Moody's cuts Georgia-Pacific

Moody's Investors Service downgraded Georgia-Pacific Corp., affecting $9 billion of debt. Ratings lowered include Georgia-Pacific's senior unsecured notes, debentures and industrial revenue bonds, lowered to Ba3 from Ba1, G-P Canada Finance Co.'s notes, cut to Ba3 from Ba1, Great Northern Nekoosa's industrial revenue bonds, cut to Ba3 from Ba1, and Fort James Corp.'s senior unsecured notes, debentures, medium-term notes and pollution control revenue bonds, cut to Ba2 from Ba1. Moody's rated Georgia-Pacific's new seven-year notes guaranteed by Fort James at Ba2. The outlook is negative.

Moody's said the downgrade is in response to Georgia-Pacific's continued high level of debt, the uncertainty associated with its rising asbestos liabilities, and a weak near term outlook for the company's commodity products, which Moody's expects will impede the company's ability to achieve significant debt reduction in the near term.

Moody's said it considers debt either issued or guaranteed by the Fort James subsidiary to be superior to other Georgia-Pacific debt, and has therefore rated those obligations Ba2. Non-supported debt is rated Ba3 to reflect the structural subordination.

Georgia-Pacific's new ratings reflect the company's high financial leverage, the significantly greater financial strength of its principal competitors in the tissue business, and the long-term uncertainty surrounding the company's asbestos liabilities, Moody's added. The ratings also consider its substantial share of the consumer and away from home tissue markets, strong brand position, sizable presence in building products, and low cost packaging operation.

The negative outlook indicates the potential for continued adverse asbestos developments and refinancing requirements during the next 2 years.

Moody's said the upcoming refinancing via the new note issue, which is consistent with Moody's expectation that Georgia-Pacific has access to the capital needed to refinance these maturities, reduces its reliance on short term debt and improves its liquidity profile.

Georgia-Pacific's cash generation has been significantly below expectations since the acquisition of Fort James in 2000, Moody's said. This, combined with a high level of debt (currently about $11.5 billion) has produced debt protection measurements that continue to be much weaker than previously envisioned, and more consistent with the revised ratings.

Since the acquisition, a substantial amount of debt has been repaid using the proceeds of asset sales, an alternative that is less likely going forward. Looking forward over the near and intermediate term, a relatively weak outlook for the company's commodity products, and price competition in the tissue business, are expected to result in a low level of cash flow in relation to debt, and will inhibit meaningful debt reduction.

For year-end 2002, Moody's estimates total debt to EBITDA to be just under 5 times, and unless the building products operations recover to mid-cycle or above levels, we expect the leverage to remain high for at least the next several years.

S&P keeps Graham Packaging on positive watch

Standard & Poor's said Graham Packaging Holdings Co. remains on CreditWatch with positive implications including its senior unsecured debt and subordinated debt at CCC+ and Graham Packaging Co.'s senior secured debt at B and subordinated debt at CCC+.

S&P said the continuing positive watch follows Graham's announcement that it has revised terms of the planned IPO and debt refinancing, which are expected to be completed in the first quarter of 2003, assuming market conditions remain favorable.

The positive implications for the CreditWatch on Graham reflect the expected improvement in Graham's financial profile following completion of the proposed IPO, proceeds of which will be used to reduce debt, S&P said. Estimated IPO proceeds have been reduced marginally to about $228 million, from previously expected proceeds of $250 million. Under the revised debt refinancing plan, the bank facility has been increased to $810 million from the previously planned $700 million facility, as the company no longer plans to issue $100 million in senior subordinated notes.

If the transaction is completed as proposed, Standard & Poor's will raise its corporate credit rating on Graham to B+ from B and the company's senior secured debt to B+ from B and subordinated debt to B- from CCC+.

Pro forma for the proposed transactions, total debt (adjusted for capitalized operating leases) to EBITDA is expected to improve to about 5x, compared with 6x for the 12-month period ended Sept 30, 2002, S&P said. Coverage ratios are also expected to benefit from a combination of continuing EBITDA growth (driven by continued conversion to rigid plastic packaging in the food and beverage segments, and the benefits of European restructuring actions), and following the IPO, lower debt-servicing costs. As a result, pro forma EBITDA to interest coverage ratio is expected to improve to about 2.5x, from the current level of about 2.0x.

