S&P lowers O'Charley's outlook, rates notes B, loan BB

Standard & Poor's assigned a B rating to O'Charley's Inc.'s planned $125 million senior subordinated notes and a BB to its new $125 million senior secured revolving credit facility, lowered the outlook to negative from stable and confirmed the existing ratings including its corporate credit at BB-.

S&P said the outlook revision is based on poor operating trends at the company's O'Charley's restaurants, which have been vulnerable to a weak economy and a competitive restaurant environment. Same-store sales at O'Charley's decreased 2.3% in the first half of 2003, while operating margins for the six months ended July 13, 2003, narrowed to 14.3% from 15.5% because of a decline in sales leverage and higher payroll, benefits and utility costs.

Moreover, S&P does not expect that the company will be able to reverse this trend in the near term because promotions implemented to increase traffic are expected to hurt margins. Customer traffic and sales may also be affected by the negative publicity that the company received because of a Hepatitis A outbreak at one of its restaurants.

O'Charley's ratings reflect the company's relatively small market position in the highly competitive casual dining segment of the restaurant industry, the increased business risk of operating multiple concepts, and a highly leveraged capital structure. These factors are partially offset by favorable growth prospects for casual dining and generally good credit protection measures for the rating category.

Although the O'Charley's chain has a large presence in the markets in which it operates, the company maintains a relatively small 2.3% market share among casual dining chains, compared with 15.2% for Applebee's, 11.3% for Red Lobster, and 10.7% for Chili's. Many of its competitors have substantially greater financial and marketing resources and continue to expand rapidly. Growth prospects for the varied menu casual dining sector are favorable, with the adoption of dining out as a lifestyle in the U.S. driving growth.

Pro forma for the refinancing transaction, cash flow protection measures are satisfactory for the rating category, with lease-adjusted EBITDA coverage of interest of more than 3.5x. The company is highly leveraged, with pro forma lease-adjusted total debt to EBITDA of about 4.0x, S&P said.

Fitch cuts Tenet

Fitch Ratings downgraded Tenet Healthcare Corp.'s senior unsecured debt and bank facility ratings to BB from BB+ and removed it from Watch Negative. The outlook is negative.

Tenet recently announced that third quarter earnings will be negatively affected by greater-than-expected bad debt expense including charges for changes in bad debt accounting methodology, Fitch noted. The company indicated that it is likely to exceed the 2.5x leverage covenant on its undrawn $1.5 billion bank credit facility for the third quarter ended September 30, 2003.

Fitch said it lowered Tenet because of uncertainty in Tenet's cash flow generation. In addition to accelerating bad debts, Tenet has stated that the company is having difficulty in achieving market-level price increases with some managed care payors.

Tenet's growth in admissions, while down year-over-year, appears to be stronger than most industry participants, in addition, while Tenet is having difficulty with some managed care payors, Medicare pricing is generally stable (excluding outliers).

However, it is difficult to gauge Tenet's ultimate profitability and operational cash flow generation capacity and it is likely that the company will generate only minimal free cash flow for 2003 and 2004 given its capital expenditure commitments, Fitch said.

Fitch expects Tenet's coverage and leverage ratios will be sufficient for the new rating level. Fitch anticipates that for 2003 Tenet's coverage (EBITDA/interest) will likely be between 5.0 times and 6.0x and leverage (total debt/EBITDA) will be between 2.2x and 2.5x. Tenet's total debt at Sept. 30, 2003 was approximately $4 billion.

S&P says Smurfit-Stone unchanged

Standard & Poor's said Smurfit-Stone Container Corp. and its wholly-owned subsidiaries Jefferson Smurfit Corp. (U.S.) and Stone Container Corp. are unchanged including the corporate credit at B+ with a stable outlook after Smurfit-Stone's announcement of $160 million in pretax charges.

Of the total, $100 million (of which $85 million is non-cash) is the cost to idle 515,000 tons (or 6%) of the company's containerboard capacity and 70,000 tons (or 12%) of its coated boxboard capacity.

These capacity reductions should result in significant cost savings and reduce excess industry capacity.

The $60 million charge establishes a reserve for certain class actions and related cases pending against the company in connection with alleged antitrust law violations. S&P said it does not expect the company to incur major cash outlays associated with this matter in the near term.

Smurfit-Stone is highly leveraged, but is expected to continue generating sufficient cash from operations to cover capital expenditures at current low demand and pricing levels, S&P said.

