S&P says Collins & Aikman unchanged

Standard & Poor's said there is no immediate change to Collins & Aikman Corp.'s ratings including its corporate credit at B+ with a negative outlook in response to published reports regarding the potential resourcing of business by its largest customer.

Recent news reports have indicated that DaimlerChrysler AG is reviewing its Chrysler contracts awarded to Collins & Aikman for potential rebidding. Sales to DaimlerChrysler totaled $1.2 billion, or 31% of the Collins & Aikman's 2002 sales.

The review has reportedly resulted from poor performance in the areas of cost, quality, delivery, and technology. Collins & Aikman officials have stated in the press that the reports are inaccurate.

S&P said it believes that the resourcing of all of the Chrysler business is unlikely because it would involve significant disruptions to several vehicle platforms at a time when Chrysler is struggling financially. In addition, DaimlerChrysler may be unable to find suitable suppliers with available capacity that are able and willing to take on the business, some of which carries low margins.

Nevertheless, S&P said it is concerned that any material loss of business would impair Collins & Aikman's credit quality at a time when its operating performance is weak and its financial flexibility is limited.

The amount of business that would have to be lost to impact credit quality would depend upon the level of profitability of the business lost and Collins & Aikman's new business awards. However, S&P estimates that the loss of 5% of sales, or around $200 million of profitable business, would be a concern at the current rating level.

S&P cuts Rhodia

Standard & Poor's downgraded Rhodia including cutting its €200 million 8% callable notes due 2010, €300 million 6% notes due 2006, 500 million 6.25% bonds due 2005, $200 million 7.625% callable notes due 2010, $75 million 8.2% bonds series B due 2012 and $215 million 7.75% bonds series A due 2009 to B+ from BB and €300 million 9.25% notes due 2011 and $385 million 8.875% callable subordinated notes due 2011 to B from BB-. The outlook is negative.

S&P said the action follows Rhodia's recent announcement of very weak forecasted third-quarter 2003 results, following a poor second quarter.

S&P said that it had expected Rhodia's financial performance to improve in 2003 but instead it has deteriorated from an already weak level at year-end 2002.

In addition, Rhodia forecasts a sharp decline in EBITDA in third-quarter 2003, raising potential liquidity issues: some of Rhodia's financial covenants will likely be breached when full-year 2003 results are released, which could induce the early repayment of about €1 billion of debt, a figure to be compared with about €700 million of cash and equivalents available to the group, S&P added.

The ratings continue to reflect Rhodia's average business profile, which is underpinned by its leading position as one of the world's largest specialty-chemicals companies, but also reflects Rhodia's below-average operating margins and lower resistance than chemical industry peers to industry downturns, S&P said. The ratings remain constrained by Rhodia's consistently aggressive financial profile, despite the many debt reduction initiatives that the company has carried out since 2001.

S&P puts Ispat on watch

Standard & Poor's put Ispat on watch including Ispat Inland Inc.'s 7.9% first mortgage bonds series R due 2007 at B-, Ispat Inland LP's $850 million senior secured credit facility at B- and Ispat Sidbec Inc.'s $400 million senior secured credit facility at B-.

S&P said the CreditWatch placement reflects concerns about liquidity at related entity Ispat Inland following high capital expenditure and pension contributions in 2003.

The placement also reflects the current poor trading performance of another related entity, Ispat Sidbec, and the subsidiary's significant debt refinancing in the next 12 months.

The Ispat group as a whole faces challenges such as oversupplied local markets, trade barriers in the U.S. and European markets, an appreciation of local currencies against the U.S. dollar and pension plan deficits, S&P added.

These factors might contribute to liquidity shortages at certain subsidiary companies such as Ispat Inland or Ispat Sidbec.

High capital expenditure at Ispat Inland, however, relates to the relining of its largest blast furnace, which S&P said it understands has now been completed.

Moody's rates Von Hoffman notes B2

Moody's Investors Service assigned a B2 rating to Von Hoffmann Corp.'s proposed $60 million issuance of 10.25% add-on senior unsecured notes due 2009 and confirmed its existing ratings including its $215 million 10.25% senior unsecured notes due 2009 at B2, $100 million 10.375% senior subordinated notes due 2007 at B3 and $90 million senior secured revolving credit facility due 2006 at Ba3. The outlook remains negative.

Moody's said the ratings reflect Von Hoffman's high financial leverage (which Moody's estimates will be stretched close to six times by the proposed acquisition of The Lehigh Press, Inc.), its dependence on educational textbook sales, the concentration of its customer base and its reliance upon one plant to provide substantially all of its four color case-bound material.

Ratings are supported, nonetheless, by the dependable (albeit cyclical) pattern of ELHI textbook spending, the company's close customer relationships with the largest educational publishers, its historical ability to maintain market share and the high barriers to entry that have limited the number of effective competitors.

At the end of June 2003, Von Hoffmann reported liquidity of $91 million, comprising $10 million in cash equivalents and $81 million available under its senior secured borrowing base credit facility. The proposed acquisition will be partly funded by cash and drawings under the revolving credit facility. Accordingly, Moody's estimates Von Hoffmann's pro-forma liquidity position will decline to about $30 million as of June 30, 2003. In Moody's opinion, this level of liquidity should be sufficient to support Von Hoffmann's seasonal working capital needs, especially as the second half-year business cycle is typically characterized by substantial cash accumulation.

In addition, the equity sponsor, DLJ Merchant Banking Partners II, LLP, will invest an additional $20 million of common equity into the parent company, Von Hoffmann Holdings, Inc. at closing. However, proceeds from this investment will not necessarily be downstreamed to Von Hoffmann Corp., and may in fact be used by the holding company to repurchase its own debt securities, which totaled approximately $38 million at the end of June 2003, Moody's said.

Pro-forma for the proposed acquisition, Moody's forecasts an increase in total consolidated leverage, inclusive of the $38 million holding company subordinated debt, to approximately 5.8 times by year-end 2003, up from 5.3 times at the end of 2002.

Moody's cuts Sanitec

Moody's Investors Service downgraded Sanitec International SA including cutting its €260 million senior notes due 2012 to B3 from B2 and €555 million senior secured credit facilities at Sanitec Oy to B1 from Ba3. The outlook is negative.

Moody's said the downgrade reflects Sanitec's highly leveraged capital structure and the limited improvements in credit metrics evidenced to date; the poor operating performance in the second quarter of 2003, with improvements from cost initiatives insufficient to offset weak top line performance, adverse exchange rate movements and certain one-off costs; ongoing weak market conditions in a number of Sanitec's markets, particularly Germany and the Netherlands, combined with Moody's expectation that there will be no improvement in the company's trading environment in the short to medium term; and short-term liquidity concerns given the forthcoming step downs in financial covenants included in the company's senior secured credit facility.

The negative outlook reflects Moody's view that the company's liquidity is currently constrained given its low cash balances, continued weak operating conditions and availability restrictions contained in Sanitec's senior secured credit facility.

Sanitec remains highly leveraged and due to weak operating performance in the second quarter of 2003. Total debt/EBITDA (on a last 12 months trailing basis) increased marginally over the period, despite the fact that second quarter is normally a strong quarter. This was principally due to ongoing weak conditions in the German market as well as low demand in the Netherlands, combined with adverse exchange rate movements and certain one off costs, which more than offset the improvements from cost initiatives and production efficiency gains. Moody's believes that there is unlikely to be a marked improvement in the company's operating environment in the near to medium term.

However, Moody's believes that the management has performed well in light of difficult operating conditions and that the company is well positioned to benefit should the operating environment improve.

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