Moody's confirms Conseco

Moody's Investors Service confirmed Conseco, Inc. but lowered its preferred stock, affecting a total of $5.6 billion of securities. Ratings affected include Conseco's guaranteed senior notes at Caa2, its old senior notes at Caa3, its trust preferreds at Ca and its preferred stock, lowered to C from Ca. The outlook is developing.

Moody's said its action follows Conseco's announcement that it intends to delay upcoming bond interest payments and pursue a capital restructuring at the parent company level.

Conseco's preferred stock rating was lowered to reflect Moody's expectation that preferred stock holders will have little, if any recovery value in a capital restructuring.

Moody's said its ratings already reflected its belief that Conseco's future beyond October 2002 rested "on a radical change in the company's capital structure."

Therefore few adjustments are currently warranted, Moody's added.

Going forward, Moody's said Conseco must improve the claims paying ratings of operating insurance subsidiaries in order to continue to sell new business and maintain stable levels of surrender and lapse activity. In addition, the rating agency noted that action by insurance regulators on behalf of policyholders could limit the ability of the insurance subsidiaries to provide dividends to the holding company.

Moody's also said it believes the company's previous strategy of selling or reinsuring blocks of insurance business will serve to erode its franchise value.

Finally, Moody's cautioned that the more harsh and volatile capital market conditions of late create additional uncertainty and could further constrain the operating earnings of Conseco and the financial flexibility of the holding company.

S&P cuts Conseco

Standard & Poor's downgraded Conseco Inc.

Ratings lowered include its notes, cutting its senior notes to CC from CCC+ except for its $250 million 6.4% notes due 2003, $800 million 8.75% notes due 2004, $14.936 million 6.4% notes due 2004 guaranteed by CIHC, Inc. and $366.294 million 8.75% notes due 2006 guaranteed by CIHC which were lowered to D from CCC+.

Fitch cuts Conseco

Fitch Ratings downgraded Conseco Inc. including lowering its senior notes to C from CCC, its preferred stock at C from CC and its trust preferreds to C from CC.

Fitch said the action follows Conseco's announcement it will pursue a debt restructuring and has exercised its 30-day grace period on upcoming bond interest payments.

The C rating indicates imminent default, Fitch noted.

If the company does not cure the delayed interest payments within the grace period, the affected instruments will be downgraded to the 'Default' category, Fitch said.

Even if the delayed interest payments are cured, Fitch added that it believes any debt restructuring would be classified as a distressed debt restructuring under Fitch's definition and therefore warrant a 'Default' rating.

S&P puts Hollywood Casino on positive watch, Penn National on negative watch

Standard & Poor's changed the CreditWatch on Hollywood Casino Corp. to positive from developing, confirmed Penn National Gaming Inc.'s ratings and put its bank loan on CreditWatch with negative implications.

Ratings affected include Hollywood Casinos' $50 million floating-rate senior secured notes due 2006 and $310 million 11.25% senior secured notes due 2007 at B, Hollywood Casino Shreveport's $150 million 13% contingent interest notes due 2006 and $39 million 13% senior secured notes due 2006 at B- and Penn National Gaming's $75 million revolving credit facility due 2005 at BB- and subordinated debt at B-.

S&P said its action follows Penn National's announcement it will acquire Hollywood Casino Corp. for approximately $780 million in cash including the assumption of debt and net of cash.

Following the closing of the transaction, S&P said it expects Hollywood Casino's debt to be refinanced upon which S&P will withdraw its ratings.

The debt of subsidiary Hollywood Casino Shreveport is likely to remain outstanding and S&P said it to raise this rating to B from B-, reflecting the implied support from the new parent.

S&P said it put Penn National's bank loan on CreditWatch because of the possibility that the financing for the closing of the transaction could include a significant amount of bank debt.

The transaction provides Penn National with top-quality assets in three of the largest riverboat gaming market in the U.S., S&P noted.

The Aurora facility, in the Chicago market, has been a solid performer and has benefited from ongoing capital investment and steady market growth. While the recent tax increase in Illinois will affect operating results in the future, the property's new barge facility is expected to enhance its competitive position, S&P said.

The Shreveport, La., facility has seen recent operating results improve significantly after a very slow start upon opening in late 2000, S&P added. Management's aggressive cost-cutting and refined marketing programs have helped grow cash flow despite continued lower-than-expected market growth. S&P said it expects the property's operating results to continue to gradually improve.

In Tunica, Miss., operating performance has remained relatively steady despite a very competitive market environment due to refined marketing programs and a loyal customer base, S&P added. The expected closing of a competing facility and Hollywood's hotel room renovation project are expected to enhance the property's competitive position. Still, the market is mature and is expected to remain competitive.

