Moody's puts AK Steel on review

Moody's Investors Service put AK Steel Corp. on review for possible downgrade including its $125 million senior secured notes due 2004 at Ba2 and $117 million 9% guaranteed senior notes due 2007, $33.5 million 8.875% guaranteed senior notes due 2008, $450 million 7.875% guaranteed senior notes due 2009 and $550 million 7.75% guaranteed senior notes due 2012 at B1.

Moody's said the review is in response to the announcement that AK Steel had submitted a proposal to acquire substantially all of the steelmaking and finishing assets of National Steel Corp. for $1.025 billion.

Moody's said its review will examine the impact of the asset purchase on AK Steel's product mix, operating costs, cash flow, financial leverage, and financial flexibility.

Financing for the acquisition has yet to be determined, although $200 million of the price represents the assumption of certain liabilities.

Extensive reliance on debt financing could very well lead to a rating downgrade, hence the indicated direction of the review, Moody's said.

However, the potential benefits of the acquisition in terms of cost savings and more flexible work rules, if combined with lesser amounts of incremental debt, could support the existing ratings.

S&P puts AK Steel on watch

Standard & Poor's put AK Steel Corp. on CreditWatch with negative implications including its $250 million senior secured notes due 2004, $450 million 7.875% senior notes due 2009, $550 million 7.75% senior unsecured notes due 2012 and $550 million 9.125% senior notes due 2006 at BB and ARMCO Inc.'s $150 million 9% senior notes due 2007 and $75 million 8.875% senior notes due 2008 at BB.

S&P said the watch placement follows the company's announcement that it has submitted a proposal to acquire substantially all of the steelmaking and finishing assets of bankrupt National Steel Corp. for $1.025 billion, of which $200 million consists of the assumption of certain liabilities.

AK is expected to fund the remaining $825 million in cash.

Although the National Steel operations would further diversify AK Steel's product mix and presents the opportunity for significant cost-based synergies, S&P said it is concerned that these benefits may be more than offset by weaker credit protection measures given the increase in debt leverage.

In addition, National Steel sells significantly more of its volumes to the spot market, while AK Steel sells the majority of its volumes under fixed price contracts, which would expose AK Steel's earnings to greater volatility at a time when it faces rising pension costs, S&P said.

Also, National Steel has under-invested in its facilities, so they will require increased capital spending. Given the recent decline in steel prices, these expenditures would likely challenge AK Steel's ability to generate free cash in the intermediate term, S&P cautioned.

S&P rates Sun Media loan BB-, notes B-

Standard & Poor's assigned a BB- rating to Sun Media Corp.'s new $200 million senior secured term B loan due 2009 and $75 million senior secured revolving credit facility due 2008 and a B- rating to its planned $200 million senior unsecured notes due 2013. S&P also kept Quebecor Media Inc. and its subsidiaries, including Sun Media and Videotron Ltee on CreditWatch with negative implications, where they were placed Sept. 16, 2002.

S&P said the CreditWatch update follows its review of Sun Media's refinancing plan.

Following completion of the announced refinancing at Sun Media, which is Quebecor Media's newspaper subsidiary, the ratings on Quebecor Media and its subsidiaries, including the B+ long-term corporate credit ratings, will be removed from CreditWatch and affirmed, with an expected stable outlook, S&P said.

The Sun Media refinancing, once completed, will improve Quebecor Media's consolidated financial flexibility, S&P added.

Sun Media's new bank facility and senior notes do address our concerns about cash flow restrictions and covenant pressures at Sun Media and, to some extent, at Videotron, S&P commented.

S&P rates Premcor notes BB-

Standard & Poor's assigned a BB- rating to Premcor Refining Group Inc.'s planned $200 million senior notes due 2010 and $200 million senior notes due 2013 and confirmed its existing ratings on Premcor Refining and parent Premcor USA Inc. including its BB- corporate credit rating with a stable outlook.

Proceeds of the notes offering, combined with expected equity proceeds of at least $250 million, will be used to finance the Memphis refinery acquisition and refinance $240 million of Premcor Refining's floating-rate loans due 2003 and 2004 and $42 million of Premcor USA's subordinated notes due 2009, S&P noted.

In connection with the acquisition, Premcor intends to enter into a two-year crude oil supply and product off-take agreement with Morgan Stanley Capital Partners under which MSCP will own the crude and product inventories associated with the Memphis acquisition. This agreement will allow Premcor to defer initial financing of the inventory for the Memphis refinery and avoid the need for Premcor to issue letters of credit to support purchases of crude inventory.

Premcor's ratings reflect its aggressive debt leverage and the company's position as a midsize, independent petroleum refiner operating in a very competitive, erratically profitable industry, S&P said. The business is burdened by excess capacity and high fixed-cost requirements for refinery equipment and environmental regulation compliance.

