties at iPCS.

With respect to bank covenants, a senior leverage and a total leverage test will become effective in the quarter ending in March 2003, S&P noted. Assuming that there is no additional borrowing under its bank credit facility, Airgate needs to generate at least $10 million in EBITDA in the six months ending in March 2003 to comply with the tests. Given the difficult operating environment and potential for more bad debt expense due to the high percentage of sub-prime credit quality subscribers, the company may find it challenging to achieve this level of EBITDA and thereby avoid violating the covenants in the near term.

S&P confirms Plains Exploration

Standard & Poor's confirmed Plains Exploration & Production Co. LP and removed it from CreditWatch with negative implications. Ratings confirmed include Plains Exploration's $200 million 8.75% notes due 2012 at B. The outlook is stable. S&P withdrew the ratings on Plains All American Pipeline LP's $200 million 7.75% senior notes due 2012, previously BB, and Plains Resources Inc.'s $50 million 10.25% senior subordinated notes series C due 2006 and $75 million 10.25% subordinated notes series E due 2006, previously B+.

Plains Exploration & Production will have about $520 million in outstanding debt, pro forma its recently announced $432 million acquisition of 3TEC Energy Corp., S&P noted.

The rating actions follow the completion of Plains Resources' spin-off of about 90% of its oil and gas exploration and production business to Plains Exploration & Production and the recently announced acquisition (including outstanding debt) of 3TEC.

The ratings withdrawal on Plains Resources reflects the lack of the company's public debt.

The ratings on Plains Exploration & Production reflect its significant debt leverage, the challenging economics associated with the company's reserve base, and its position as a midsize, independent oil and gas company in the volatile E&P sector, S&P said. The ratings also reflect Plains Exploration & Production's fair business position, characterized by a combination of low-risk development programs and extremely long-lived reserves in California and higher-risk exploration prospects on the Gulf Coast.

S&P said it expects that Plains Exploration & Production will generate strong cash flow in the near term, supported by favorably priced hedges on more than 60% of production. EBITDA interest coverage is expected to be around 7.0x, while expected debt to EBITDA should be around 2.0x in the near to intermediate term.

S&P raises Coventry outlook

Standard & Poor's raised its outlook on Coventry Health Care Inc. to positive from stable and confirmed its ratings including its $175 million senior notes due 2012 at BB+.

S&P said the revision reflects Coventry's improved capital adequacy and very strong profitability and operating cash flows.

But S&P said it remains cautious about the company's acquisition-based growth strategy and the potential for aggressive competitor pricing in western and central Pennsylvania, which is one of the company's core markets.

Consolidated earnings strength is expected to remain at or above its currently strong level but could be hindered by aggressive competitor pricing in western and central Pennsylvania, which is one of the company's core markets, S&P noted.

Despite the expectation for strong bottom-line performance in 2003, Coventry's capital adequacy is likely to be moderately diminished in because of the combination of revenue growth and dividends paid to the holding company. As a result, statutory surplus is expected to increase modestly by about $30 million and capital adequacy is expected to be 120%-130% as measured by Standard & Poor's capital model, which is considered very good to strong.

Moody's confirms Kellwood

Moody's Investors Service confirmed Kellwood Co. including its $150 million 7.625% senior unsecured debentures due 2017 and $150 million 7.875% senior unsecured notes at Ba1. The outlook is stable.

Moody's said its confirmation comes after Kellwood announced it will acquire Briggs New York Corp.

The confirmation reflects the anticipated benefits to Kellwood from the acquisition, including Briggs' experience in quick replenishment management, working capital management and the potential for brand extension of the purchased asset as well as product extension within Kellwood's portfolio of brands, Moody's said.

To date, Kellwood has maintained a sizable cash balance. The confirmation assumes that Kellwood would finance the acquisition prudently, that leverage will not increase and that there will not be a material introduction of secured debt, Moody's added.

The stable outlook reflects Kellwood's strong position as a leading supplier of moderate priced women's apparel as well as the company's improving balance sheet and cash flow generation, Moody's said.

Continued improvements in cash flow generation coupled with moderate leverage could lead to a positive outlook, Moody's noted. However, volatility in revenues and earnings associated with a challenged retail sector, an inability to sustain meaningful profitability margins and cash flow growth, or unanticipated integration challenges could result in a negative rating pressure.

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