S&P cuts Nortel

Standard & Poor's downgraded Nortel Networks Ltd. two notches and maintained its negative outlook on the company. Ratings lowered include Nortel's $200 million 6% notes due 2003, $200 million 6.875% notes due 2023, $1.5 billion 6.125% notes due 2006 and $300 million 6.875% notes due 2002, all cut to B from BB-, Nortel Networks Capital Corp.'s $150 million 7.4% debentures due 2006 and $150 million 7.875% debentures due 2026, cut to B from BB-, and Nortel Networks Corp.'s $1.5 billion 4.14% convertible notes due 2008, cut to B from BB-.

S&P said the action is in response to Nortel's Aug. 27 announcement that revenues from continuing operations in the third quarter of 2002 will be lower than previously forecast.

The negative outlook reflects S&P's belief that plans for Nortel to return to net profitability by mid-2003 may not be achieved, in light of accelerating marketplace stresses.

Nortel's ratings continue to reflect very challenging market conditions, as the company's core customer base continues to defer purchases of new communications equipment, S&P said.

S&P said it believes the industry decline in telecommunications spending will continue through 2003. In this context, should Nortel's revenues and earnings continue to decline significantly from expected levels, ratings could be lowered.

Moody's keeps Tyco on review

Moody's said information disclosed recently by Tyco International Ltd. does not change its ratings, which remain on review for possible downgrade.

The rating agency noted Tyco actions provide a basis for improved governance practices and to re-establish its credibility in the financial markets.

Nevertheless, the ratings remain on review pending the outcome of several factors, including Tyco's ability to implement a comprehensive refinancing plan for maturing debt that includes the two convertibles that are putable in 2003, Moody's said.

Moody's expects that Tyco's free cash flow generation for this quarter will be within the range of $800 million to $1 billion and liquidity, enhanced by $4.4 billion of proceeds from the CIT spin-off, remains strong in the near-term.

S&P upgrades Brand Services, rates notes B-, loan B+

Standard & Poor's upgraded Brand Services Inc. and assigned a B- rating to its planned $165 million senior subordinated notes due 2012 and a B+ rating to its planned $150 million senior secured term loan, $50 million revolving credit facility and $20 million letter of credit line. Ratings upgraded include Brand Services' $130 million 10.25% senior notes due 2008, raised to B from B-. The outlook is stable.

S&P said the reflects the announcement that J.P Morgan Partners, the private equity arm of J.P Morgan Chase Co., has signed a definitive agreement to acquire Brand Services for about $502.4 million, including the assumption of about $240 million of debt.

Although this transaction will result in a material increase in the company's total debt to EBITDA to 4.6 times versus a pre-transaction level of 3.5 times, S&P said it is upgrading the company to reflect its operational improvement since its initial rating in 1998, its expected diminishing capital intensity and expectations for the application of upcycle cash flows for debt reduction.

S&P said the operationally improvement is exemplified by Brand Services' increasing geographic coverage, growing long-term contract coverage, and improving safety record. As a result of strong demand and more efficient equipment utilization, Brand Services has generated free cash flow in recent years and this trend is expected to continue because of increased refinery expenditures to meet new clean fuels requirements and the construction of new power plants.

Capital expenditure is now roughly 4% of sales compared to 10% of sales historically due to overseas procurement of scaffolding and to a lesser extent the absence of special events equipment spending.

Use of cash for debt reduction is reinforced by strict covenants in the company's bank credit facility, S&P added. Based on the company's base case, Brand should have at least $20 million per year of free cash flow that can be applied toward debt reduction.

However the company has a narrow scope of operations and aggressive capital structure, which outweigh its leading market share in the niche scaffolding services industry, S&P said.

Brand's financial profile is aggressive. Pro forma total debt to total book capital as of June 30, 2002 is 59%, although this measure does not adjust for $283 million of goodwill. When adjusted for goodwill, pro forma book leverage is 125%. While pro forma debt to EBITDA for this transaction worsens to 4.6 times as compared with 3.5x times, the company intends to reduce absolute debt levels in the medium term through the application of free operating cash flow, resulting in a debt to EBITDA ratio of about 3.6x by year ending 2003, S&P said.

