S&P downgrades XO, still on negative watch

Standard & Poor's downgraded XO Communications Inc. and its Concentric Network Corp. unit. Ratings affected include XO's senior unsecured, lowered to CCC- from CCC, its convertible subordinated debt, also lowered to CCC- from CCC, its preferred stock, cut to CC from CCC- and its senior secured bank loan, lowered to CCC+ from B-. Concentric Network's senior unsecured debt and preferred stock had similar downgrades. The ratings remain on CreditWatch with negative implications, where they were placed July 31, 2001.

S&P said the downgrade is based on XO's "weakened liquidity position and its inability to provide fourth quarter 2001 guidance because of the economic downturn."

While XO had $1 billion of cash as of Sept. 30, S&P noted this only funds the company's current business plan into the second half of 2002.

S&P said it had previously anticipated there would be enough funding through 2002 but use of about $290 million to repurchase bonds and preferred stock in the open market "accelerated the funding gap time frame. Furthermore, the company has retained an investment banking firm to evaluate strategic alternatives that may be implemented to restructure the balance sheet."

Moody's downgrades Weirton Steel senior unsecured to Ca

Moody's Investors Service downgraded Weirton Steel Corp., including cutting its senior notes to Ca from Caa3. The outlook remains negative.

Moody's took the action after Weirton announced an offer to exchange its long-term debt for new senior secured discount notes. The rating agency considers completion of a debt exchange for a security of lesser value to be a default.

Moody's downgrades Completel's unsecured debt to Caa3

Moody's Investors Service downgraded Completel Europe NV's ratings, including its $120.5 million 14% senior discount notes due 2009 to Caa3 from Caa1 and its €165 million 14% senior notes due 2010 to Caa3 from Caa1. The outlook is negative.

Moody's said its downgrade reflects "heightened concerns with respect to Completel's liquidity position and the company's ability to generate operating cash flows to a level sufficient to fund the business and service debt obligations, going forward."

The rating agency described Completel's new strategy of rationalizing operations as appropriate but said it is "concerned that Completel's ability generate absolute levels of cash flows to a level sufficent to meet debt service requirements (post escrow) is significantly reduced."

S&P puts Completel on negative watch

Standard & Poor's put Completel Europe NV's ratings on CreditWatch with negative implications including its senior unsecured debt rated CCC+ and its secured debt rated B-.

S&P said its action follows Completel's announcement of "weak results for the second consecutive quarter and its lack of progress in securing additional financing."

S&P noted: "Although Completel recorded encouraging growth in its retail business in the third quarter of 2001, higher network costs and continued weakness in the carrier activity and in the ISP dial-up business have led to disappointing operating results for the second quarter in a row."

The rating agency added that EBITDA (earnings before interest, taxation, depreciation and amortization) losses increased and the company again lowered forecasts for full-year revenues and earnings. In addition, it does not expect to reach EBITDA breakeven before the first half of 2003, compared to the previous forecast of the second half of 2002.

Moody's cuts Metals USA senior subordinated notes to Caa2

Moody's Investors Service downgraded Metals USA, Inc.'s ratings and put them on review for further downgrade. Ratings affecting include the company's $200 million of 8 5/8% senior subordinated notes due 2008, cut to Caa2 from B3.

Moody's said Metals USA's financial performance has been "severely impacted by weak steel markets and the recession in the manufacturing sector of the U.S. economy."

Moody's does not expect Metals USA to be in compliance with the financial covenants in its credit facility at the end of the third quarter, "raising questions regarding its ability to maintain adequate liquidity for working capital and other needs."

S&P downgrades Metals USA, still on negative watch

Standard & Poor's downgraded Metals USA Inc. and kept the ratings on CreditWatch with negative implications where they were placed May 4, 2001. Ratings lowered include Metals USA's senior secured bank loan, cut to B- from BB- and its subordinated debt, cut to CCC- from B-.

S&P said the downgrade reflects "heightened concerns regarding Metals USA's tight liquidity and the expectation that Metals USA will be in violation of covenants under its loan agreement for the quarter ended Sept. 30, 2001. Moreover, the company's attempts to enhance liquidity, including selling non-core assets, is taking longer than expected."

