S&P rates Gerdau Ameristeel notes B+, loan BB

Standard & Poor's assigned a B+ rating to to Gerdau Ameristeel Corp.'s proposed $400 million senior unsecured notes due 2011 and a BB rating to its proposed $350 million senior secured revolving credit facility due 2008 and confirmed its existing ratings including its corporate credit at BB-. The outlook is stable.

S&P said the credit facility is rated one notch above the corporate credit rating reflecting S&P's assessment of the strong prospect for full recovery in a default or bankruptcy scenario.

Gerdau Ameristeel's ratings reflect its fair business position as a producer of rebar, structural shapes, and merchant bar, rod, flat rolled and fabricated steel, S&P said.

The new company benefits from an improved product mix as higher value-added products account for a larger percentage of sales and lower value-added products such as rebar account for a lower percentage of sales versus the former Ameristeel Corp. Logistical efficiencies are expected to be realized through the company's ability to service customers from geographically closer mills (reducing shipping and freight costs) and greater purchasing volumes of raw materials. The company expects to save approximately $23 million annually, S&P noted.

However, integration of different cultures may prove to be difficult. The Whitby mill experienced a three month labor disruption in the first quarter of 2001. Management's ability to adapt to the culture at Whitby will be tested in the beginning of 2004 as the union contract expires. Furthermore, the Whitby (former Co-Steel) mill experienced an extended shutdown in 2002 because of a fire and will be challenged to gain back lost customers. Considering Co-Steel's flat rolled sheet operations, the combined entity is exposed to the difficult conditions of the flat rolled sector where oversupply and weak demand continue to negatively impact prices.

Gerdau AmeriSteel's debt leverage is aggressive, with total debt to total capital at 53% as of March 31, 2003, S&P said. First quarter results were poor due to high scrap and energy costs resulting in $14 million of EBITDA, excluding other income.

Moody's rates Gerdau Ameristeel notes B2

Moody's Investors Service assigned a B2 rating to Gerdau Ameristeel Corp.'s proposed $400 million senior unsecured notes due 2011. The outlook is stable.

The ratings reflect the very competitive markets Gerdau Ameristeel operates in, weak construction and equipment manufacturing demand, high leverage and current margin pressures related to higher raw material and energy costs, but are supported by the company's broad geographic and product range, improving rebar and merchant bar prices, and the sponsorship of Gerdau SA, Moody's said.

Moody's said it believes that soft prices and higher energy and raw material costs (versus 2002) will subdue Gerdau Ameristeel's margins and produce U.S. GAAP EBITDA of $115-135 million in 2003.

The ratings further reflect Gerdau Ameristeel's high leverage. Pro forma debt is $650 million under U.S. GAAP, whereas tangible net worth was $419 million on March 31 (this is distorted by the reverse take-over method of purchase accounting for Co-Steel). Gerdau Ameristeel also has fairly high postretirement benefit liabilities, which is unusual for a minimill producer.

For the 12 months ended March 31, 2003, using U.S. GAAP and pro forma for the Co-Steel acquisition and the proposed refinancing, Gerdau Ameristeel reported EBIT and EBITDA of $32 and $132 million, respectively, Moody's said. Results in the first quarter of 2003 were negatively affected by weak construction and manufacturing markets, bad weather, and higher costs for steel scrap and energy. On a pro forma basis, EBITDA was $12 million in the first quarter of 2003 compared to $31 million in the first quarter of 2002, even though net sales were 10% higher in 2003 (per U.S. GAAP).

S&P raises United Surgical outlook

Standard & Poor's raised its outlook on United Surgical Partners International Inc. to positive from stable and confirmed its ratings including its corporate credit at B+.

S&P said the outlook change indicates that its could raise United Surgical's ratings if the surgery center chain can sustain noteworthy improvements in its operating performance and capital structure.

In recent years, measured expansion and efficiency initiatives have yielded increasingly strong operating cash flow that has enabled United Surgical to deleverage and reinvest, S&P noted. This improvement could, if sustained, provide credit insulation against near-term competitive risks that is more indicative of a higher rating category. In particular, Standard & Poor's will monitor the company's expansion discipline and its progress toward a bank loan refinancing by late-2005.

At March 31, 2003, United Surgical's capital structure was somewhat stronger than it had been in the past, with total debt to EBITDA of 3.2x, compared with 4.7x at year-end 2001, S&P said. The improvement reflects handsome growth in EBITDA levels and $49 million of common equity sold in late 2002. The new equity let the company reduce debt, fund then-pending acquisitions, and build cash to fund future growth.

