Moody's upgrades Dean Foods

Moody's Investors Service upgraded Dean Foods Co. including raising its $2.7 billion senior secured credit facility maturing 2007-2008 to Ba1 from Ba2, Dean Holding Co.'s $100 million 6.75% senior unsecured notes due 2005, $250 million 8.15% senior unsecured notes due 2007, $200 million 6.63% senior unsecured notes due 2009 and $150 million 6.9% senior unsecured notes due 2017 to Ba3 from B1 and Dean Capital Trust's $600 million trust convertible preferred (TIPES) to B1 from B2. The outlook is stable.

Moody's said the upgrade reflects Dean's effective integration of Dean Food Corp. (Old Dean) and reduction in leverage since the December 2001 $1.7 billion acquisition of Old Dean, which added 70% to Dean's revenue base.

Moody's noted that the stable outlook accommodates share repurchases if funded from cash flow, as well as add-on acquisitions that do not result in leverage above Dean's targeted parameters of 3-3.5x EBITDA (excluding the TIPES).

Ratings could gain support with continued leverage reduction and enhancement to the company's business platform over time through further asset rationalization, cost reduction, and sustained success in the growth and development of its branded product portfolio, Moody's said. Ratings pressure could develop from debt-funded share repurchases or acquisitions.

Dean has realized over $100 million of cost savings to date compared with the initial $60 million targeted cost savings following the acquisition of Old Dean, the rating agency noted. Dean believes it can achieve an additional $50 million of savings over the next two years.

Dean's ratings are limited by its financial leverage and the low margins characteristic of Dean's traditional dairy business, its primary operating segment (Dean's traditional dairy business accounted for about 75% of 2002 revenues), Moody's said. In addition, Dean has high growth objectives, has been acquisition-oriented, and has done significant share repurchases.

Dean reduced debt to $3.3 billion (including the TIPES) at Dec. 31, 2002 from $3.6 billion at Dec. 31, 2001 (following the acquisition of Old Dean), decreasing leverage to 4.0x EBITDA from 4.4x at (pro forma for the Old Dean acquisition), Moody's said.

Moody's cuts Aquila, still on review

Moody's Investors Service downgraded Aquila, Inc. including cutting its senior unsecured debt to B1 from Ba2, subordinate debt to B2 from Ba3 and preferred stock to B3 from B1. The ratings remain on review for possible further downgrade.

Moody's said the downgrade reflects weak cash flow generation relative to total debt; asset sales proceeds which have not sufficiently reduced the debt that was incurred to purchase the same assets; liquidity pressures related to the trading business that Aquila is winding down; the need to extend or replace maturing bank facilities; which Moody's believes will require regulatory approvals for the provision of security.

Aquila advises that it has over $300 million in cash on hand, Moody's said but noted one of the company's principal bank credit facilities matures in April, and a waiver of default under the other facility also expires in April. Without an extension of its bank credit facilities the company would not have sufficient cash to repay its maturing debt obligations and leave itself a comfortable cash cushion with which to operate.

S&P cuts MeriStar

Standard & Poor's downgraded MeriStar Hospitality Corp. including cutting its $150 million 4.75% convertible subordinated notes due 2004, $150 million 8.75% senior subordinated notes due 2007 and $55 million 8.75% senior subordinated notes due 2007 to CCC from CCC+ and MeriStar Hospitality Operating Partnership, LP's $100 million revolving credit facility due 2005, $250 million 10.5% senior unsecured notes due 2009 and $300 million 9% tranche 1 senior unsecured notes due 2008 to B- from B. The outlook is negative.

S&P said the downgrade is based on MeriStar's limited liquidity position and S&P's expectation that MeriStar's credit measures will deteriorate more in 2003 than previously expected.

Based on the company's EBITDA guidance of $46-$50 million for the first quarter and roughly $190 million for the full year, total operating lease adjusted debt to EBITDA ratio will likely be in the mid- to low-8x area throughout the year, S&P noted.

For 2002, the company's portfolio of hotels experienced an 8.6% decline in revenue-per-available room (RevPAR) and generated $216 million in EBITDA. This represented a 20% decline in EBITDA over 2001.

At the end of 2002, MeriStar's credit measures were very weak with debt to EBITDA in the high-7x and EBITDA coverage of interest expense under 2x, S&P said.

