Moody's cuts Qwest to junk

Moody's Investors Service downgraded most Qwest ratings to junk, cutting the senior unsecured rating of Qwest Communications International and wholly guaranteed Qwest Capital Funding to Ba2 from Baa3 and the regulated subsidiary Qwest Corp. to Baa3 from Baa2. A total of $26.4 billion of debt is affected. The outlook for all ratings is negative.

Moody's said it cut Qwest because of concerns about the company's weak and still unresolved liquidity situation; material cash drain at its long distance operating subsidiary, Qwest Communications Corp.; slowing growth in Qwest Corp.'s ILEC operations; high leverage relative to expected free cash flow generating capacity, even with planned asset sales; uncertainties associated with the ongoing SEC investigation of Qwest's accounting practices relating to IRU capacity sales, equipment sales that were part of certain structured transactions, and the timing of Dex revenue recognition; and general corporate governance.

Qwest Communications International and Qwest Capital's Ba2 ratings reflect the structural subordination of about $18 billion of debt to $7 billion of debt at Qwest Corp.

While the potential sale of QwestDex should significantly reduce the debt load at Qwest Communications International and Qwest Capital, it will likely remain in excess of $10 billion, Moody's said.

Furthermore, since Qwest's unregulated entities (excluding Dex) are consuming capital, Qwest Communications International and Qwest Capital creditors must rely heavily on free cash flow generated by Qwest Corp., Moody's added.

With its own capital expenditure and debt service requirements, Qwest Corp. will be hard pressed to make substantial distributions to Qwest Communications International over the next 12-18 months and in any event is only permitted to upstream in the amount of its accumulated reported net income, which now stands at approximately $2.1 billion.

Moody's added that the negative outlook reflects "the many execution and operational challenges Qwest management faces in the next several months."

These include the potential for additional downgrades should Qwest be unable to: close asset sales in the amount of $8 to $10 billion; realize cash proceeds to pay down bank debt outstanding to $2.0 billion and subsequently begin negotiating a new long-term bank facility; complete a planned $300 to $400 million accounts receivable securitization program by early July; stabilize operating performance, particularly the cash drain at QCC; and have the SEC investigation into its accounting practice concluded without serious implications.

Fitch lowers United Defense outlook

Fitch Ratings confirmed its BB rating on United Defense Industries' senior secured credit facilities and lowered the rating outlook to stable from positive.

Fitch said it revised the outlook because of higher debt levels and the uncertainty surrounding the likely cancellation of the Crusader program. While United Defense's credit statistics should steadily improve after the acquisition of U.S. Marine Repair as debt is reduced with free cash flow, the improvement will not be as strong as Fitch estimated before discounting the contribution from Crusader, the rating agency said.

Positives for the ratings are the benefits of the U.S. Marine acquisition, strong free cash flow, a track record of debt reduction, adequate post-acquisition credit protection measures and solid competitive positions in several defense markets, Fitch said, added that United Defense has improved financial flexibility as a result of its IPO last December.

Negatives are the potential for additional acquisitions, the uncertainty surrounding the Crusader program, higher debt levels post-acquisition, and the uncertainty of United Defense's position in the U.S. Army's transformation plans, Fitch said.

S&P rates Big Food notes BB-

Standard & Poor's assigned a BB- rating to the planned £150 million notes due 2012 of The Big Food Group plc.

Moody's confirms Dillard, outlook still negative

Moody's Investors Service confirmed Dillard's senior unsecured debt at Ba3 and said the outlook remains negative. Its subordinated debentures and capital securities are at B2.

Moody's said it confirmed Dillard's senior unsecured debt because of the significant asset coverage for unsecured creditors despite the security given to the new unrated $400 million bank agreement.

Part of inventory is collateral for the new facility. But Moody's noted Dillard's owns 252 of its 340 stores, which combined with the unencumbered portion of inventory provide sufficient coverage for its senior unsecured debt.

The continuing negative outlook reflects "the major challenges that the company faces in improving its same store sales, profitability and debt protection measures in an unforgiving retail environment," Moody's said.

Moody's cuts Petroplus outlook

Moody's Investors Service lowered its outlook on Petroplus International NV and Petroplus Funding BV to negative from stable. The companies' senior unsecured rating is B1.

Moody's said it cut Petroplus' outlook because of significantly and persistently lower than anticipated European refining margins in 2002 to date, as a result of uncertain economic conditions, which are currently affecting the refining industry as a whole.

This has exacerbated the ongoing imbalance between refining capacity and product demand, Moody's said, adding: "It remains unclear at what point market conditions will improve."

The weak industrial trends have adversely impacted Petroplus's key operating metrics and financial flexibility, Moody's said but noted that Petroplus has adequate supporting liquidity and a diversified bank lending group.

Should margins remain relatively weak beyond the short term, the current rating levels may not be sustainable, Moody's added.

S&P says Wabtec ratings unchanged

Standard & Poor's said it is not making any change to the ratings of Wabtec - Westinghouse Air Brake Technologies Co. - after the company's announcement that it will redeem its $175 million 9.375% notes on or after June 30, 2002 using credit facility borrowings. The company is rated BB and has a stable outlook.

Interest savings of $8 million annually are offset by modestly increasing term risk, the company's further reliance on its senior bank lenders, and Wabtec's potential exposure to future fluctuations in interest rates, S&P said.

Moody's puts William Hill notes on upgrade review

Moody's Investors Service put William Hill Finance plc's £150 million senior subordinated notes at B1 under review for possible upgrade and confirmed the Ba2 senior implied and Ba3 senior unsecured issuer rating of William Hill plc.

