S&P sees Pacific Gas successors at investment grade

Standard & Poor's said Pacific Gas & Electric Co. will likely be capable of achieving an investment-grade rating of at least BBB- upon emergence from bankruptcy.

In a letter to Pacific Gas's chief financial officer, S&P said its preliminary rating is based on an expected reduction of at least $500 million in the debt of the yet-to-be-named parent of the electric transmission company, gas transmission company and electric generation company prior to or simultaneous with the emergence from bankruptcy. Also, PG&E Corp. will issue $700 million of equity, with proceeds to reduce the four new companies' debt to levels consistent with the model.

S&P said the four companies Pacific Gas proposes to create after a successful emergence from bankruptcy will be capable of achieving investment-grade ratings based on a few conditions, including an updated reorganization plan and regulatory approval.

S&P's preliminary rating evaluation reflects the financial and operational forecasts underlying the plan. Any material deviations from the proposed plan could result in a lower rating. S&P said a definitive ratings opinion will require additional assessment and more detailed analysis at the time a plan is implemented.

S&P rates Hilite's loan BB-

Standard & Poor's rated Hilite International Inc.'s proposed $235 million senior secured credit facilities at BB-. The outlook is stable.

The loan consists of a $50 million five-year revolver and a $185 million six-year term loan B. Proceeds will be used to refinance all of the company's existing domestic and European credit facilities and all of the existing subordinated notes. Security is all the capital stock of each subsidiary of the company, all intercompany notes, and substantially all tangible and intangible assets of the company and its subsidiaries, including accounts receivable, inventory, intellectual property, real property, and cash.

Using its enterprise valuation analysis, S&P concluded that in a distressed scenario the likelihood of recovery attributable to collateral in the event of a default or bankruptcy is not meaningful. Tangible noncurrent assets totaled $200 million at Dec. 31, 2002 versus total bank debt, if the revolver were fully drawn, of $235 million. Intangible assets represent 33% of total assets. Total accounts receivable and inventories were $83 million at year-end 2002.

The rating reflects the company's below-average business profile due to a highly competitive and cyclical automotive market, a relatively narrow product line, lack of diversity in the customer base and modest geographic diversity. Furthermore, the rating reflects the company's aggressive financial position caused by expectations of an ongoing acquisitive growth strategy, S&P said.

These negative factors are mitigated by the highly engineered nature of the company's products, which have a long life cycle and provide the opportunity to earn a return on invested capital higher than would be likely for a commodity product, S&P added.

Moody's rates Hilite loan Ba3

Moody's Investors Service assigned a Ba3 rating to Hilite Industries, Inc.'s planned $50 million guaranteed senior secured revolving credit facility maturing 2008 and $185 million guaranteed senior secured term loan maturing 2009. The outlook is stable.

Moody's said the rating reflect its concerns about the ability of Hilite's management to effectively operate and integrate the company, which was constructed through an aggressive acquisition strategy.

The original Hilite business was acquired by a group of private equity investment firms and management during June 1999. The company's sponsors have since pursued an acquisition program which roughly tripled Hilite's revenue base and widely expanded its geographic reach, and which most recently included the very significant German acquisition of the Hydraulik-Ring business from Siemens during May 2002, Moody's noted.

Moody's furthermore believes that there is a high probability of additional strategic acquisitions by the company going forward, in combination with an increased focus on organic growth. Despite Hilite's rapid expansion from an initial revenue base of under $100 million, Hilite's absolute size remains quite small within the automotive supplier industry relative to the majority of its key competitors, which primarily consist of more established and diversified Tier 1 suppliers possessing greater financial resources and flexibility (including Delphi, Bosch, BorgWarner, Magna, Denso, Tower Automotive, and others).

Hilite is therefore potentially more vulnerable to cyclical economic downturns; declining vehicle production volumes, and additional price compression from the automotive original equipment manufacturers, Moody's said.

Hilite's Dec. 31, 2002 results pro forma for the proposed refinancing include total debt/EBITDA leverage approximating 2.6x, Moody's said. Total debt/revenues is expected to exceed 50% and total debt/book capitalization is anticipated at about 58%. Pro forma EBIT coverage of cash interest is healthy at about 3.8x, and the pro forma EBIT return on total assets is initially anticipated at about 10.4%.

Moody's rates SpectaGuard loan B2

Moody's Investors Services rated SpectaGuard Acquisition LLC's $125 million senior secured credit facilities at B2. The outlook is stable.

The facilities consist of a $20 million five-year revolver and a $105 million seven-year term loan. Proceeds will be used to help fund the acquisition of Allied Security by MacAndrews and Forbes for a total consideration of about $270 million. Security is a first priority interest in all tangible and intangible assets, including, without limitation, intellectual property, contract rights and all of the capital stock of the borrower and each of its direct and indirect subsidiaries.

Ratings reflect high leverage, low levels of free cash flow after capital expenditures and debt amortization payments, modest size, negligible tangible assets and litigation risk, particularly given higher security concerns nationwide, Moody's explained.