S&P confirms Lyondell, off watch

Standard & Poor's confirmed Lyondell Chemical Co. and removed it from CreditWatch with negative implications. The outlook is negative. Ratings confirmed include Lyondell's $1 billion 9.875% senior secured notes series B due 2007, $275 million 11.125% senior secured notes due 2012, $350 million revolving credit facility due 2005, $420 million term E bank loan due 2006, $730 million 9.5% senior secured notes due 2008, $900 million 9.625% senior secured notes series A due 2007 and Lyondell Chemical Worldwide, Inc.'s $100 million 10.25% debentures due 2010, $100 million 9.375% debentures due 2005 and $225 million 9.8% debentures due 2020 at BB and Lyondell's $500 million 10.875% senior subordinated notes due 2009 at B+.

S&P said the actions are in response to indications that business disruptions related to reduced crude oil deliveries from Venezuela to one of Lyondell's affiliates, 58.75%-owned Lyondell-Citgo Refining LP, would be limited in terms of the potential affect on Lyondell's credit profile.

The ratings confirmation followed Lyondell's announcement that it has restored operating rates at Lyondell-Citgo to near normal levels, S&P said. Earlier this year, Lyondell-Citgo's business was disrupted by a lack of crude availability from Venezuela's state-owned oil company, PDVSA, related to a general strike against the Chavez administration. While cash distributions to Lyondell are expected to fall short of earlier expectations, despite Lyondell-Citgo's recent ability to obtain and process crude from alternative sources, it now appears that other credit concerns, such as the risk that Lyondell would find it necessary to use its credit capacity to support LCR, will be resolved satisfactorily.

The ratings incorporate expectations that a gradual recovery in business conditions and moderate capital spending will lead to strengthened credit protection measures, S&P said. In terms of operating prospects, most of the improvement is likely to come from Lyondell's increased stake in Equistar, which appears positioned to benefit from an upturn in the cycle as conditions tighten. On a consolidated basis, debt to EBITDA should improve from currently weak levels above 7.0x to about 3.0x, within several years. There is now very limited capacity in the ratings for additional weakness in the petrochemical cycle, despite Lyondell's ability to preserve liquidity.

S&P lowers Equistar outlook

Standard & Poor's lowered its outlook on Equistar Chemicals LP to negative from stable and confirmed its ratings including its senior secured debt at BB+ and senior unsecured debt at BB.

S&P said the outlook revision follows disappointing fourth quarter results, which underscore the ongoing challenges faced by petrochemical companies in the current operating environment.

Equistar's operating profits declined sharply from the previous quarter as rapid increases to raw material costs eroded margins, while demand showed some weakness due to seasonal issues and economic malaise, S&P noted. These results raise concern that anticipated improvements to the financial profile may be delayed further, particularly if geopolitical turbulence forestalls recent efforts to expand margins in the face of raw material pressures.

The ratings incorporate recognition of Equistar's position as a major petrochemical producer, and the risks associated with an aggressive financial profile that reflects an onerous debt burden and operating margins that vary widely over the course of the business cycle, S&P added. The business risks associated with commodity petrochemical producers include volatile raw materials linked to oil and natural gas derivatives, capital intensity and pricing that is determined by the dynamic balance between supply and demand. These limitations are offset by Equistar's ability to generate strong free cash flows as business conditions improve, a commitment to restoring credit quality, and by good sources of liquidity including an a $450 million committed bank facility.

Over the course of the business cycle, the partnership is expected to comfortably meet capital spending and interest requirements from internal cash generation, although the depth of the current industry downturn has resulted in temporary free cash flow deficits, S&P said. Similarly, funds from operations as a percentage of total debt is weak for the rating at below 5%, but should strengthen as market conditions improve and average 20% through the industry cycle. Total adjusted debt to total capitalization is close to 60%, slightly above the appropriate 55% level.

Moody's raises Leica Geosystems outlook

Moody's Investors Service raised its outlook on Leica Geosystems AG to positive from stable including its €65 million 9.875% senior notes due 2008 issued through Leica Geosystems Finance plc at B1 and CHF 270 million senior unsecured multi-currency revolving credit facility.

Moody's said it raised Leica Geosystems' outlook because of the company's continued operating progress over recent quarters combined with an improvement in certain business fundamentals and material debt reductions in recent weeks.

While the company's performance had been adversely affected by unfavorable demand conditions over the past 18 months including government budget re-allocations and slower construction spending as well as certain product ramp-up issues (including Disto and Cyra, the latter having been the subject of a CHF58.0 million goodwill impairment charge during fiscal 2002), results for the past two quarters exhibited improved product performance and cash-flow generation, Moody's said.