S&P warned: "If the company is unable to obtain an amendment or complete other actions, a liquidity crisis would likely follow."

S&P rates Compass Minerals upcoming notes at B

Standard & Poor's assigned a B rating to Compass Minerals Group Inc.'s upcoming offering of subordinated notes and a BB- bank loan rating to its $410 million senior secured bank credit facility. The outlook is stable.

S&P said its assessment reflects Compass' "leading position in the recession resistant salt industry, high margins, steady cash flow generation, and high barriers to entry. These factors are offset by its aggressive financial profile and its limited product and mine diversity."

The rating agency noted: "Salt uses are non-cyclical, including highway de-icing, food grade applications, water conditioning and other industrial uses. A high EBITDA margin, averaging 30%, is evidence of its competitive cost position, largely due to its strategic locations, which use low cost waterway transportation, and a lack of cost effective substitute products. Barriers to entry are meaningful and include high upfront capital costs, strategic mine locations, an established distribution network, and strong customer relationships."

Moody's rates Chesapeake Energy's senior unsecured notes B1, convertible Caa1

Moody's Investors Service rated Chesapeake Energy Corp.'s new 8 3/8% senior unsecured notes due 2008 at B1 and its new 6¾% convertible preferred securities at Caa1. The rating agency upgraded some other ratings including Chesapeake's existing senior notes, raised to B1 from B2. The outlook is positive.

Moody's said its positive outlook takes into account the cash flow support of price hedges, which, if productively reinvested in drilling and acquisitions, could begin to reduce Chesapeake's currently high proportion of debt relative to its proven developed reserve base. The rating agency noted Chesapeake has open hedges covering about 60% of 2002 production and about 30% of 2003 production; it has locked in about $60 million of hedge gains on 2002/03 production.

Despite some support from the preferred issue and the hedge-supported cash flow, Moody's warned the outlook could be pressured if Chesapeake makes substantial leveraged acquisitions.

The rating agency lifted the unsecured notes to the same level as Chesapeake's undrawn credit facility but cautioned the differential could be reinstated if existing reserves were leveraged further with secured debt to help fund a substantial acquisition.

S&P cuts Flextronics outlook to stable

Standard & Poor's cut its outlook on Flextronics International Ltd. to stable from positive and affirmed the existing ratings including the BB+ bank loan rating and the BB- subordinated note rating.

S&P said the revision is based on "weaker profitability measures that are likely to remain pressured due to challenging industry conditions over the near term."

The rating agency said its assessment continues to reflect Flextronics' "top-tier industry position, broad geographic scope of operations, and solid long-term customer relationships."

But it added: "These factors only partially offset the challenges associated with managing through a severe downturn in end-market demand in a highly competitive industry."

S&P cuts Knowles Electronics outlook to negative

Standard & Poor's revised its outlook on Knowles Electronics to negative from stable and affirmed its ratings, including its B+ senior secured bank loan and its B- subordinated notes.

S&P said the revision reflects "declining sales and profitability that will likely lead to weaker credit measures."

Sales for the first nine months of 2001 fell 6% and profitability nearly 10% from the same period of 2000, S&P noted. "Furthermore a weaker economic climate is likely to further pressure operating performance in the near term."

S&P added: "Ratings are based on a leading niche market position, offset by a highly leveraged financial profile and by risks associated with growth initiatives in Knowles' other lines of business."

S&P downgrades Krystal

Standard & Poor's downgraded The Krystal Co., including cuttings its senior unsecured debt to B from B+ and its senior secured bank loan to BB- from BB. It removed the rating from CreditWatch, where they were Aug. 16, 2001. The outlook is stable.

S&P said it downgraded Krystal because of weakened operating and financial performance, "as the company has experienced negative comparable-store sales and receding operating margins over the past two years."

It noted: "Intense competition from stronger industry players, and higher food and paper costs have negatively impacted results."

Comparable-store sales at company-owned stores fell 1.4% for the nine months ended Sept. 30, 2001, following a 4.4% decrease in 2000, S&P said. It added that operating margins declined to about 10.0% for the nine months ended Sept. 30, 2001, and all of 2000, from about 12.5% in 1999.

As a result, S&P continued, EBITDA coverage of interest was only 1.6 times for the 12 months ended Sept. 30, 2001.

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