Moody's confirms Pharma Services

Moody's Investors Service confirmed its initial ratings on Pharma Services Acquisition Corp., an intermediate holding company to be merged with Quintiles Transnational Corp., including its planned senior subordinated notes at B3 and credit facility at B1. The outlook is stable.

Moody's said the ratings were assigned on June 10 based on the terms of the buy-out transaction it understood at that time and based on its expectation that Eli Lilly would receive approval for Cymbalta by year-end 2003, which is now less certain. Moody's believes the current terms of the transaction are substantially similar, with changes to the credit facility maturities.

Moody's said the rating reflects Quintiles' high leverage following the proposed management buy-out, limited free cash flow generation, industry-wide risks including uneven pharmaceutical spending and rising operating risks particularly within Quintiles' commercialization services business and its PharmBio Development unit.

The rating also reflects Quintiles' breadth, scale and market presence as the largest contract research organization serving the pharmaceutical industry, as well as its prospects for good generation of operating cash flow.

The stable rating outlook reflects Moody's expectation that Quintiles will begin deleveraging in 2004, and that the company will not use incremental debt to fund additional PharmaBio investments. The stable outlook also assumes an early 2004 launch of Eli Lilly's Cymbalta (duloxetine for depression), which should help reverse the declining operating trends in Quintiles CSO business. If it becomes apparent that Cymbalta may be substantially delayed, Quintiles outlook and/or ratings could face downward pressure, Moody's added.

The operating company capital structure includes $310 million of bank debt and $450 million of senior subordinated notes, and Moody's projects pro forma debt/EBITDA of approximately 4.0 for 2003, although leverage rises to over 5 times after adjusting for Quintiles' high operating leases. Likewise, Moody's projects EBIT/interest of 1.5x. and EBITDA-capex/interest of 1.8x.

Fitch confirms Levi Strauss, rates loan BB, BB-

Fitch Ratings confirmed Levi Strauss & Co.'s $1.7 billion senior unsecured debt at B and assigned a BB rating to its planned $650 million asset-based loan due 2007 and a BB- rating to its $500 million term loan due 2009. The outlook remains negative.

Fitch's confirmation follows Levi's announcement of organizational changes that will eliminate about 650 salaried positions throughout the world and necessitate restructuring charges of $70-80 million.

Fitch said the negative outlook reflects the continued challenges Levi faces in stimulating top-line sales growth and maintaining operating margins.

Levi's ratings reflect the ongoing difficulties it has encountered in increasing sales and profit margins, Fitch added. The slower than expected pace of debt reduction, which has been largely driven by the cash costs of the restructuring charges and the weak retail environment and shows no signs of easing, are also factored into the assigned ratings.

In addition, the uncertain impact of the Levi Strauss Signature line on the company's core business remains a concern.

These factors are weighed against Levi's solid brands, with leading market positions as well as the geographic diversity of its revenue base, and sufficient cash flow generation to meet capital needs.

Credit measures will be modestly weaker than previously expected, as cash flow that had been earmarked for debt reduction will be used to pay for restructuring costs. However, leverage at year end will be somewhat better than at the end of the second quarter, when total debt/EBITDA reached 5.8 times, Fitch said.

Fitch expects Levi's leverage to improve significantly in 2004 as EBITDA benefits from cost savings associated with the restructuring. In addition, though revenues in its core business are expected to remain soft, the full-year benefit of the Levi Strauss Signature line, coupled with the cost savings, should lead to a substantial improvement in the company's profit margins.

Moody's rates Seminis notes B3, loan B1

Moody's Investors Service assigned a B3 rating to Seminis Vegetable Seeds, Inc.'s proposed $190 million senior subordinated notes and a B1 to its proposed $250 million senior secured credit facility. The outlook is stable.

Moody's said the ratings reflect Seminis' aggressive financial profile, with high pro forma debt and limited free cash flow available for debt reduction.

The ratings also take into account risks associated with the high level of inventories needed to operate the business and the company's limited track record of profitable operation following a series of acquisitions that resulted in large restructuring charges and inventory write-offs in 2000-01.

The ratings also consider Seminis' leading position in the fruit and vegetable seed business, its diverse revenue stream and the defensibility of its strategic position, anchored by ownership of the world's largest seed germplasm bank.

Pro forma for the transaction, Moody's assumes EBITDA of approximately $90 million (after a $5 million management fee), which results in total debt/EBITDA of 4.8x. Pro forma debt to revenues would be 92%, and debt to book capitalization, 61%. Moody's estimated EBITDA would produce roughly $25 million in free cash flow before working capital investment (and assuming no use of tax NOLs), representing about 6% of debt, which is weak for the rating level.

Moody's expects ongoing investment in working capital, which would reduce cash flow available for debt repayment. While Seminis has $194 million of pro forma book equity, Fox Paine expects $40 million of the $241 million in contributed equity to be in the form of holding company 12% PIK preferred stock held by certain Fox Paine co-investors, and contributed as equity to Seminis.