Moody's rates Allied Waste notes Ba3

Moody's Investors Service assigned a Ba3 rating to Allied Waste North America, Inc.'s proposed $250 million guaranteed senior secured notes due 2012, confirmed the company's existing ratings and continued its negative outlook. Ratings confirmed include Allied Waste North America's $4.2 billion senior secured and guaranteed credit facility maturing 2007, $700 million 8.5% guaranteed senior secured notes due 2008, $225 million 7.375% guaranteed senior secured notes due 2004, $600 million 7.625% guaranteed senior secured notes due 2006, $875 million 7.875% guaranteed senior secured notes due 2009 and $600 million 8.875% guaranteed senior secured notes due 2008, all at Ba3, and its $2 billion 10% guaranteed senior subordinated global notes due 2009 at B2; Allied Waste Industries, Inc.'s $1 billion perpetual convertible preferred stock at B3; and Browning-Ferris Industries, Inc.'s $360 million 7.4% secured debentures due 2035, $99.5 million 9.25% secured debentures due 2021, $161.1 million 6.375% senior secured notes due 2008, $156.7 million 6.1% senior secured notes due 2003 and $69.4 million 7.875% senior secured notes due 2005 at Ba3.

Moody's said the ratings continue to reflect Allied Waste's leading market position as the second largest integrated solid waste company in the United States, the company's strong management, and its track record of profitable growth.

The ratings also incorporate the company's high leverage, with total debt to last 12 months EBITDA of 5.2 times, and deeply negative tangible equity resulting from minimal equity and sizeable goodwill comprising 60% of total assets, Moody's added.

The ratings also reflect Allied's modest interest protection measurements with EBIT-to-interest at 1.4 times and fixed charge coverage at 1.1 times, as well as a moderate EBIT return on total assets of 8.2%.

The negative outlook reflects the company's high leverage relative to free cash flow (cash from operations less capex) of 26.7 times for the 12 months ending Q2-02, up from 22.9 times for the same period last year.

Moody's said it is concerned about the limited potential to substantially reduce debt via free cash flow in order to address the company's sizable bank debt maturities over the intermediate term.

S&P rates Allied Waste notes BB-

Standard & Poor's assigned a BB- rating to Allied Waste North America Inc.'s proposed $250 million senior notes due 2012 and confirmed its existing ratings. The outlook is stable.

Allied Waste's ratings reflect a strong competitive business position, offset by a relatively weak financial profile, S&P said.

Although the U.S. solid waste industry is mature and competitive, its overall risk characteristics are favorable, supported by the essential nature of services, relatively strong and reliable cash flows, and considerable resilience to economic swings, particularly in the more predictable residential and light commercial segments, S&P said. Allied Waste's market position is enhanced by a low cost structure, very good collection route density, and a relatively high rate of waste internalization.

Still, the economic slowdown has had a moderately adverse affect on the firm's volumes, especially in the industrial and roll-off segments (about 20% of revenues), and pricing flexibility in core services, the latter stemming partly from greater competition for the remaining waste, S&P added. In fact, pricing declined 1.5% in the first six months of 2002, which prevented the company from recovering increase in costs caused by normal inflation and an expanded organization structure.

Consequently, Allied Waste's historically very impressive profit margins in the mid-30% area declined to the low 30% area in 2002. As a result, the anticipated improvement in currently sub-par credit protection measures has been delayed. In the intermediate term, debt to EBITDA should be about 4.5 times, EBITDA and EBIT interest coverages approximately 2.5x and 1.75x, respectively, and debt to capital about 80%, S&P said. Gradual strengthening in the credit profile is expected over time, aided by additional debt reduction, primarily from internally generated funds.

Fitch rates Allied Waste notes BB-

Fitch Ratings assigned a BB- rating to Allied Waste North America's proposed $250 million senior secured note due 2012. The company's existing ratings are BB for its $1.3 billion senior secured credit facility and $2.9 billion tranche A,B and C loan facilities, BB- for its $3.1 billion senior secured notes and Browning Ferris Industries' $847 million senior secured notes, debentures and MTNS and B for its $2.0 billion senior subordinated notes. The outlook is negative.

Fitch said Allied Waste Industries, Inc.'s ratings reflect a very high leverage position that leaves the company with reduced flexibility during an economic downturn offset by a geographically diverse asset base, strong market positions, and solid EBITDA margins. Also incorporated into the ratings are the relatively low risk profile of the waste industry.

The weak economy has had a negative affect on Allied Waste's ability to increase prices in certain business segments, pressuring margins and free cash flow generation, Fitch said. Competitive pricing in the industrial and construction roll off segments has led to negative year over year pricing for the last couple of quarters and there are no indications of near term improvement.