Profitability and cash-flow protection measures should continue to reflect network, productivity, and efficiency gains and result in financial measures that are strong for the rating category, with operating margins averaging in the high-20% area, return on capital above 10%, funds from operations to total debt above 20%, and EBITDA interest coverage in the mid-3x area, S&P said.

Moody's rates Pharma Services notes B3, loan B1

Moody's Investors Service assigned a B3 ratings to Pharma Services Acquisition Corp.'s planned $450 million senior subordinated notes and a B1 to its $75 million secured revolving credit facility and $315 million secured term loan B. The outlook is stable. Pharma Services will be merged into Quintiles Transnational Corp. in a management buy-out.

Moody's said the rating reflects Quintiles' high leverage following the proposed management buy-out, limited free cash flow generation, industry-wide risks including uneven pharmaceutical spending, and rising operating risks particularly within Quintiles commercialization services business and its PharmBio Development unit.

The rating also reflects Quintiles' breadth, scale and market presence as the largest contract research organization serving the pharmaceutical industry, as well as its prospects for good generation of operating cash flow.

The stable rating outlook reflects Moody's expectation that Quintiles will begin deleveraging in 2004, and that the company will not use incremental debt to fund additional PharmaBio investments. The stable outlook also assumes a timely approval and launch of Eli Lilly's Cymbalta (duloxetine for depression), which should help reverse the declining operating trends in Quintiles CSO business.

As a large contract research organization serving the pharmaceutical industry, Quintiles has faced slower and more volatile top-line growth rates, arising from uneven R&D funding from pharmaceutical and biotechnology companies. Moody's believes the slowdown is attributable to consolidation in the pharmaceutical industry, and rationalization of R&D spending in the wake of patent expirations and other operating issues facing many of the large pharmaceutical companies.

Despite the recent reduction in growth, Moody's believes that the longer term fundamentals for pharmaceutical R&D spending are positive, driven by the ongoing need of the pharmaceutical industry to increase R&D funding in order to develop products to replace those with patent expirations. In particular, Moody's expects that a number of significant products will lose patent exclusivity in the 2005-2007 timeframe, and that the industry is aggressively seeking to develop replacement products.

The rating also reflects Quintiles high leverage following the transaction, as well as its slim liquidity cushion based on the proposed financing, Moody's said. The operating company capital structure includes $450 million of bank debt and $350 million of senior subordinated notes, and Moody's projects pro forma debt/EBITDA of 4.2 for 2003, although leverage rises to over 5 times after adjusting for Quintiles' high operating leases.

S&P puts NBTY on watch

Standard & Poor's put NBTY Inc. on CreditWatch negative including its $150 million 8.625% senior subordinated notes due 2007 at B+ and $60 million revolving credit facility due 2003 and $75 million term loan due 2005 at BB+.

S&P said the CreditWatch placement reflects NBTY's announcement that it has agreed to acquire Rexall Sundown Inc.

While S&P said it believes the acquisition will enhance NBTY's distribution capabilities and broaden its portfolio of brands, Rexall Sundown's business operates at a lower EBITDA margin than that of NBTY. In addition, Rexall Sundown's financial performance has been weak, with fiscal 2002 net sales down 22% from the prior year. Furthermore, an acquisition of this size, which increases NBTY's sales by approximately 45% on a pro forma basis, contains significant integration risk.

S&P rates Danka notes B+

Standard & Poor's assigned a B+ rating to Danka Business Systems plc's proposed $175 million senior unsecured notes due 2010. The outlook is stable.

Revenue and EBITDA levels have declined at double-digit rates since fiscal 1999, driven by a history of problematic acquisitions and an ongoing customer-base transition from analog to digital copiers, S&P noted.

However, Danka has stabilized its EBITDA margins - at about 8% - and reduced debt levels, S&P said. Revenues are expected to stabilize over the near-to-intermediate term, as growth in digital product sales, installed base and related service revenues offsets the declining analog product base. EBITDA interest coverage is expected to remain in excess of 2x.

The proposed note offering will be used to repay existing bank debt, as well as outstanding zero-coupon notes due in 2004, and thereby extend debt maturities.

Despite material debt reductions - achieved through preferred stock issuance, asset sales and working capital improvements - debt to EBITDA has remained in the 3x-3.5x range (and is in excess of 5x if preferred stock is treated as debt), S&P said.

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