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Published on 11/5/2002 in the Prospect News Bank Loan Daily.

Moody's raises Boyd Gaming outlook

Moody's Investors Service raised its outlook on Boyd Gaming Corp. to stable from negative and confirmed its ratings including its $400 million secured revolving credit facility due 2007 and $100 million secured term loan due 2008 at Ba1, $122.2 million 9.25% senior notes due 2003 and $200 million 9.25% senior notes due 2009 at Ba3 and $250 million 8.75% senior subordinated notes due 2012 and $250 million 9.5% senior subordinated notes due 2007 at B1.

Moody's said it revised Boyd's outlook in response to consistent EBITDA improvements combined with modest levels of absolute debt reduction which have improved Boyd's free cash flow profile and resulted in a debt/EBITDA level that Moody's believes is more consistent with a Ba2 senior implied rating.

Debt/EBITDA for the 12-month period ended Sept. 30, 2002 (excluding Borgata related debt) was 4.1x compared to 5.1x at Dec. 31, 2001 and 5.0x at Dec. 31, 2000, Moody's noted.

Moody's said it anticipates Boyd will use its free cash flow to maintain its current credit profile, and that continued EBITDA improvement and lower capital expenditure requirements will further strengthen Boyd's ability to deal with near and long-term challenges.

These challenges include the completion and success of the Borgata project, the threat of Native American gaming in N.Y. State, and moderating growth rates across the gaming sector, Moody's added.

Boyd is responsible for all cost overruns related to the Borgata project that is still under construction and expected to open in the summer of 2003. Currently, construction of the Borgata is on time and on budget.

S&P cuts Iusacell

Standard & Poor's downgraded Grupo Iusacell Celular SA de CV and put it on CreditWatch with negative implications. Ratings affected include Iusacell's $150 million 10% notes due 2004 and Grupo Iusacell SA de CV's $350 million 14.25% senior unsecured notes due 2006, cut to CCC- from B-, and $265.621 million bank loan bank loan due 2002, cut to CCC+ from B+.

Fitch cuts Goodyear

Fitch Ratings downgraded The Goodyear Tire & Rubber Co. including cutting its senior unsecured debt to BB from BB+. The outlook is negative.

Fitch said it lowered Goodyear because of the steady deterioration in its core North American tire operations, where the company's margins and competitive position have eroded.

While liquidity is currently ample, substantial contractual cash requirements loom over the forthcoming periods, including pension funding requirements of $350-$550 million over the next 18 months and debt maturities of $378 million and $809 million over the next 12 and 24 months, respectively, Fitch said.

Goodyear is currently in compliance with the interest coverage ratio covenant contained in its undrawn committed bank and its bank term loan but remains vulnerable to non-compliance should profitability erode in the forthcoming quarters, Fitch added.

Looking forward, meaningful increases in raw material and structural costs are likely to pressure margins further unless aggressive offsetting measures are implemented.

Moody's keeps Cablevision on review

Moody's Investors Service said its review for downgrade continues on CSC Holdings, a subsidiary of Cablevision Systems Corp. Ratings affected include CSC's $3.7 billion senior unsecured notes at B1, $600 million senior subordinated notes at B2, $1.5 billion preferred stock at B3 and SGL-4 liquidity rating.

Moody's said its continuation of the review follows Cablevision's announcement that it will be selling its stake in the Bravo network to NBC and netting approximately $1 billion in value (in the form of Cablevision and GE shares, split roughly 65%-35%, respectively, as estimated based on the current Cablevision share price) through the combined redemption of NBC's holdings in both Cablevision and its indirect subsidiary Rainbow Media Holdings.

Although the proposed transaction confirms the high underlying value of the company's assets, and potentially suggests more of a willingness to divest non-core assets (at least at high cash flow multiples and corresponding valuation levels) on the part of management, Moody's said these issues were never the focus of its concerns about the company.

Effectively, the transaction mostly constitutes a large stock buy-back by the company, which will not likely benefit bondholders that much, if at all, even though it seems quite favorable from an equity-holder's perspective given the large amount of shares being retired at historically low prices, Moody's said.