In particular, the successful introduction of the Disto 5 product generation (revenues up 24.3% year-on-year in the third quarter of 2003 ended Dec. 31, 2002) and improvements in the GIS & Mapping (11.7% pre-FX year-on-year growth) and IMS (10.7% pre-FX growth) divisions point to a gradual stabilization of the business in key markets.

However, at this juncture, Moody's cautioned that the sustainability of recent improvements in the business has yet to be fully demonstrated, particularly in light of the continued uncertain macroeconomic environment.

Moody's lowers Invensys outlook

Moody's Investors Service lowered Invensys plc's outlook to negative from stable and confirmed its senior unsecured debt at Ba1, affecting €4 billion of securities.

Moody's said it changed Invensys' outlook because it perceives weaknesses in certain businesses that will prevent the company from meeting its earnings and cash flow targets for the current fiscal year and possibly beyond.

Any strategic response developed by management that fails to demonstrate a clear path towards improving cash flows in the core business and/or include measures to reduce net debt further would be likely to add to the pressure on the company's rating, Moody's added.

Invensys has announced that, following a business review, management expects second-half core operating profit to be as much as 25% lower than the first-half figure, Moody's noted. The under-performance relates to certain of the company's businesses, including software company Baan and climate controls, which together account for about 20% of revenues. The new profit indications are materially below Moody's expectations for the pace and impact of the company's restructuring of operations.

S&P cuts ThyssenKrupp to junk

Standard & Poor's downgraded ThyssenKrupp AG to junk including cutting its $1.5 billion syndicated bank loan due 2007 and €500 million 7% bonds due 2009 to BB from BBB. The ratings were removed from CreditWatch with negative implications. The outlook is stable.

S&P said the downgrade reflects its treatment of unfunded pensions as debt-like in character.

Including unfunded pensions in the calculation of the group's indebtedness, credit protection measures are weak, with funds from operations to net debt (including pensions) of about 15%, and pension-adjusted debt to capital of more than 60% for the fiscal year ended Sept. 30, 2002, S&P said. Unadjusted for pensions, FFO to net debt for the same period was slightly less than 30%, and debt-to-capital was about 45%.

The group reported a substantial €7.1 billion of provisions for pensions and similar obligations at the end of September 2002, S&P noted. This is net of pension plan assets of almost €1.6 billion at Sept. 30, 2002. The ongoing servicing costs for ThyssenKrupp's pension schemes in Europe are estimated at about €450 million per year.

Fitch rates Houghton Mifflin loan BB-, notes B, B-

Fitch Ratings initiated coverage on Houghton Mifflin Co. and assigned a BB- rating to its existing senior secured debt and new $325 million senior secured revolving credit facility expiring 2008 and a B rating to its senior unsecured debt and new $600 million 8.25% senior unsecured notes due 2011 and a B- rating to its new $400 million 9.875% senior subordinated notes due 2013. The outlook is stable.

Proceeds from these new debt issuances refinanced debt used to fund the acquisition of Houghton Mifflin, Fitch noted. In December 2002, three investment firms, Thomas H. Lee, Bain Capital, and The Blackstone Group, completed their acquisition of Houghton Mifflin for $1.3 billion in cash and $380 million in assumed debt. In conjunction with the acquisition, the investment firms contributed approximately $615 million of equity to the purchase price.

Fitch said its ratings reflect the company's high debt balance relative to cash flow, modest cash flow coverage ratio, significant working capital requirements, as well as smaller size and overall weaker credit metrics compared to the other three major U.S. educational publishers.

The ratings recognize Houghton Mifflin's prominent franchise in educational publishing benefiting from its well-developed, long-standing customer relationships and highly regarded brand names, Fitch said. U.S. elementary-high school publishing represents the largest component of the company's business at approximately 55% of revenues and 65% of EBITDA adding back plate amortization. The company's other operating segments include college publishing, assessment services and trade and reference books.

Pro forma for the debt issuances, Fitch estimated total debt (including anticipated peak revolving borrowings associated with seasonal working capital needs) to EBITDA less plate amortization to be in the low-to-mid 6 times range at year-end 2002. On a total senior debt basis, the leverage ratio improved to the low 4 times range and on a senior secured basis to the low one times range. Pro forma EBITDA less plate amortization to interest coverage is estimated at approximately 2.0x.