S&P cuts Millicom, still on watch

Standard & Poor's downgraded Millicom International Cellular SA and kept it on CreditWatch with negative implications including cutting its $962 million 13.5% senior subordinated discount notes due 2006 to C from CC.

S&P said the action is in response to Millicom's company's announced debt exchange offer on its 13.5% notes.

The company is offering to exchange the notes for a combination of two new note issues with interest rates of 9% and 4%, respectively, at an overall 32.5% discount to the fully accreted value of the 13.5% notes.

S&P said it views the proposed transaction as a distressed exchange, given the company's need for additional liquidity and the discount to accreted value of the offer. Moreover, the 4% bonds, representing 11% of the new notes, are payable at maturity in cash or in Millicom common stock, at the company's option.

On completion of the exchange, the corporate credit rating will be lowered to SD as a selective default and the 13.5% notes will be lowered to D.

S&P puts Central Garden on positive watch, rates notes B+

Standard & Poor's put Central Garden & Pet Co. on CreditWatch with positive implications including its $125 million revolving credit facility at BB- and assigned a B+ rating to its planned $150 million senior subordinated notes due 2013. The new notes are not on CrediWatch.

S&P said the positive watch reflects Central Garden's intention to refinance a significant portion of its existing indebtedness as well as the company's improved financial profile and credit measures.

S&P added that it expects to raise the company's corporate credit and senior secured bank loan rating to BB on closing of the refinancing. If completed as described, the note offering will extend Central Garden's debt maturities.

Central Garden & Pet's ratings reflect the strong competition in the company's business segments, significant seasonality in the lawn and garden business and customer concentration, S&P said.

These risks are somewhat mitigated by the company's broad product portfolio and moderate financial profile.

The lawn and garden business is highly seasonal, and sales are influenced by weather conditions, S&P noted. Historically, about 60% of the company's total sales and more than one-third of its operating profits are generated in the first six months of the calendar year. Moreover, the continued consolidation in the retail industry has resulted in an increasing consolidated retail base that could further pressure pricing.

The company has demonstrated progress in shifting from distribution sales to higher margin branded product sales after the termination of its distribution agreement with Scotts in 1999, S&P said. As a result of acquisitions and new product introductions, about 75% of the company's fiscal 2002 sales were derived from its branded products, with only 25% of sales representing distributed product.

Central Garden & Pet's conversion into a branded products manufacturer, in addition to its facility closures to right-size infrastructure, has resulted in improved operating performance and credit protection measures, S&P added. Indeed, lease-adjusted operating margins in fiscal 2002 improved to 7.2% from 6.7% in fiscal 2001 and 5.9% in fiscal 2000, while EBITDA coverage of interest improved to 4.1x in fiscal 2002 from 2.7x in fiscal 2001. Leverage has also shown improvement, with total debt to EBITDA at about 3.3x in fiscal 2002, down from 4.2x for fiscal 2001 as a result of lower borrowing requirements.

S&P rates Herbst notes B

Standard & Poor's assigned a B rating to Herbst Gaming Inc.'s planned $45 million 10.75% senior secured notes due 2008 and confirmed its existing ratings including its senior secured debt at B. The outlook is positive.

S&P said Herbst Gaming's ratings reflect its moderate-size cash flow base, competitive market conditions and high debt levels. These factors are tempered by the company's strengthened market position in the Nevada route business as a result of the acquisition, and the relatively stable cash flow generated from these route operations.

With the acquisition of Anchor Coin, Herbst Gaming further expands its presence in the Nevada route business with an additional 1,100 machines in more than 88 locations, bringing its total base to approximately 8,100 machines in 620 locations, S&P said.

Based on the number of machines and pro forma for the Anchor transaction, Herbst Gaming is a number-two player next to Alliance Gaming, which has approximately 8,900 machines, S&P added.