Moody's said its review is in response to William Hill's filing of a prospectus for an initial public offering and related recapitalization.

The review for upgrade on the notes reflects the expected tender of these notes (tender offer announced on May 13, 2002) as part of the company's recapitalization, Moody's said.

The rating agency confirmed William Hill's senior implied and senior unsecured issuer ratings because the company's consolidated credit profile would not materially change as a result of the proposed recapitalization.

S&P raises Rent-A-Center outlook

Standard & Poor's raised its outlook on Rent-A-Center Inc. to stable from negative and confirmed its existing ratings including its senior secured bank loan at BB- and subordinated debt at B, affecting $703 million of debt.

S&P said it revised Rent-A-Center's outlook in response to the company's progress towards improving its operating costs and S&P's analysis that current litigation against the company will not materially affect its credit measures.

Although operating margins are below previous levels, they have begun to show improvement due to management's initiatives, including effective pricing of rental merchandise and reduction of store-level expenses, S&P said.

In addition, Rent-A-Center has reached an agreement in principle, subject to court approval, to settle all class-action gender discrimination lawsuits against it for a payment of $47 million, S&P added, noting that the settlement removes significant potential liabilities, as the plaintiffs were seeking $410 million.

Rent-A-Center still faces a class action alleging that the company issued a series of materially false and misleading statements to the market and two lawsuits regarding the legality of its rental purchase agreements.

S&P rates JLG notes BB+

Standard & Poor's assigned a BB+ rating to JLG Industries Inc. proposed $150 million senior subordinated notes due June 2012 and assigned a BBB- rating to its $250 million senior secured revolving credit facility due June 18, 2004 and a BBB- corporate credit rating. The outlook is stable.

S&P said the investment-grade corporate credit rating on JLG reflects the company's position as the world's largest manufacturer of aerial work platforms as measured by revenues, although the company operates within a challenging industry.

JLG is a well-respected brand in the industry, has only one competitor of any size in the U.S., and has experienced an upward trend for its AWP market share, S&P said.

Few direct substitutes exist for the products supplied by JLG, and the company spends about 2% of its sales annually on improvements in technology and product design to maintain its market position as a supplier of value-added products and to reduce the cost of production.

In addition, JLG is somewhat geographically diverse, with U.S., European, and other international (Latin America and Asia) sales providing 71%, 22%, and 7% of revenues, respectively, for the 12 months ended Jan. 31, 2002, S&P said.

Negatives are seasonal and cyclical demand influenced by macroeconomic factors affecting construction and manufacturing activity, S&P said. The company has a concentrated customer base, with the two largest customers accounting for more than 30% of sales although the rating agency noted the ultimate end customer base is diverse.

S&P rates Boyd's bank loan BB+

Standard & Poor's assigned a BB+ rating to Boyd Gaming Corp.'s proposed $500 million senior secured credit facility and affirmed its BB corporate credit rating, BB- senior unsecured debt rating and B+ subordinated debt rating.

The loan consists of a $400 million revolver due 2007 and a $100 million term due 2008. The term will amortize by $1 million per year until maturity. The bank facility is guaranteed by all of the company's significant subsidiaries and is secured by a first lien position on the assets of all such subsidiaries, according to S&P.

"Ratings for Boyd Gaming reflect its diversified portfolio of gaming properties and historical ability to generate steady cash flow," S&P said. "These factors are offset by high debt leverage for the rating and the potential for challenges associated with completing and opening the Borgata project in Atlantic City, N.J."

During the first quarter of 2002, EBIDTA grew by 30% to $71.5 million and property-level EBIDTA grew by 18.5% on a same store basis. For the twelve months ending March 31, total debt to EBIDTA declined to 4.8 times.

Fitch keeps AES Drax on watch

Fitch Ratings said AES Drax Holdings Ltd.'s senior secured bonds remain on Rating Watch Negative as does Inpower Ltd.'s senior secured bank loan and AES Drax Energy Ltd.'s senior notes. Drax Holdings' senior secured bonds and Inpower's loan are rated BB+ and Drax Energy's notes are rated B+.

Fitch noted Drax Holding and Inpower were downgraded and placed on Rating Watch Negative in November 2001, reflecting lower forecast coverages to levels which, given developments in respect of the insurance arrangements, were no longer consistent with a BBB- rating. At the time, the Rating Watch reflected uncertainty over the credibility of the project's response to a lower merchant price environment, which supports about 40% of the station's output by volume and about 25% by revenue; increased exposure to operational risks as a result of the high insurance deductible (£50 million on each and every claim) and exposure of the structure to the impact of technical defaults should waivers related to the insurance arrangements not be granted. Concerns over the future of the primary hedge agreement with TXU Europe were also an issue.

There have been positive developments with regard to resolving some, though not all, of the above issues, Fitch said.

Drax has a credible program to reduce operating costs in line with lower current expectations for market pricing going forward, Fitch said.

But while first quarter 2002 figures indicate progress, with controllable costs down by more than 8% over the prior year, moderate execution risk does remain on achieving and maintaining this lower cost base, Fitch said.

In addition, the insurance deductible has been reduced to £25 million from £50 million.

Drax has undertaken further steps to enhance short-term liquidity, including the sale of excess coal stocks, Fitch said.

However the project remains in technical default on the InPower bank facility with regard to several issues, which are currently the subject of a comprehensive waiver request package, Fitch said.

While there is a cross-default to the secured bonds, the clauses within the bank facility are not mirrored within the bond documentation, and thus approval to waive these defaults, and to amend the project's trading strategy, is currently only required from the bank lenders.

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