Moody's rates VCA Antech loan B1

Moody's Investors Service rated VCA Antech Inc.'s new $146.4 million senior secured term loan D at B1 and withdrew the ratings on the previous term loan C, which was repaid with the proceeds. Furthermore, the ratings outlook was changed to positive from stable.

Ratings reflect the company's high levels of goodwill, high leverage, significant rent expense and integration risk from acquisitions. Somewhat offsetting these factors is the company's diversified hospital and laboratory base, diversified recurring customer base and recent deleveraging through a $54 million equity issuance that has resulted in net debt declining to $316 million at the end of June 2003 from $375 million at the end of 2002, Moody's said.

The change in outlook is due to the company's improving financial coverage ratios and strong recurring demand for its services, and reflects the expectation that the VCA Antech's acquisition strategy will continue to be exercised cautiously and at a pace that allows management to integrate the acquisitions and to continue to report positive free cash flow after capital expenditures, Moody's added.

Pro forma for the transaction, debt to EBITDA for the last twelve months ended June 30, was approximately 2.8x. Pro forma EBITDA coverage of interest was approximately 3.8x and EBITDA less capital expenditures coverage of interest was around 3.2x. Pro forma debt to free cash flow was around 6.0x, Moody's said.

Fitch confirms Legrand

Fitch Ratings confirmed the ratings of Legrand SA including its €600 million equivalent senior unsecured 10-year notes at BB- and €2.083 billion senior secured facilities at BBB-. The outlook remains stable.

Fitch said the three-notch differential between the notes and the senior secured facilities reflects its of the significant difference in the potential recovery prospects between the two classes of debt in the event of any future forced restructuring or distress scenario.

As pointed out in Fitch's Feb. 6 release, the rating of the notes reflects their structural subordination to both the senior secured lenders and to the other classes of creditor at the FIMAF, Legrand SA and operating subsidiary levels. Given the weak position of noteholders and their uncertain treatment in a restructuring or distress situation, Fitch believes that potential recoveries for the noteholders would be likely to be severely restricted.

For the full year to Dec. 31, 2002, Legrand achieved sales and EBITDA of €2.970 billion and €612 million respectively, compared to sales and EBITDA of €3.096 billion and €625 million in 2001. The results for the half year ended June 30, 2003 show an 8.8% decline in revenues year-on-year, mainly due to adverse exchange rate movement. However, on a like-for-like basis, Legrand was able to increase its EBITDA margin to 20.6% (versus 19.4% for the first half of 2002), which is considered a positive development in the current economic climate, Fitch said.

S&P puts Oxford Automotive on watch

Standard & Poor's put Oxford Automotive Inc. on CreditWatch negative including its corporate credit rating at B+.

S&P said the action follows the cancellation of the company's recent proposed debt offering.

S&P said the CreditWatch reflects its need to evaluate the company's current capital structure, liquidity sources and alternative financing plans.

Since the postponement of the debt offering, Oxford has received some additional financing from its equity sponsor and it is anticipated that the company will receive additional financial support in the near term.

Still, the company remains aggressively leveraged and has limited liquidity, S&P said.

Fitch rates MGM Mirage notes BB+

Fitch Ratings assigned a BB+ rating to MGM Mirage's $600 million 6% senior secured notes due 2009. The outlook is positive.

Fitch said the ratings reflect MGM Mirage's market-leading assets, significant discretionary free cash flow, steady improvement of credit measures in a difficult operating environment and visible growth prospects.

Offsetting factors include the company's limited geographic diversification and risk that cash flow will be directed toward share repurchases and/or other investment opportunities at the expense of further capital structure strengthening.

The positive outlook reflects the firm fundamentals in Las Vegas and at MGM Mirage's properties and the resilience of the gaming sector following a number of adverse factors over the last several years.

The outlook also reflects the reduced risk and earnings contribution provided by the start up of the company's 50%-owned Borgata property in Atlantic City.

Incorporated in the outlook is MGM Mirage's stated intention and capacity to reduce leverage to investment grade levels over the intermediate term. Recently, MGM Mirage decided not to pay a dividend until capital projects are complete and credit measures improve. While the company continues to reduce debt, this is somewhat offset by heavier than anticipated share repurchase activity year-to-date.

For the full year 2003, Fitch expects EBITDA to decline roughly 5% versus the prior year. This primarily reflects the impact of a sluggish economy, the war and SARS on Las Vegas in the first half, potential construction disruption at Bellagio, and the loss of cash flow from the Golden Nugget properties (now in the process of being sold) in the second half of the year. For the year, Fitch expects free cash flow to be split 60/40 between debt repayment and share repurchases. This implies leverage and coverage of 4.5 times (x) and 3.2x, respectively, versus 4.4x and 3.3x at the end of fisacl 2002.

S&P says Scientific Games unchanged

Standard & Poor's said Scientific Games Corp.'s ratings are unchanged including its corporate credit at BB- with a stable outlook following the gaming operator's agreement to acquire IGT OnLine Entertainment Systems Inc. for approximately $143 million in cash.