However, pro forma EBITDA for Herbst Gaming is expected to exceed that of Alliance Gaming as a result of a higher win per day.

Pro forma EBITDA for the 12 months ended Dec. 31, 2002, was approximately $49 million. Adjusted for operating leases, EBITDA coverage of interest expense is less than 2.0x, and total debt to EBITDA is in the 6.0x area. These measures are in line with current ratings, and are expected to improve during the intermediate term, S&P added.

Fitch rates Sanluis loan B-, notes, convertibles CCC+

Fitch Ratings assigned a B- rating to Sanluis Corporacion, SA de CV's $265 million of bank loans and a CCC+ rating to its $47.6 million of 8% senior notes due 2010 and $76.2 million of 7% mandatorily convertible debentures due 2011. The outlook is stable. The ratings were announced following completion of the company's debt restructuring in which the senior notes and convertibles were issued in exchange for defaulted debt.

The debt restructuring is positive for Sanluis as it will result in the reduction of the company's debt burden by close to 25% and the lengthening of debt maturities, Fitch said.

In addition, cash flow will improve as a portion of the company's debt will have interest that is paid-in-kind rather than paid in cash.

The resulting improvements in its debt profile are expected to help Sanluis normalize its ongoing operations and to focus on improving the profitability of its auto part business, Fitch added. Since defaulting on its debt obligations, Sanluis has sought to preserve a minimum of liquidity necessary for its ongoing operations. This objective was made difficult by more restrictive credit terms from raw material suppliers and other vendors. Since then, credit terms have gradually improved and are expected to become more normal after the debt restructuring is completed.

Sanluis will continue to face a challenging operating environment for the auto parts industry. Sanluis, which manufactures suspension and brake components primarily for export to original equipment manufacturers including Ford, DaimlerChrysler and General Motors, is exposed to the cyclicality of the United States auto industry, which remains in a downturn, Fitch said.

Sanluis' debt leverage will remain high after the debt restructuring, with EBITDA generation of $55.5 million over the 12 months ended September 30, 2002 to total pro forma debt above 8.0 times, Fitch said. EBITDA/interest during the first nine months of 2002 would have been slightly above 1.0x if Sanluis was still making interest payments on its debt as originally scheduled. After the debt restructuring, EBITDA/interest is expected to improve closer to 1.5x due to the recent stabilization of profitability margins and the estimated reduction in debt from $568 million at Sept. 30, 2002 to an estimated $427.3 million after the restructuring.

Fitch rates KB Home notes BB-

Fitch Ratings assigned a BB- rating to KB Home's $250 million 7.75% senior subordinated notes due Feb. 1, 2010 and confirmed its existing ratings including its senior unsecured debt at BB+. The outlook is stable.

Compared to the debt being refinanced with the new bond issue, new securities have a lower rate and a later maturity by roughly three years.

For the fiscal year ending Nov. 30, 2003, Fitch expects leverage (excluding financial services) to remain comfortably within KB Home's stated debt to capital target of 45-55%.

The long-term ratings for KB Home are based on the company's geographic diversity, primary focus on the entry-level homebuyer, solid operating performance, conservative building practices and effective utilization of return on invested capital criteria as a key element of its operating model, Fitch said. Risk factors include the inherent cyclical nature of the homebuilding industry.

The company has expanded EBITDA margins over the past several years on steady price increases, volume improvements and reductions in SG&A expenses, Fitch said. Also, KB Home has produced record levels of home closings, orders and backlog as the housing cycle extended its upward momentum.

KB Home realizes a significant portion of its revenue from California, a region that has proved volatile in past cycles. But the company has reduced this exposure as it has implemented its growth strategy and currently sources 23% of its deliveries from California, compared with 69% in fiscal 1995. Over recent years KB Home shifted toward a presale strategy, producing a higher backlog/delivery ratio and reducing the risk of excess inventory and debt accumulation in the event of a slowdown in new orders, Fitch said. The strategy has also served to enhance margins.