Positive influences include the strength and stability of the company's operations, strong customer demand and low account turnover at its key clients.

Pro forma for the debt issuance and for the acquisition by Mafco, the company's debt to EBITDA is expected to be in the area of 4.5 times. Pro forma EBITDA less capital expenditures coverage of interest is expected to be around 2.1 times. Pro forma debt to free cash flow for 2003 is expected to be around 20 times.

S&P cuts Marsh

Standard & Poor's downgraded Marsh Supermarkets Inc. including cutting its $150 million 8.875% senior subordinated notes due 2007 to B from B+ and $90 million unsecured bank facility to BB- from BB. The outlook is negative.

S&P said it lowered Marsh because of weak sales trends and declining EBITDA in recent quarters. These resulted from competitive store openings in Marsh's market, and a highly promotional sales environment and more selective consumer spending patterns due to the weakened U.S. economy.

The company's same-store sales trends were negative for the past three quarters, which has negatively impacted credit protection measures, S&P added.

Marsh's supermarkets have a strong market position in Indianapolis, with a market share of about 29%, similar to Kroger Co., according to the 2002 Market Scope, S&P noted. However, the company has faced increased competitive store openings over the past year from Wal-Mart Stores Inc., Kroger, and others. This factor, coupled with increased promotional activity from competitors and more selective consumer shopping patterns, contributed to a 3.3% same-store sales decline in the first nine months of fiscal 2002.

Marsh's Village Pantry convenience store business segment continues to face challenging trends as volatile gasoline prices and weakened economic conditions persist.

S&P said it expects Marsh will be challenged to improve same-store sales trends significantly in 2003 if increased promotional activity and more selective consumer shopping trends continue.

The company's lease-adjusted operating margin is trending at about 5.0% compared with 5.4% in fiscal 2001, S&P added. Lease-adjusted EBITDA interest coverage is trending at about 2.0x compared with 2.3x in fiscal 2001. Total debt to EBITDA is 5.3x.

S&P confirms Sierra Pacific Resources, off watch

Standard & Poor's confirmed Sierra Pacific Resources and removed it from CreditWatch with negative implications. Ratings confirmed include Sierra Pacific Resources' $200 million floating-rate notes due 2003, $300 million 7.93% premium income equity securities due 2007 and $300 million 8.75% senior notes due 2005 at B-, Nevada Power Co.'s $130 million 6.2% senior secured notes series A due 2004, $140 million floating-rate notes due 2003, $200 million secured revolving credit facility, $350 million 8.25% senior secured notes due 2011 and $45 million 8.5% first mortgage bonds due 2023 at BB and $210 million 6% senior unsecured notes due 2003 at B-, NVP Capital I's $118.871 million 8.2% cumulative QUIPS at CCC+, NVP Capital III's $70 million trust preferred securities at CCC+ and Sierra Pacific Power Co.'s $115 million medium-term notes series A due 2022, $150 million revolving credit facility, $320 million 8% senior secured notes due 2008 and $50 million medium-term notes series C due 2006 at BB and $50 million 7.8% preferred stock class A at CCC+. The outlook is negative.

S&P said the confirmation follows Sierra Pacific's successful completion of its offering of $300 million 7.25% convertible notes.

Sierra Pacific will use the proceeds of the $300 million debt issue to retire $191 million in outstanding floating rate notes maturing on April 20. Another $53 million will be used to fund a debt service reserve that will be pledged to secure interest payments on the convertible notes for the next two and a half years. The balance of about $55 million will bolster liquidity at Sierra Pacific.

With the issue of the convertible notes, the pressure on Sierra Pacific's liquidity has eased, with the next maturity occurring only in 2005, S&P said. The debt service reserve and $55 million in cash from the convertible notes issue, and dividends from Sierra Pacific Power, should enable Sierra Pacific to meet all of its cash requirements until Nevada Power can resume dividend payments to the parent.

S&P added that Sierra Pacific's rating reflects the adverse regulatory environment in Nevada, the substantial operating risk arising from the dependence on wholesale markets for over 50% of the utilities' energy requirements, and the substantially weakened financial profile following the disallowance by the Public Utility Commission of Nevada of $434 million in deferred power costs incurred by Nevada Power during the 2001 western U.S. power crisis.

Key credit concerns include the PUCN's ruling on Nevada Power's pending deferred cost-recovery case, the outcome of the Enron Corp. lawsuit demanding cash collateral from Nevada Power, and Nevada Power's ability to overcome the current restrictions on its ability to pay dividends to Sierra Pacific, S&P said.

Sierra Pacific's financial position will continue to be strained, with cash flow interest coverage expected to be under 3x and adjusted debt to total capital at over 55% for the next few years, S&P added.

Moody's withdraws FastenTech ratings

Moody's Investors Service withdrew its ratings on FastenTech, Inc. including its $175 million of senior subordinated notes due 2011 at B3 and $40 million senior secured credit facility due 2007 at Ba3 after the company canceled its planned high-yield bond offering.

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