S&P confirms CGG, off watch

Standard & Poor's confirmed Compagnie Générale de Géophysique and removed it from CreditWatch with negative implications. The outlook is negative. Ratings affected include CGG's $220 million 10.625% senior notes due 2007 at BB.

S&P said the confirmation reflects its expectation that CGG's loss of the Mistral, one of its off-shore seismic ships, in December 2002 will have a limited impact on the company's credit quality, as its insurance coverage is adequate and insurance proceeds from the lost ship will be used to pay down debt.

CGG's ratings are based on its average profitability in the context of the highly volatile, capital-intensive, and competitive seismic industry, S&P said. These factors are tempered by CGG's integrated position, including Sercel (its profitable equipment manufacturing subsidiary), its modern, versatile, five-vessel fleet, geographically diverse operations, and conservative operating policies with a modestly valued multi-client database.

The negative outlook reflects the likelihood that difficult industry conditions will continue in 2003, S&P said.

Moody's lowers Dobson outlook

Moody's Investors Service lowered its outlook on Dobson Communications Corp. and its subsidiaries Dobson/Sygnet Communications and Dobson Operating Co. to negative from stable and confirmed their ratings including Dobson Communications' $300 million 10.875% senior notes due 2010 at B3 and 12.25% exchangeable preferred stock due 2008 and 13.0% exchangeable preferred stock due 2009 at Caa2, Dobson Operating's $925 million secured credit facility at Ba3 and Dobson/Sygnet's $200 million 12.25% senior notes due 2008 at B3. The action ends a review for downgrade begun in June 2002.

Moody's said the negative outlook reflects the difficult operating environment for all wireless operators and for rural cellular carriers in particular.

Despite stable operating trends such as ARPU and churn, along with decent subscriber growth, quarterly improvements have begun to decelerate making the future cash flow growth necessary to service the company's indebtedness more doubtful, Moody's added.

Dobson's 2002 subscriber growth was below Moody's expectations, roaming revenues are under pressure and are also below Moody's expectations, and costs per gross addition remain stubbornly high, the rating agency said. This will put downward pressure on the company's cash generation and could strain the company's ability to make required principal repayments under its two main credit facilities as they increase in 2005 and 2006.

The confirmation is based upon the good liquidity of Dobson Communications and its 100% owned subsidiaries, stable operating metrics, and relatively modest near-term debt amortization requirements, Moody's said.

S&P puts North Atlantic Trading on developing watch

Standard & Poor's put North Atlantic Trading Co. Inc. on CreditWatch with developing implications including its $155 million 11% senior notes due 2004 at B and $34 million senior PIK preferred stock at CCC+. The BB- senior secured debt ratings was withdrawn.

S&P said the watch placement follows North Atlantic's announcement that it had entered into an asset purchase agreement with Star Scientific Inc. and Star Tobacco Inc., a wholly owned subsidiary of Star Scientific. North Atlantic will purchase substantially all of the assets of Star relating to the manufacturing, marketing, and distribution of four discount cigarette brands in the U.S. The purchase price for the transaction is $80 million in cash, subject to certain closing adjustments and the assumption of certain liabilities.

S&P puts Radnor on positive watch, rates new notes B-

Standard & Poor's put Radnor Holdings Corp. on CreditWatch with negative implications including its $100 million 10% senior notes due 2003, $135 million senior notes due 2010 and $60 million 10% senior notes series B due 2003 at B-. S&P also assigned a B- rating to Radnor's planned $135 million senior notes due 2010.

S&P said the positive watch is in response to Radnor's recently announced debt refinancing plan, which is expected to improve its liquidity position as well as relieve refinancing pressures. This pressure is the primary limitation on the current ratings.

If the refinancing is completed as planned, S&P said it expects to raise Radnor's senior unsecured debt to B from B-. These actions would reflect the meaningful enhancement to its financial flexibility and recognize the improvement in the company's financial performance. The company's operating profits have improved significantly in 2002 supported by renewed pricing power in the foam cup segment and higher selling prices and volume growth in its EPS operations.

Accordingly, credit measures have improved with total debt (adjusted for capitalized operating leases) to EBITDA of about 4.5x as of Dec. 31, 2002, from a peak level of about 7x in 2000, S&P said. Although the company has not generated positive cash flows for the past three years, lower capital spending and working capital needs are expected to facilitate modest free cash flows for debt reduction for 2003 and beyond.

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