Allied Waste has been unable to achieve price increases sufficient to offset higher costs, especially insurance and health related expenses, Fitch added. As a result, EBITDA expectations have moderated and free cash flow with which to reduce debt will be lower than Fitch had expected.

Moody's cuts Key3Media

Moody's Investors Service downgraded Key3Media Group, Inc. and continued its negative outlook on the company. Ratings lowered include Key3Media's $100 million senior secured credit facility due 2004, cut to Caa1 from B3, and its $290 million 11.25% senior subordinated notes due 2011, cut to Ca from Caa3.

Moody's said the downgrade reflects Key3Media's continuing deterioration of cash flow, material under-performance in comparison to expectations, and vulnerable liquidity position.

Given the rapid deterioration of spending in this sector and the limited prospects for near-term recovery, Key3Media is unlikely to be able to comply with its bank covenants moving forward and is expected to be cash absorptive, Moody's said.

Moreover, cash on the balance sheet will not likely sustain the company through the rating horizon at current pacing, Moody's added. Given Key3Media's small size, lack of diversity, and the continuing weak operating environment, the company is expected to experience difficulty in attracting additional capital.

Moody's said it believes "the most likely alternative" is that the company will pursue a financial restructuring as the universe of likely buyers for its assets is small.

S&P confirms Premcor

Standard & Poor's confirmed Premcor Refining Group Inc. and parent Premcor USA Inc. including the corporate credit rating of both at BB-. The outlook is stable.

S&P said its ratings reflect Premcor's position as a midsize, independent petroleum refiner operating in a very competitive, erratically profitable industry. The business is burdened by excess capacity and high fixed-cost requirements for refinery equipment and environmental regulation compliance, and Premcor has aggressive debt leverage.

Mitigating these factors somewhat are Premcor's ability to process high volumes of heavy crude at its Port Arthur, Texas facility, which should lead to improved profitability over the intermediate term, the company's ability to deliver gasoline into Midwest markets, which frequently experience seasonal refined product shortages, and maintenance of cash balances which provides the company with liquidity during cyclical troughs, S&P added.

In the second quarter of 2002, Premcor initiated a two-step plan to fortify its financial profile. First was an IPO of 20.7 million common shares, yielding proceeds of $482 million. Second was the restructuring of its project financing for Port Arthur Coking Co., which eliminated most of the transaction's project finance structure and liberated restricted cash (trapped at PACC, roughly $140 million), which was used to repay debt. As a result of these transactions, Premcor's consolidated total debt-to-total capital fell to about 57% as of June 30, 2002, compared with 84% at year-end 2001, S&P said.

Even with this level of reduced debt leverage, Premcor remains very weakly capitalized on a cash flow basis, S&P added. Based on mid-cycle refining margins, S&P said it expects Premcor's EBITDA interest coverage ratio (currently about 1 times) and funds from operations to debt to average only about 3x and 20%, respectively.

S&P raises Kappa Beheer outlook

Standard & Poor's raised its outlook on Kappa Beheer BV on positive from stable.

Ratings affected include Kappa Beheer's €370 million 10.625% subordinated notes due 2009, $100 million 10.625% subordinated notes due 2009 and €145 million 12.5% subordinated discount notes due 2009, all at B.

S&P cuts Windsor Woodmont Black Hawk

Standard & Poor's downgraded Windsor Woodmont Black Hawk Resort Corp. including lowering its $100 million 13% first mortgage notes due 2005 to D from CC.

S&P said the action follows Windsor Woodmont's decision not to make the interest payments due Sept. 15 on $108 million of secured debt. The company intends to discuss restructuring the debt securities with noteholders, S&P added.

S&P cuts Cenargo

Standard & Poor's downgraded Cenargo International plc and kept it on CreditWatch with negative implications.

Ratings lowered include Cenargo's $175 million 9.75% first priority ship mortgage notes due 2008, cut to B- from B+.

Fitch cuts PDV America

Fitch Ratings downgraded PDV America, Inc.'s senior notes to BB+ from BBB- and Citgo Petroleum Corp.'s senior unsecured debt to BBB- from BBB. Citgo is owned by PDV America, an indirect, wholly owned subsidiary of Petroleos de Venezuela SA. The outlook for PDV America and Citgo is negative.

Fitch said the downgrade reflects its continued concerns with the prolonged political and macroeconomic uncertainty in Venezuela as the country faces sharp economic contraction, accelerating currency depreciation, a lack of a coherent macroeconomic plan and increasing social and political tensions.