S&P confirms Northwest, lowers NWA Trust 1

Standard & Poor's confirmed Northwest Airlines Corp.'s ratings including its corporate credit rating at BB- and downgraded NWA Trust No. 1's $177 million 8.26% senior aircraft notes series A due 2006 to BB from BBB- and $66 million 9.36% subordinated aircraft notes series B due 2006 to B+ from BB. Northwest's outlook is negative.

S&P said the downgrade reflects substantial deterioration in collateral coverage for NWA Trust No. 1, the first enhanced equipment trust certificate, which is secured by six B747-200 and four B757-200 aircraft. Northwest Airlines Corp.'s $488 million fourth quarter 2002 net loss included $366 million of pretax charges to write down B747-200 and DC10-30 aircraft whose retirement is being accelerated.

Northwest posted a fourth-quarter net loss, $178 million before special charges, which was less than the net loss of $256 million the prior year, in line with expectations, and somewhat better than average among results anticipated from large U.S. airlines, S&P said. Still, the continuing significant losses, without a clear path to profitability, indicate that, in management's words, "the (airline) industry's revenue environment has permanently changed."

The company indicated that it will approach its labor unions, and possibly other parties, such as suppliers, about changes, in order to lower costs and remain competitive. Northwest also took a $1 billion aftertax charge to equity, which is not recorded as an expense on the balance sheet, due to pension underfunding, S&P noted.

Northwest's liquidity remains adequate, with $2.1 billion of unrestricted cash at Dec. 31, 2002, a larger amount, relative to the company's size, than that of peer airlines, S&P said. However, the company has no available bank lines and little unencumbered collateral for secured borrowing. Debt maturities total about $350 million in 2003, and cash capital expenditure needs are about $220 million (another $1.6 billion is covered by committed lease financing).

S&P withdraws Perry Judd ratings

Standard & Poor's withdrew Perry Judd's Holdings Inc.'s ratings including its senior secured debt, previously at BB-, and $115 million 10.625% senior subordinated notes due 2007, previously at B-.

The action was at the company's request, S&P said.

Moody's cuts Durango

Moody's Investors Service downgraded Corporacion Durango, SA de CV including cutting its $175 million senior notes due 2009, $301.7 million senior notes due 2006, $10.4 million senior notes due 2008 and $18.2 million senior notes due August 2003 to Ca from Caa3. The outlook is negative.

Moody's said the downgrade follows Durango's failure to make a Jan. 15, 2003 interest payment, and reflect Moody's view that the noteholders will likely experience a material loss in principal.

Moody's believes the company will be challenged to make the missed payment within the 30-day grace period.

The revised ratings reflect Moody's opinion that bondholders are likely to experience a loss in principle in excess of 25% of face value.

Moody's cuts PDVSA, PDV America

Moody's Investors Service downgraded of Petroleos de Venezuela (PDVSA)'s foreign currency rating to Caa1 from B3 and PDV America, Inc.'s senior notes to Caa1 from B3. The outlook is developing.

Moody's said the downgrade follows its downgrade of Venezuela's country ceiling for foreign currency bonds to Caa1 from B3 with a developing outlook.

The country ceiling rating action denotes heightened liquidity and rollover risk due to the disruption of PDVSA's production and exports, which are Venezuela's main source of foreign currency earnings and principal support for the country ceiling, Moody's said.

Moody's added that it believes it will take substantial financial resources to restore PDVSA's production capacity and that political uncertainty and social unrest could also further disrupt government operations and increase the risk of non-payment.

Moody's cuts PDVSA Finance

Moody's Investors Service downgraded PDVSA Finance Ltd.'s notes to Caa1 from B3 and kept them on review for possible further downgrade.

The downgrade is a result of the downgrade of the foreign and local currency ratings of Petroleos de Venezuela (PDVSA) to Caa1 from B3, Moody's said. The ratings of the PDVSA Finance notes are linked to the local currency and foreign currency ratings of PDVSA, which generates the receivables that back the repayment of the rated notes. As a result of this linkage, any further change in those ratings may also result in a change in the PDVSA Finance notes' ratings.

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