The primary concern for the company at the moment continues to be its weak liquidity profile, which in Moody's opinion will not get that much of a boost from the sale of Bravo and remains dependent on many uncertainties with respect to share price movement, the ability to monetize the GE shares (and the terms of any monetization) that will be received as partial payment, the permanent repayment requirement for existing Rainbow Media debt, the willingness of the financial markets to replace existing credit facilities, and management's intentions with respect to any remaining cash proceeds thereafter.

The anticipated deleveraging impact of the Bravo transaction, which on a cash basis may only translate into $200 million or less and reflects a more modest 6x multiple of cash flow being sold after debt reduction (versus the estimated 23x multiple based on the full value of the transaction), will therefore be fairly immaterial to the consolidated entity, which remains leveraged at more than 8x and growing inclusive of both debt and preferred securities, Moody's said.

S&P raises Home Interiors

Standard & Poor's upgraded Home Interiors & Gifts Inc. The outlook is stable. Ratings affected include Home Interiors' $149 million 10.125% senior subordinated notes due 2008 to B- from CCC+ and $172.3 million term loan B due 2008, $19 million term loan A due 2004 and revolving credit facility due 2004 to B+ from B.

S&P said the upgrade reflects Home Interiors' improvements in marketing and infrastructure, with solid recruitment and retention of strong management and sales personnel. These positive steps have resulted in stronger profitability and credit ratios.

The rating is based on the high level of business risk associated with Home Interiors' direct sales business model and the company's aggressive debt leverage, S&P added.

With better sales training, product development, professional marketing, and improved logistics, Home Interiors has enhanced its profitability, S&P noted. The EBITDA margin has improved to 20% and higher in recent quarters from a low of 7.1% in December 2000.

Key elements in this improvement include displayer productivity resulting from better sales training and the retention of experienced people. Metrics such as sales per displayer and average order size have all risen since 2000, S&P said. In addition, the company has improved profitability by emphasizing sales of its internally manufactured products and by directly purchasing third-party manufactured goods rather than sourcing them through brokers.

Fitch cuts U.S. Industries' 7.125% notes

Fitch Ratings downgrade U.S. Industries, Inc.'s 7.125% senior secured notes to D from C and kept its 7.25% senior secured notes due 2006 at B- and on Rating Watch Negative.

Fitch said the downgrade follows U.S. Industries' announcement that it has accepted for payment approximately 96% of the $250 million of originally outstanding 2003 notes that were validly tendered for exchange.

The exchange offer on the 7.125% notes was considered a distressed debt exchange given the need to complete this exchange to prevent a potential default if U.S. Industries was not able to refinance the notes prior to October 2003, the high 90% level of participation necessary for the exchange to be made effective and the lengthened maturity of the new securities, Fitch said. Therefore, while not a contractual default, by definition Fitch considers the exchange to be an in substance default.

As a result of the exchange, U.S. Industries' debt will be reduced by about $106 million from cash in the collateral accounts. In addition, U.S. Industries has a tender offer outstanding for a portion of the 7.25% notes due in 2006 to be paid for with cash collateral. Therefore leverage, measured by total debt to EBITDA, is expected to improve considerably, Fitch said.

Fitch added that it expects to assign a rating to the new 11 ¼% notes and review the rating on the remaining 7.25% notes in the near term following a meeting with management and review of financial data.

Fitch lowers Durango outlook

Fitch Ratings revised its outlook on Corporacion Durango to stable from positive and confirmed its B+ rating on the company's senior unsecured notes due 2003, 2006, 2008 and 2009.

Fitch said the outlook change reflects a poor third quarter performance by Durango.

As a result, planned assets sales will not have as large of an impact upon the company's capital structure as originally indicated, Fitch said.

Also prompting the outlook change is a significant downward revision by the company in its midpoint EBITDA from $240 million to $175 million. While the businesses that will be sold account for some of the difference in this figure, they do not represent the entire figure, Fitch said.