Since the beginning of 2002, Fitch has downgraded the long-term foreign currency rating of Venezuela to B from BB- and its long-term local currency (Venezuelan bolivar) rating to B- from B. The outlook for Venezuela remains negative.

Although the strengths and concerns that have supported Citgo and PDV America's ratings remain unchanged, the latest sovereign downgrades with continued negative outlook heighten the possibility that the ultimate shareholder (i.e. the Venezuelan government) may interfere with Citgo and PDV America, impairing their financial flexibility, Fitch said.

Venezuela has increasingly extracted cash out of Citgo and PDV America in recent years as the downstream sector flourished in 2000 and 2001, Fitch noted. Since 1998, the company has paid dividends of approximately $1.1 billion ($570 million net of capital contributions) to PDVSA. Citgo now faces a significant capital expenditure program to meet the upcoming low sulfur gasoline and diesel regulations, the current downturn in refining margins and continued force majeure cutbacks in crude supply under the PDVSA contracts.

Fitch upgrades Pecom

Fitch Ratings upgraded Pecom Energia's senior unsecured foreign and local currency ratings to CC from DD. The outlook is stable.

Fitch said the action follows a credit review period after Pecom's distressed debt exchange offer involving $997.5 million in outstanding securities.

Pecom's financial flexibility and credit profile have been adversely affected by the various emergency measures implemented by the Duhalde administration - including pesofication, revocation of convertibility and prohibition of price and/or tariff adjustments based on foreign currency indexation - to address the systemic crisis affecting Argentina following the sovereign's default, Fitch said. These policies have eviscerated the market-oriented framework instituted in the 1990s and expropriated significant value and decision-making autonomy from private sector companies, including Pecom.

Pecom's domestic operations have been adversely affected by the marked deterioration of its regulated businesses, Fitch added. This refers to the inability of regulated entities to completely pass through the devaluation effect on its product pricing and the general uncertainty surrounding the power generation segment.

Fitch believes that Pecom's international revenue generation ability will also be hindered in the near term due to OPEC-related production cutbacks in Venezuela and to the significant reductions in Pecom's capital investment program. Capital expenditures are expected to total $150 million this year, compared to the recent annual mean of $500 million. This sharp decline will delay the monetization of the company's cross-border upstream reserves, adversely affecting expected output gains over the medium term.

S&P cuts PolyOne

Standard & Poor's downgraded PolyOne Corp. and maintained its negative outlook on the company. Ratings lowered include PolyOne's $200 million 8.875% notes due 2012, Geon Co.'s $50 million 7.5% debentures due 2015 and $300 million senior unsecured notes due 2010 and M.A. Hanna Co.'s $150 million 9 3/8% senior notes due 2003, all cut to BB+ from BBB-.

S&P said the downgrade is in response to slower-than-expected progress in improvement to the financial profile and a deterioration in operating and financial performance stemming from adverse business conditions.

The continuation of challenging industry fundamentals has weakened the financial profile and is likely to limit the improvement anticipated in the prior rating, S&P said although it recognized the company's efforts to reduce costs and manage cash flow, as well as recent modest improvement in earnings.

The capital structure of PolyOne is somewhat stretched for the rating category, and credit protection measures are weak, S&P said. The ratio of total debt (adjusted for joint venture debt, the sale of receivables, and the capitalization of operating leases) to EBITDA is over 5 times and the ratio of funds from operations to adjusted debt is near 10%. These key credit ratios are expected to modestly improve in the next one to two years, aided by a gradual recovery in business conditions and operational performance.

Moody's lowers PolyOne outlook

Moody's Investors Service lowered its outlook on PolyOne Corp. to negative from stable. It rates the company at Baa3.

Moody's said its change reflects its concern that PolyOne may have difficulty meeting the financial covenants in its bank agreement over the next year if the U.S. industrial economy takes longer to recover than previously anticipated.

Although PolyOne's financial performance has begun to demonstrate year over year improvement due to cost reduction efforts, the significant increase in financial ratios envisioned under the company's bank agreement will require a sustained recovery in industrial demand in 2003, Moody's said.

Fitch cuts Reliant Resources to junk

Fitch Ratings downgraded Reliant Resources, Inc. to junk including cutting its senior unsecured debt to BB from BBB- and its short-term commercial paper rating to B from F3 and then withdrawn. The senior secured debt remains on Rating Watch Negative.