Fitch cuts Kinetics

Fitch Ratings downgraded Kinetics Group, Inc.'s senior secured credit facilities to B from BB-. The outlook is negative.

Fitch said it cut Kinetics because of a significant weakening of credit protection measures and increasingly limited financial flexibility.

Kinetics' profitability has declined due to a significant downturn in capital expenditures from semiconductor manufacturers resulting in deteriorating credit protection measures and pressure on bank financial covenants, Fitch noted.

Projected EBITDA for the 12 months to June 30, 2002 has decreased to approximately $38 million from $74 million for the 12 months to Sept. 28, 2001, Fitch noted. As a result, while debt has decreased to an estimated $251 million at June 30, 2002 from $279 million at September 28, 2001, leverage has increased significantly to 6.6x from 3.8x. However, including $44 million of PIK seller notes at Kinetics' parent, Kinetics Holding Corporation, leverage increases to 7.7x and 4.4x for the 12 months to June 30, 2002 and Sept. 28, 2001, respectively. Kinetics' cash interest coverage declined to 1.4x for the 12 months to June 30, 2002 versus 2.7x for the 12 months to Sept. 28, 2001.

Moody's upgrades Nebraska Book's loan to Ba3

Moody's Investors Service upgraded Nebraska Book Co.'s senior secured credit facility rating to Ba3. Furthermore, the senior subordinated notes due 2008 were confirmed at B3 and the parent company NBC Acquisition Corp.'s senior discount debentures due 2009 were confirmed at Caa1. The rating outlook was changed to positive from stable.

The credit facility consists of a $50 million revolver, a $11.1 million term loan A and a $23.8 million term loan B.

Ratings reflect high leverage, modest operating cash flow generation after capital expenditures, high seasonal working capital needs, increased cash interest burden beginning in 2003, lack of significant organic growth opportunities due to market saturation of college bookstores and a limited supply of used books and risks faced through the diversification beyond its core business, Moody's said.

Ratings are supported by stable operating profitability, low volatility in distribution of used textbooks, short inventory cycles and excess demand for used textbooks that mitigate obsolescence risk, conservative expansion strategy, seasoned senior management and continued success of steadily increasing franchise value without incurring additional debt, Moody's said.

The upgrade of the bank loan rating reflects "the decreased amount of senior debt relative to tangible assets and overall enterprise value, and to other debt in the capital structure, as well as more rapid amortization of the term loan," Moody's said.

The positive outlook reflects the expectation of modest sales growth as the company remains moderately acquisitive and maintains its focus on increased sourcing of books. Furthermore, the outlook includes the expectation that the company will maintain profit margins at historical levels and continue to reduce debt with excess cash flow, Moody's said.

S&P cuts Acterna, on watch

Standard & Poor's downgraded Acterna Corp. and put it on CreditWatch with negative implications. Ratings lowered include Acterna's $85 million 10.125% senior subordinated notes due 2007 and $275 million 9.75% senior subordinated notes due 2008, cut to CC from CCC+, and its $165 million senior bank facilities, $175 million revolving credit facility due 2007, $175 million tranche A term loan due 2007 and $510 million tranche B term loan due 2008, cut to B- from B.

S&P said the action reflects the cash tender offer by Acterna and CD&R Barbados, an affiliate of equity sponsor Clayton, Dublier & Rice Inc., for up to $155 million of Acterna's outstanding 9¾% senior subordinated notes due 2008. The consideration for each $1,000 principal amount of the notes tendered and accepted for payment pursuant to each tender offer will be $220.

S&P said that under its criteria an exchange offer at a substantial discount to par value recognizes that in effect the company will not meet all of its obligations as originally promised.

Therefore, even though the investors technically accept the offer voluntarily and no legal default occurs, the rating treatment is identical to a default on the specific debt issues involved.

On completion of the tender offer, Acterna's subordinated note rating will be lowered to D and the corporate credit rating to SD, S&P said.

S&P rates IASIS loan at B

Standard & Poor's assigned a B rating to IASIS Healthcare Corp.'s proposed $463 million senior secured credit facility and confirmed its existing ratings including its senior secured debt at B and its subordinated debt at CCC+. The outlook remains negative.

S&P said the new credit facility is a refinancing that will extend debt maturities.

IASIS has been struggling since its formation in 1999, S&P noted. The closure of its Rocky Mountain Medical Center (RMMC) located in Salt Lake City and elimination of its losses was expected to begin to improve company performance. However, problems in its Arizona market contributed to the difficulty the company has experienced in improving its performance, despite favorable reimbursement trends for the corporate hospital sector.