Fitch raises Unisys outlook

Fitch Ratings raising its outlook on Unisys Corp. to stable from negative and confirmed its senior unsecured debt at BBB-.

Fitch said the outlook change reflects the improved operating performance of the company despite a continued challenging albeit stabilizing end market environment, especially as it relates to the more profitable hardware segment.

Unisys's quarterly revenues have remained consistent the last two years, and operating results and margins (before pension income credit) have improved mostly as a result of the shift to high-margin services business and a cost restructuring program implemented in late 2001 that ultimately resulted in a 10% headcount reduction.

The ratings continue to reflect Unisys's strong customer base, the increasing recurring revenue base due to a focus on services and solutions, and solid liquidity and financial flexibility, Fitch added. This is balanced against minimal free cash flow levels after pension funding and cash restructuring charges, but the cash charges are expected to decline. Additional concerns center on the competitive nature of the information technology industry, the company's small scale relative to its competitors, and the constant need for new product introductions (hardware).

For the latest twelve months ending September 30, 2003, leverage (measured by total debt-to-EBITDA) was 1.4 times and 1.5x when measured on pre-pension income EBITDA basis. Interest coverage was 8.7x on a pre-pension income EBITDA/Interest Incurred basis compared to 6.0x for the same time period a year ago, Fitch said.

S&P rates LNR notes B+

Standard & Poor's assigned a B+ rating to LNR Property Corp.'s new $350 million 10-year senior subordinated notes and confirmed its existing ratings. The outlook remains stable.

S&P said that issuance of the notes will have a marginal impact on the company's leverage position.

Offsetting this is the lengthening of the debt maturities and the reduction in funding costs, as the company has announced that it will use the majority of the proceeds to redeem its outstanding 10½% senior subordinated notes due 2009, S&P noted.

The rating confirmation is based on LNR's continued success in managing the balance-sheet risk inherent in its investments in CMBS, real estate properties and real estate loans, and its successful track record in acquiring, repositioning, operating and harvesting income-producing properties to realize gains.

S&P cuts Petroplus notes

Standard & Poor's confirmed Petroplus International NV's ratings including its corporate credit at B+ but cut Petroplus Funding BV's €225 million 10.5% notes due 2010 to B- from B. The outlook is stable.

S&P said the downgrade is due to the considerable subordination of the debt instrument to Petroplus' secured debt with bank creditors and subsidiaries' operating creditors. The ratio of priority liabilities to total adjusted assets is well in excess of 30%, the threshold beyond which S&P adjusts speculative-grade debt ratings by two notches.

The action on Petroplus' corporate credit rating follows the company's announcement that $450 million of its bank lines have been renewed on a committed basis.

S&P added that the action reflects its assessment that credit protection measures will improve in the near future to be fully in line with the company's rating. S&P said it views a sufficient amount of committed bank lines as essential for Petroplus to be able to manage its working capital requirements in the long term.

S&P rates Scientific Games facility BB-

Standard & Poor's assigned a BB- rating to Scientific Games Corp.'s proposed $532.8 million senior secured credit facility and confirmed its existing ratings including its senior secured debt at BB- and subordinated debt at B. The outlook is stable.

S&P said Scientific Games' ratings reflect the competitive market conditions in the lottery and pari-mutuel industries, the mature nature and capital intensity of the lottery industry, the cash flow concentration from its lottery segment, the existence of a much larger and well-established competitor in the on-line lottery segment, GTech Holdings Corp. (BBB/positive) and the company's relatively aggressive growth strategy. These factors are tempered by the company's leadership position in the pari-mutuel gaming and instant-ticket lottery industries, long-term customer contracts, a diversified customer base, and good credit measures for the rating.

EBITDA for the six months ended June 30, 2003, was $72 million, an approximately 16% increase over the prior-year period, due mainly to the continued strength of the instant ticket business and increased lottery systems sales. Pro forma for both the proposed refinancing and the OES transaction, EBITDA coverage of interest expense approximates 7x and total debt to EBITDA around 3x for the 12 months ended June 30, 2003, both good for the rating, S&P said.

The bank facility is rated the same as the corporate credit rating. S&P believes that in a severely distressed liquidation scenario the collateral package may fall short of providing the lenders with full recovery of principal but they would recover a meaningful portion, probably over 50%.

