Moody's puts Wellman on review

Moody's Investors Service put Wellman, Inc. on review for possible downgrade including its senior implied rating at Ba2.

Moody's said the review was prompted by its concern over the company's deteriorating operating performance, elevated leverage metrics and substantial refinancing requirements over the next 12 months.

The company's PET resin margins have eroded due to volatile feedstock costs and weaker than expected seasonal demand combined with significant North American capacity additions during 2003. Additionally, textile and apparel fiber imports from China continue to pressure demand for the company's polyester fiber.

Further the company will need to refinance a $150 million synthetic lease maturing July 2004. The company also needs to address a potential $75 million pre-payment associated with raw material purchase contracts, Moody's said.

S&P rates Alon USA loan B

Standard & Poor's assigned a B rating to Alon USA Inc.'s proposed $100 million senior secured term loan due 2008. The outlook is stable.

S&P said Alon's ratings reflect the significant challenges the company faces as a small independent petroleum refiner and marketer with high book leverage and modest liquidity, participating in a competitive, erratically profitable industry that is burdened by excess capacity and high fixed-cost requirements for refinery equipment and regulation compliance.

These weaknesses are partially offset by the company's significant advantage as a local refiner in physically remote markets and relatively modest spending necessary to meet upcoming clean fuels requirements.

In the intermediate term, the company's market position could be threatened by the possible completion of the Longhorn pipeline and other projects that could bring refined products from more efficient Gulf coast refineries into the Four Corners region, S&P said.

Somewhat mitigating the risk of increased competition are Alon's cost-effective operations, which should provide a buffer against a potential tide of new low cost product into the company's core retail operating areas. Alon has an added measure of protection against margin erosion given its strong asphalt and jet fuel market positions in the Southwest, as well as the somewhat countercyclical benefit of owning both refining and marketing operations, with the marketing operations generating a more stable stream of cash flow through the cycle.

Nevertheless, Alon is highly leveraged largely reflecting its initial capitalization. Earnings have helped to reduce leverage somewhat; however, debt to capitalization will remain high at around 65%, S&p said. Based on midcycle refining margins, cash flow measures are expected to be adequate for the rating with EBITDA interest coverage averaging around 3.5x and funds from operations to total debt averaging about 15% to 20% during the intermediate term.

Moody's rates Alon USA loan B2

Moody's Investors Service assigned a B2 rating to Alon USA, Inc.'s new $100 million senior secured term loan due 2008. The outlook is stable.

Moody's said the ratings are supported by Alon's long standing Southwest business position; partial integration with refining, pipeline (product and crude), and retail assets; solid liquidity; currently firm sector refining margins; management's long sector and regional experience; and the capital and crude oil cost advantages of Alon's ability to run near full capacity with medium sour crude oil and its large asphalt business.

The ratings are restrained by Alon's single refinery status; high leverage, including operating leases; the potential for the near-term addition of refined products volumes being shipped into the region; higher unit operating costs, driven primarily by higher natural gas costs; high capital spending and working capital needs (especially at high oil prices); pari passu deferred payment obligations to former shareholders; and inherent volatile and cyclical refining margins.

Moody's estimates Alon's 2003 EBITDA to range between $55 million and $65 million. Leverage, measured as debt/EBITDA, pro forma for the term loan is expected to be approximately 2.0x to 2.5x, (between 3.3x and 4.4x adjusted for operating leases) based on an estimated $15 million to $20 million of EBITDA for the quarter ended Sept. 30, 2003. Results for 2004 will depend on unpredictable refining margins and could be impacted by the likely completion of the Longhorn Pipeline in the second half of 2004.

Moody's rates 24 Hour Fitness loan B1

Moody's Investors Service assigned a B1 rating to 24 Hour Fitness Worldwide's proposed $340 million senior secured credit facility made up of a $65 million senior secured revolving credit facility due 2008 and a $275 million senior secured term loan due 2009. The outlook is stable.

The ratings are constrained by the company's high leverage and low interest coverage, Moody's said. The company's historical financing costs have resulted in a funding structure that does not currently reflect recent years' operational improvement. The company's relatively high cost of capital pressures its interest coverage ratios. The company's ratings are also constrained by its high levels of rent expense and low levels of tangible asset coverage.

The ratings benefit from positive free cash flow and a diversified club base, Moody's added. 24 Hour Fitness also benefits from its position as the second largest fitness company in the United States, and from historical investments in clubs that continue to generate increasing levels of free cash flow as clubs mature. Continued success in managing its operations should lead to an improving cost of capital over time, thereby further enhancing the company's interest coverage levels.

The stable rating outlook reflects the company's track record of consistent operating growth at its core U.S. operations and expectations that free cash flow will remain positive.

For the year ended 2003, projected debt to EBITDA before and after $96 million of convertible preferred stock is expected to be approximately 2.8x and 3.4x, respectively. Total adjusted debt to EBITDA, adjusted for $158 million of leases, is expected to be 5.8x for 2003. EBITDA coverage of total interest is expected to be 2.5x and EBITDA less capital expenditures coverage of interest is expected to be 1.6x. Debt to free cash flow less capital expenditures is expected to be around 9.8x.

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