Significant senior management activity, including key management changes at both the corporate and hospital levels, new information systems, initiatives for managed care contracting, and other efforts, finally appear to be having some beneficial impact on results, S&P continued.

Improvements in accounts receivables, and in volume gains have had a positive impact. In the nine-month period through June 30, 2002 compared to the comparable period in 2001, cash flow from operations grew to $39 million from $21 million, and EBITDA margin improved about 70 basis points, S&P said.

Moody's rates IASIS loan at B1

Moody's Investors Service rated IASIS Healthcare's $125 million senior secured revolver due 2007 at B1 and $338 million senior secured term loan B due 2008 at B1. Furthermore, Moody's confirmed the $230 million senior subordinated notes due 2009 at B3, senior implied rating at B1 and senior unsecured issuer rating at B2. The B1 rating on the $455 million bank credit facilities will be withdrawn upon completion of the refinancing. The outlook is negative.

Ratings reflect high leverage and weak coverage, operational problems, challenging nature of the market, escalating costs for liability insurance, a nursing shortage and the challenge of controlling bad debt and supplies expenses, Moody's said.

Offsetting these influences is a recent improvement in performance, a favorable reimbursement environment, positive industry trends and the geographic diversification of the company's assets, Moody's said.

The negative outlook reflects concern regarding the sustainability of recent improvements.

For the 12 months to June 30, 2002, total debt/EBITDA leverage was 4.9 times and EBITDA/interest was 2.2 times.

S&P cuts Cornerstone Family Services

Standard & Poor's downgraded Cornerstone Family Services Inc. and maintained a negative outlook. Ratings lowered include Cornerstone's $100 million term loan facility due 2006 and $100 million revolving credit facility due 2004, both cut to B- from B+.

S&P said the downgrade reflects Cornerstone's weak operating performance, lower investment income and reduced cushion under its bank covenants.

The company's current cash coverage of interest of 2.19 times is consistent with the rating, but has decreased recently, providing only a small cushion above the 2.0x covenant requirement. S&P said.

Although the company has $10 million available on its $30 million revolving credit facility, possible further erosion of EBITDA due to continued weakness in operating performance and/or investment income could limit available liquidity, S&P added.

Moody's puts AAR on review

Moody's Investors Service put AAR Corp. on review for possible downgrade to junk, affecting $200 million of debt including its senior debt and credit facilities at Baa3.

Moody's said it began the review on AAR because of concerns that fundamental changes in AAR's business may continue to place pressure on its operating performance over the intermediate-term.

Those changes include 1) the transformation of AAR's markets from older jet engine technology to newer technology, and 2) increasing competition from OEMs, as they continue to aggressively pursue the aftermarket business through internal expansions, acquisitions and joint-ventures worldwide.

Moody's also noted that weak airline traffic and pressures on airlines to contain cost together with the grounding of older aircraft (the largest aftermarket services generators) is resulting in lower need for aircraft parts and maintenance.

All these factors have led to significant pressures on the company's sales, profits and cash flows, Moody's said.

S&P sees NRG stabilizing

Standard & Poor's said news that NRG Energy Inc. will not be obliged to complete the $1.5 billion acquisition of power generating plants from FirstEnergy Inc., along with the sale of substantially all non-U.S. generating assets will help stabilize NRG's financial profile. S&P rates NRG's corporate credit at B+ on CreditWatch with negative implications.

In addition, marketing the generating assets held by NRG South Central would further strengthen NRG's credit profile, S&P said.

However, NRG is still in the "danger zone" until negotiations are completed with the banks providing the $2 billion construction facility, S&P warned. The downgrade of NRG's rating to below investment grade triggered a call for collateral of around $1 billion. NRG's management, assisted by financial advisors, is in active negotiations. The deadline for resolution is August 16. It is likely that an extension of that deadline will be sought and given.

S&P says United Defense unchanged

Standard & Poor's said United Defense Industries Inc. ratings are unchanged on news that the U.S. Army is canceling the Crusader artillery program. S&P rates United Defense's corporate credit at BB- with a stable outlook.

S&P said the cancellation was expected and factored into the ratings.

United Defense also announced that it received a $27 million contract from the Army, which lasts through the end of September 2002, to begin work on a lighter replacement artillery cannon. The new contract will likely offset most of the impact on revenues and earnings from the announced Crusader cancellation during the balance of 2002, S&P said.

S&P says will likely raise Orbital Sciences

Standard & Poor's said Orbital Sciences Corp. remains on CreditWatch with developing implications but that its ratings will likely be raised after it successfully closes its offering of $135 million of units. Orbital Sciences' corporate credit rating is CCC+.

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