Moody's rates new Valassis convertible Baa3

Moody's Investors Service assigned a Baa3 rating to Valassis Communications Inc.'s new $160 million of senior unsecured convertible notes due 2033.

Also, Moody's confirmed the Baa3 rating on the company's $100 million senior unsecured notes due 2009 and $272 million zero-coupon senior unsecured convertible notes due 2021, with current accreted value of $158.2 million. The outlook is stable.

The confirmation reflects steady growth and an expectation the company will continue to benefit from its substantial market share position in the expanding free standing insert industry, the maintenance of fairly stable gross profit margins and a high conversion of EBITDA to free cash flow.

The rating also incorporates the expectation of stable debt protection measures despite the recent acquisition of NCH Marketing for nearly $60 million in cash, competitive pricing pressure, market share loss to News America and anticipated modest additional share repurchase activity in 2003, Moody's said.

While gross debt will increase, Valassis has stated that net proceeds from the convertible note issuance will be used for general corporate purposes, including potentially repurchasing outstanding debt.

Despite the potential for lower margins, Moody's expects Valassis will generate at least $100 million in free cash flow this year, which is more than a 50% conversion of EBITDA. Capital requirements are very low, and Moody's expects the company will continue to invest in developing related businesses and making small tuck-in acquisitions over time.

However, Moody's does not anticipate meaningful debt reduction as the board of directors has authorized up to 75% of free cash flow to be allocated to share repurchases over the course of the remainder of the year.

Over the intermediate term, Moody's believes operating performance could weaken somewhat due to continuing pricing pressure and market share loss to News America, the current market share leader in the duopoly FSI industry.

S&P rates new Bunge notes BBB

Standard & Poor's assigned a BBB senior unsecured debt rating to Bunge Ltd. Finance Corp.'s $300 million of 5.875% senior notes due 2013 and affirmed its other ratings.

Pro forma, White Plains, N.Y.-based Bunge will have about $2 billion in total debt.

The ratings reflect Bunge's position as the largest player in global oilseed origination, trading, and processing, with broad geographic and product diversity. Moderate financial policies and improving profitability measures, as well as an experienced management team, also provide support.

These strengths are offset by the predominately commodity-oriented nature of Bunge's operations, which are subject to the price variability associated with supply and demand conditions and intensely competitive markets, S&P said.

Cash flow generation is expected to continue to improve and be adequate for the rating.

S&P expects adjusted EBITDA to interest to be in the 5.5x area, adjusted pretax coverage in the 3.5x area and adjusted total debt to EBITDA in the 3x area. Adjusted EBITDA margins are expected to remain in the 4.0% to 4.5% range.

Liquidity is adequate with $396 million of cash and marketable securities, highly liquid commodity inventories, availability under seasonal lines of credit and $76 million available under a $600 million commercial paper facility at March 31. In addition, there is about $380 million of available borrowing capacity under credit facilities and credit lines.

Furthermore, Bunge has guaranteed a €600 million revolving credit facility entered into by its Cereol subsidiary to refinance the debt assumed as part of the Cereol acquisition.

Liabilities are manageable and S&P does not foresee any issues in the near term as debt maturities are moderate intermediately.

The outlook is stable.

S&P confirms Valero

Standard & Poor's confirmed the ratings of Valero Energy Corp., including senior debt at BBB and preferreds at BBB-, following its plans to acquire Orion Refining Corp. for $500 million.

The acquisitions effectively has been financed through the prior issuance of $250 million of new common equity and the proceeds from a planned $250 million offering of mandatory convertible preferred stock.

The ratings outlook remains negative as the transactions are only modestly beneficial to Valero Energy's financial profile, particularly given the operational risks posed by the Orion refinery, S&P said.

Furthermore, Valero continues to face material clean fuels expenditures through 2004 that could cause its financial profile to significantly worsen should refining margins experience a sharp downturn.

The ratings reflect risks associated with participation in the volatile, fiercely competitive and capital-intensive North American refining industry, an acquisitive growth strategy and moderate financial policies.

Debt levels are somewhat aggressive for the current rating. S&P expects Valero to deleverage further over the medium term. Although total balance sheet debt is reported at $4.5 billion, S&P calculates total obligations including off-balance-sheet transactions at about $5.5 billion.

Based on average funds from operations of about $1.1 billion and pro forma total debt, pro forma FFO to total debt should average about 20%. Nevertheless, assuming no debt reduction, coverage ratios will be volatile, with peak FFO to total debt nearing 40% and trough coverage potentially as low as 10%.

Liquidity should be adequate to fund operations and repay maturing debt for the next two years, S&P said. At March 31, Valero had about $740 million of cash on hand and $1.2 billion of incremental bank borrowing capacity. Liquidity could tighten at year end, and prompt a ratings downgrade, if Valero is unsuccessful in extending its 364-day bank credit facility without a suitable replacement.

Other sources of liquidity include a C$115 million bank credit facility and a $250 million accounts receivable program that likely could be expanded to $500 million.

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