Moody's raises Joy Global outlook

Moody's Investors Service raised its outlook on Joy Global Inc. to positive from stable and confirmed its ratings including its $250 million senior secured revolving credit facility at Ba2 and $200 million senior subordinated notes due 2012 at B2.

Moody's said the positive outlook reflects improvements in the company's balance sheet as a result of working capital and operating cost controls and healthy sales of aftermarket parts and services.

While market conditions for sales of new mining equipment may continue to be challenging, Moody's does not expect conditions to worsen and notes that the fundamentals are more favorable for key commodities such as copper, iron ore and coal.

Despite a challenging environment for original equipment, Joy Global has been able to maintain aftermarket sales, right-size its operating base, and generate - across its surface and underground mining equipment segments - relatively stable operating income and cash flow.

In the 15 months between May 4, 2002 and Aug. 2, 2003, Joy Global used its cash flow to strengthen its balance sheet, applying $76 million for debt reduction, contributing approximately $50 million to its underfunded U.S. pension plan, and adding $46 million to its cash balance, which was $90 million on Aug. 2, 2003. For the 12 months ended Aug. 2, 2003, the company's gross debt to EBITDA was 2.2 times, net debt to EBITDA was 1.3 times, and gross debt to free cash flow was 2.4 times.

Moody's puts Volume Services on upgrade review

Moody's Investors Service put Volume Services America, Inc. on review for possible upgrade including its $184 million secured bank loan at B1 and $100 million 11.25% senior subordinated notes due 2009 at B3.

Moody's said the review was prompted by the company's senior subordinated note tender offer at 108.3% of par and Moody's understanding that the current bank loan will simultaneously be retired.

Proceeds from the pending offer of Income Deposit Securities and a new bank loan will finance the proposed transaction. Assuming that the rated bank loan is replaced and virtually all of the rated senior subordinated note issue is retired, Moody's will then withdraw all ratings.

Ratings likely would be confirmed at the current levels if the proposed transaction does not take place and the rated debt remains outstanding.

Moody's raises Rogers Wireless outlook

Moody's Investors Service raised its outlook on Rogers Wireless Inc. to positive from stable including its senior secured debt at Ba3 and senior subordinated debt at B2.

Moody's said the positive outlook reflects its expectations that Rogers Wireless will continue to outperform as it has done over the past nine months, generating meaningful free cash flow in the next two years.

The three main competitors in the Canadian wireless marketplace have all been pursuing increased profitability and have avoided aggressive price-based competition. This has resulted in increasing average revenue per subscriber at Rogers Wireless and improving postpaid churn, which together with cost containment has resulted in improved margins that Moody's expects will increase further next year.

Moody's expects Rogers Wireless to have approximately breakeven free cash flow this year, which is a strong improvement from the negative free cash flow of the prior three years. Moody's believes that Rogers Wireless has the potential to develop meaningful free cash flow in 2004.

Moody's rates Gaylord Entertainment notes B3

Moody's Investors Service assigned a B3 rating to Gaylord Entertainment Co.'s proposed $225 million guaranteed senior unsecured notes due 2013. The outlook is stable.

Moody's said the ratings reflect the company's high leverage and relatively weak coverage, the limited scope of its operations, and the potential refinancing risk associated with its secured CMBS loan on its Opryland Nashville Hotel property.

The ratings also consider the challenges the company will likely encounter with the acquisition of ResortQuest International, Inc., the ramp-up of Gaylord Opryland Texas, the persistent weakness in the lodging industry and a potential cash tax liability associated with its Secured Forward Exchange Contract agreement in 2007.

The ratings also reflect the guarantees provided by the subsidiaries of Gaylord and ResortQuest, with the exception of Opryland Nashville, as well as Gaylord's core customer base, which provides extended lead times for contracted room nights, its relatively stable RevPAR performance, the substantial contribution of food and beverage to total RevPAR, adequate liquidity and asset values, and an opportunity to extend the branding of the Grand Ole Opry.

On a pro-forma basis for the acquisition of ResortQuest, leverage is high at over 7.5x on a trailing 12 months debt to EBITDA basis as of the second quarter of 2003 (including pre-opening costs and non-cash lease expenses of approximately $6.7 million and $6.5 million, respectively) whereas on an adjusted basis excluding these costs, leverage would still be high at just over 6.5x.

Although Moody's expect leverage to decline gradually to under 5.0x over the intermediate term it does do not anticipate any material reduction in total debt until 2006.

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