Fitch said its downgrade reflects its growing concern over Reliant Resources' ability to successfully refinance near-term maturing bank debt on an unsecured basis, including $2.9 billion of bridge financing that was used to acquire the assets of Orion Power Holdings, whose value and ability to upstream free cash flow to Reliant Resources have been significantly reduced in the current bank market environment.

The resolution of the Rating Watch will thus also focus on the collateral values available at the corporate level to satisfy a potential new class of secured creditors, Fitch said.

In addition, the downgrade incorporates the expectation for further erosion in Reliant Resources' consolidated credit measures primarily due to continued weakness in the financial performance of Reliant Resources' wholesale energy merchant business, Fitch said.

Fitch said it now expects cash interest coverage to approximate 2.5x in 2003 and remain at or below 3.0x through 2005.

Given that Reliant Resources' wholesale generation business does not currently benefit from a substantial hedge position after 2003, further volatility in credit measures is possible as existing above market hedges roll off, Fitch added.

Fitch rates Ferrellgas notes BB+

Fitch Ratings assigned a BB+ rating to the $170 million 8.75% senior notes due 2012 issued jointly by Ferrellgas Partners, LP and its special purpose financing subsidiary Ferrellgas Partners Finance Corp. The outlook is stable.

Fitch said the rating recognizes the subordination of Ferrellgas Partners' debt obligations to approximately $547 million unsecured debt of Ferrellgas, LP, the operating limited partnership, including the OLP's $534 million BBB rated senior notes.

Fitch also noted the underlying strength of Ferrellgas' retail propane distribution network, its extensive geographic reach, track record of customer retention, a proven ability to maintain consistent gross profit margins even during past run-ups in spot propane prices and strong internal operating, pricing, and financial controls.

Although Ferrellgas' recent financial performance was impacted by significantly warmer than normal weather conditions during the 2001-2002 heating season, credit measures have generally remained consistent with its rating category, Fitch said. Consolidated lease-adjusted ratios for earnings before interest, taxes, depreciation, and amortization (EBITDA) coverage of interest and total debt to EBITDA for the 12 month period ended April 30, 2002 were 2.5 times and 5.1x, respectively.

S&P cuts Applied Extrusion

Standard & Poor's downgraded Applied Extrusion Technologies Inc. and kept the ratings on CreditWatch with developing implications. Ratings lowered include Applied Extrusion's $275 million 10.75% notes due 2011, cut to B- from B.

S&P said the action follows Applied Extrusion's announcement that it has hired a financial advisor to evaluate options to maximize shareholder value, including recent expressions of interest made by third parties to acquire the company. The developing CreditWatch means the ratings could be raised, lowered, or affirmed.

Against the backdrop of a sluggish domestic economy and intensified competitive pressures, Applied Extrusion has witnessed lower-than-expected volume growth (in the low-single digit area) in 2002 resulting in capacity utilization levels in the mid- to high-80% area, as compared to previously expected improvement to the mid-90% area, S&P said. In addition, an inventory buildup necessitated selective shutdowns of its production lines in the fourth quarter of 2002. Further, competitive pressures are likely to constrain the company's ability to fully pass through increased raw material costs to customers in the near term, adversely affecting profitability levels.

Given the company's limited scale of operations and heavy debt burden, these factors have led to a deterioration in the company's financial profile to sub-par levels, S&P continued. EBITDA Interest coverage was about 1.8 times and funds from operations to total debt (adjusted for capitalized operating leases) to EBITDA was about 6% for the 12-month period ended June 30, 2002.

Applied Extrusion has been unable to meet its working capital and capital expenditure needs through internal cash generation for several years, and is unlikely to generate meaningful free cash from operations until 2004, S&P said. In the intermediate term, gradually improving demand growth and industry fundamentals should boost the company's profitability and cash flow generation.

S&P cuts SpectraSite to SD

Standard & Poor's downgraded SpectraSite Holdings Inc.'s corporate credit rating to SD from CC and its $200 million 10.75% senior notes due 2010 to D from C. The remaining senior unsecured debt remains at C and continues on CreditWatch with negative implications. SpectraSite Communications bank loan remains at CC and on CreditWatch with negative implications.

S&P said the action follows SpectraSite's announcement that it missed the interest payment on its 10.75% senior notes.

The company announced it is pursuing a restructuring of its public debt. Upon completion of such an exchange, the affected debt would be lowered to D, S&P added.

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