The acquisition fits with Scientific Games' strategy of expanding its presence in the on-line lottery segment, S&P noted.

Scientific Games had adequate debt capacity within its rating to pursue growth opportunities, while maintaining credit protection measures appropriate for its BB- rating.

Moody's raises Pathmark outlook, rates notes B2

Moody's Investors Service assigned a B2 rating to Pathmark Stores, Inc.'s new $100 million senior subordinated notes due 2012, raised its outlook to stable from negative and confirmed its ratings including its $200 million 8¾% senior subordinated notes due 2012 at B2.

Moody's said the revision of the outlook was prompted by small market share gains around the New York and Philadelphia metropolitan region and margin improvements as the promotional environment has somewhat subsided.

Constraining the ratings are the company's leveraged financial condition, the low-margin nature of the highly competitive supermarket industry and Moody's belief that the company needs to invest most operating cash flow in refurbishing its store base.

However, the recent improvements in market share and operating margins and the wide regional recognition of the "Pathmark" name support the currently assigned ratings.

For the 12 months ending August 2, 2003, lease adjusted debt to EBITDAR equaled about 4.5 times and fixed charge coverage was around 1.9 times, Moody's said. Compared to before the September 2000 reorganization when most cash was used for interest payments, capital investment has more than doubled as the company makes up for an extended period of underinvestment. However, Moody's believes that the company needs to continue renovating stores as quickly as its liquidity situation permits.

Moody's rates Premcor liquidity SGL-2

Moody's Investors Service assigned an SGL-2 liquidity rating to Premcor Refining Group, wholly-owned by Premcor, Inc.

Although tempered by extreme sector margin volatility, the SGL-2 rating indicates good expected internal coverage over the next 12 months by balance sheet cash and operating cash flow of: substantial interest expense; minor scheduled maturities; and rising heavy mandatory capital spending through at least 2005.

Much of the near-term risk of extreme margin volatility and heavy capital spending is mitigated by mid-2003 consolidated unrestricted cash balances of $450 million, Moody's said.

The rating is further supported by Premcor's $75 million cash borrowing sub-tranche (depending on letter of credit outstandings) under its $750 million working capital secured borrowing base revolver maturing February 2006.

The SGL-2 liquidity rating is tempered by and vulnerable to: extreme margin volatility driven by a number of global, U.S., and regional forces; an aggressive growth and acquisition program; the risk of underestimating capital spending needed to meet mandatory low sulfur gasoline and diesel fuel specifications; an inability to materially reduce heavy 2004 and 2005 capital spending once it is commenced; the inherent risk of unscheduled downtime; and heavy and seasonal working capital and letter of credit needs, Moody's added.

Moody's rates Dura liquidity SGL-3

Moody's Investors Service assigned an SGL-3 speculative-grade liquidity rating to Dura Automotive Systems, Inc.

Moody's said the SGL-3 rating reflects that Dura Automotive is currently maintaining liquidity consisting of cash plus unused revolving credit availability (after incorporating covenant restrictions) that ranges between $125 million to $175 million.

Moody's considers this level of available liquidity to be adequate, relative to Dura Automotive's more than $2 billion per annum revenue base.

The bulk of Dura Automotive's available liquidity is being maintained in the form of cash, as management desires to operate the company with a comfortable protective cushion. The covenants under the existing bank credit agreement are fairly restrictive.

While there were actually no outstandings under the existing $390 million revolving credit facility at second quarter end June 30, 2003, it is meaningful that only about $10 million of revolving credit usage would have effectively been permitted based upon covenant restrictions, Moody's said. However, Dura Automotive did notably have an approximately $163 million cash balance on that date.

Moody's rates XTO liquidity SGL-1

Moody's Investors Service assigned an SGL-1 liquidity rating to XTO Energy, Inc.

Moderately sensitized for market benchmark prices of $3.50/mmbtu for natural gas prices and $21/barrel for crude oil, the SGL-1 liquidity rating reflects very good operating cash flow cover over the next 12 months of visible cash needs, Moody's said. These include: interest, no scheduled maturities, budgeted capital spending to maintain production, discretionary capital spending and dividends.

Assuming finding and development costs do not rise materially to consume expected free cash flow, at those prices XTO sustains a degree of growth capital spending and/or debt reduction. If natural gas prices remain in up-cycle for the next 12 months, free cash flow would also fund a portion of XTO's aggressive acquisition plan, Moody's added.

The sensitized cash flow coverage amply mitigates both the lack of material balance sheet cash and the exposure of a heavily drawn secured bank revolver to the risk of downward borrowing base revisions during weak prices. Debt maturities are minor, the revolver matures May 12, 2005, and revolver covenants are amply covered at sensitized prices. Sensitized cash flow is aided by XTO hedging of roughly 44% of 2004 natural gas production at an average price in the range of $4.70/mmbtu, with no oil hedging in place for 2004.

The SGL-1 rating is principally vulnerable to XTO's aggressive acquisition program, particularly if not suitably funded with equity, and if natural gas and oil prices fall below sensitized levels.

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