S&P lowers Rotech outlook

Standard & Poor's revised its outlook on Rotech Healthcare Inc. to negative from stable. S&P rates Rotech's senior secured debt BB and subordinated debt B+.

S&P said the action follows a search by federal agents of financial records and other materials at five Rotech locations. The U.S. Attorney's Office for the Northern District of Illinois also served Rotech with a grand jury subpoena relating to the same information.

Although the focus and timing of this federal investigation are currently unclear, S&P said it will evaluate the effect of the investigation on Rotech's rating as developments occur.

Rotech's ratings reflect the highly leveraged company's vulnerability to third-party reimbursement, cost-containment pressures, and a narrow business focus. These challenges are partly offset by the company's operating efficiency and leading position in its niche industry segment.

Rotech's capital structure is expected to strengthen from its currently aggressive levels as the company's term loan amortizes and as earnings improve, S&P said. The company repaid $20 million of term debt in excess of amortization requirements in 2002. At year-end, total debt to capital was nearly 50%.

Although the new investigation is a significant uncertainty, in the near term, profitability and cash-flow protection measures are expected to remain consistent with the rating category, with operating margins averaging in the high-20% area, funds from operations to total debt above 20%, and EBITDA interest coverage above 3x, S&P said. Return on permanent capital, though, will likely remain low at below 10%. Earnings quality is also tempered somewhat by unrecognized stock-based employee compensation expenses.

S&P keeps UAL non-defaulted debt on watch

Standard & Poor's said UAL Corp.'s debt that has not defaulted remains on CreditWatch with negative implications.

S&P's comments came after UAL Corp., parent of United Air Lines Inc., reported a first-quarter 2003 net and pretax loss of $1.3 billion, including $385 million of reorganization items and other special charges, two days after reaching final agreement with all labor groups on concessionary contracts to reduce costs.

UAL's heavy loss was expected and the company very likely incurred a further substantial deficit in April, but will benefit going forward from concessionary labor contracts intended to save an average of $2.56 billion annually over 2003-2008, compared with expenses that would be incurred under the current contracts, S&P said.

Loss of revenue on Pacific routes from passenger concerns over the SARS virus and the continuing risk of a breach of covenant in two debtor-in-possession facilities remain risks, S&P added.

UAL's pretax loss margin of 30% before special items was even worse than peer AMR Corp.'s negative 25% for the first quarter, despite implementation of interim wage cuts at the beginning of 2003. Still, savings from suspension of many debt payments limited the operating cash outflow to about $2 million per day ($4 million per day outflow including nonoperating cash expenditures), and the company's unrestricted cash balance at March 31, 2003, was about $956 million, including proceeds from an additional DIP borrowing of $92 million.

United continues also to seek to renegotiate many aircraft financings to bring debt service down to levels reflecting the current depressed aircraft market, S&P noted. The airline has, however, resumed some debt service on many of its aircraft. United has also missed payments on most of its airport revenue bonds and stated that has stopped making any such payments since April 2003.

Moody's withdraws Venture ratings

Moody's Investors Service withdrew all ratings on Venture Holdings Company, LLC after it filed for Chapter 11 bankruptcy filing for its U.S. operations on March 28.

Venture ultimately filed for bankruptcy protection in response to events over the past year at its European operations that severely affected liquidity, Moody's noted. The company expects to be able to file a plan of reorganization within the near future which would entail a new capital structure.

Moody's cuts MTS

Moody's Investors Service downgraded MTS, Inc., the parent company of Tower Records, including cutting its senior subordinated notes due May 2005 to C from Ca. The outlook is stable.

Moody's said the action follow the company's announcement that it will defer an interest payment on its subordinated notes, as well as the delayed release of the company's 10Q announcing very weak earnings for MTS' second fiscal quarter.

Tower's second fiscal quarter ends in January, and is typically its most robust quarter since it includes the holiday period.

The ratings reflect Moody's increased expectation of loss throughout the capital structure as a result of the payment default following unexpectedly weak earnings.

Tower's operating income before extraordinary items was near zero for the holiday quarter, and the company did not generate positive cash flow from its continuing U.S. operations for the first 6 months of its fiscal year.

Moody's said it believes these operating results could reflect accelerated decline in Tower's long-term enterprise value, in addition to weak performance trends exhibited by retailers of recorded music.

The corporate ratings recognize the likelihood of substantial recovery of value for secured lenders and the potential for impairment of senior unsecured obligations. The ratings of the subordinated notes reflect the likelihood of severe loss in a distressed exchange or bankruptcy given thin asset coverage after claims of secured and unsecured creditors.

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