During the third quarter, Durango generated only $21 million of EBITDA, a decline from $39 million in the same quarter of 2001, Fitch noted. The company's performance was hindered by a spike in the price for old corrugated containers during the quarter. In addition, during September, one of the recovery boilers exploded at the company's plant in Georgia. As a result of this explosion, plus the company's inability to lower production costs at this facility, Durango shuttered its operations in Georgia. This closure represents a significant setback for the company, as it had spent more than $150 million on the facility, including purchase price and capita expenditures, since 1999.

S&P lowers GEO outlook

Standard & Poor's lowered its outlook on GEO Specialty Chemicals Inc. to negative from stable. Ratings affected include GEO's senior secured bank loan at B+ and senior subordinated debt at B-.

S&P said the outlook revision is in response to concerns about substantially reduced volumes and profitability in the gallium market, which has not recovered since its falloff in early 2001, and a decline in GEO's liquidity during the first nine months of 2002.

End markets for gallium products, primarily telecommunications and electronics, are not expected to rebound materially in the near-term, thus maintaining downward pressure on the firms operating profits, S&P said.

In addition, liquidity has deteriorated markedly as a result of lower operating cash flows and the reduction of the revolving credit facility to $20 million from $40 million as a result of an amendment to the bank credit agreement in May 2002, the rating agency added. However, the firm does not face meaningful term loan amortization until mid-2004 and is expected to fund working capital, debt service, and capital expenditures from operating cash flow.

GEO is highly leveraged, with a debt to EBITDA ratio of more than 7 times, and cash flow protection, as measured by the ratio of EBITDA to interest, is expected to remain thin at almost 1.5x, S&P said. Accordingly, S&P expects the company to improve EBITDA interest coverage and the ratio of funds from operations to total debt (adjusted to capitalize operating leases), to the 2.0x to 2.5x and low-teens percentage areas, respectively, over the intermediate term from their current subpar levels, prior to the resumption of material acquisition activity. Because of oversupply conditions in key end markets, capital spending over the next one to two years should be held at maintenance levels.

S&P says Entercom unchanged

Standard & Poor's said Entercom Communications Corp.'s ratings remain unchanged at a corporate credit rating of BB with a stable outlook.

S&P's comments follow Entercom's release of "good" 2002 third quarter net revenue and broadcast cash flow growth.

Net revenue and broadcast cash flow grew 25% and 38%, respectively, in the third quarter ended Sept. 30, 2002, compared with the comparable year ago period, due to recovering ad demand and market revenue share gains, S&P noted. Operating performance is bolstered by a broad base of advertising categories and double-digit increases in national and local revenues. The company also benefited from easier comparisons versus 2001 due to last year's depressed advertising levels and the absence of political ad dollars, though political advertising constitutes a nominal amount of total revenue.

Despite radio advertising's positive momentum, the economic outlook remains soft and the near-term advertising climate remains uncertain, S&P added.

Rating stability is enhanced by steady debt reduction from discretionary cash flow.

At the most recent quarter end, pro forma leverage, net of cash, would have been 2.9 times (x) assuming the company's remaining Denver transaction were closed.

"Although credit metrics may appear relatively strong for the rating level, the ratings incorporate some cushion in the event that the advertising environment again weakens or the company escalates acquisition activity," S&P commented.

S&P says Cablevision unchanged

Standard & Poor's said Cablevision Systems Corp. ratings remain unchanged at BB for the corporate credit rating with a stable outlook.

S&P's comments follows Cablevision's announced agreement to sell its 80% share of the Bravo channel to NBC for $1 billion. Cablevision will receive a combination of GE and Cablevision stock, with the GE-related portion ranging from 45% to 67%, depending on Cablevision's stock price.

S&P said it expects Cablevision to monetize the roughly $450 million to $670 million of GE stock to reduce bank debt, including borrowings on its $2.4 billion revolving credit facility.

However, the company will lose roughly $55 million in annual operating cash flows from Bravo. Therefore, the overall deleveraging impact is minimal, S&P said.

Given the magnitude of capital and operating needs anticipated for 2003, Cablevision may not have sufficient funding beyond 2003 under its current financial plans, especially if it is not able to materially increase operating cash flows from its cable businesses in the 2002 to 2003 time frame, including cable modem, digital cable, and telephony services, as well as stem additional subscriber losses, S&P said.


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