Mitigating these factors somewhat are Premcor's ability to process high volumes of heavy-sour crude at its Port Arthur, Texas facility, which should lead to improved profitability over the intermediate term and maintenance of cash balances, which provide the company with liquidity during cyclical troughs, S&P added.

Premcor is expected to continue its expansion through selective acquisitions of refineries that geographically complement its existing assets and, depending on margin conditions, undertake discretionary capital expenditure projects to expand existing refinery capacity, S&P said.

S&P said it believes Premcor will continue to finance such transactions conservatively.

The stable outlook reflects the expectation that Premcor will maintain an appropriate liquidity position and financial profile for its rating. S&P said it believes that Premcor's management is committed to improving its credit ratings, but, without further deleveraging transactions, positive ratings actions will be highly dependent on the company's ability to comfortably meet its expected peak capital expenditures.

S&P rates Anchor Glass notes B+

Standard & Poor's assigned a B+ rating to Anchor Glass Container Corp.'s new $300 million notes due 2013. The outlook is stable.

With annual revenues of about $720 million, Anchor is the third-largest producer of glass containers for beer, beverages and foods in the U.S., S&P noted.

Pro forma debt outstanding will be about $367 million.

Anchor's ratings reflect a weak business profile, aggressive debt leverage, and improved financial flexibility following the issuance of its proposed secured notes, S&P said.

Moody's rates Nexstar loan Ba3

Moody's Investors Service assigned a Ba3 rating to Nexstar Broadcasting Group, LLC's proposed $255 million of bank credit facilities and confirmed its existing ratings including its $155 million of 12% senior subordinated notes at Ba3 and Nexstar Finance Holdings' $37 million of 16% senior discount notes at Caa1. The outlook is stable.

The re-financing includes the acquisition of four new stations for a combined purchase price of $100 million or 9.2 times the unadjusted broadcast cash flow multiple, Moody's noted, adding that its ratings incorporate the modest increase in leverage as well as the expectation that Nexstar's financial profile is likely to remain highly leveraged given the company's debt-financed acquisition strategy and the smaller markets in which it operates.

Moody's said Nexstar's ratings reflect its minimal free cash flow and integration challenges as well as the expectation that its pursuit of under-performing small market stations is likely to continue.

Moody's does not expect material improvement in the company's risk profile over the near term given the company's focus on "turnaround" stations and the lack of political and Olympic related revenue in 2003.

In addition, Moody's noted that unlike most of its peers Nexstar will need to continue to invest in capital equipment upgrades to meet the FCC's requirements for digital television (potentially $10 to $20 million in additional capital expenditures).

Strengths include Nexstar's number one or number two ranking in the local news in 13 of the 16 markets its serves. Moody's said it believes a strong news program draws greater and more stable local advertising.

In addition, Nexstar has a diversified portfolio of stations in regard to both network affiliation and geography (albeit 54% NBC as measured by broadcast cash flow). Further, Nexstar's margin performance should continue its appreciation as station operations are improved and the benefits of 7 duopolies are incorporated.

The stable outlook reflects Moody's view that while Nexstar has high leverage over the two year cycle it should begin to moderate.

As of Sept. 30, 2002 Nexstar's leverage is high at over 7 times (through the holding company) and on a pro forma basis for the LIN and Morris acquisitions. In the near-term, leverage is expected to improve as a result of fourth quarter political revenue, Moody's said. Next year's leverage could increase by more than half a turn as a result of the decline in revenue and cash flow associated with political and Olympic related revenue.

Moody's cuts Magellan Health notes

Moody's Investors Service downgraded Magellan Health Services Inc.'s bonds including cutting its senior unsecured notes to Caa3 from Caa2 and senior subordinated notes to C from Ca. Magellan's senior secured bank facility was confirmed at Caa1. The outlook is negative.

Moody's said the downgrades reflect its view of estimated recovery values in the event that Magellan Health files for protection under Chapter 11 of the U.S. bankruptcy code.

Moody's said it believes recovery values are highly dependent on Magellan's ability to retain contracts and noted that Magellan anticipates that its TriCare contracts will not be renewed.

Magellan has proposed a restructuring which would be facilitated through a Chapter 11 filing, Moody's said.

The negative outlook reflects Moody's concerns that recovery values may be lower should Magellan lose additional key contracts.

Moody's lowers Arch Coal outlook

Moody's Investors Service lowered its outlook on Arch Coal, Inc. to negative from stable and assigned a B1 rating to its proposed $150 million perpetual cumulative convertible preferred stock. Existing ratings were confirmed including Arch Coal's $350 million senior secured revolving credit facility maturing 2007 at Ba1 and Arch Western Resources, LLC's $150 million senior secured term loan A due 2007 and $525 million senior secured term loan B due 2008 at Ba1.

Moody's said Arch Coal's ratings are supported by its relatively stable operating profile and cash flow, which can be attributed to its size, diversified asset and customer base, low operating costs, and a high proportion of low-sulfur coal production and reserves.

Nevertheless, temperate weather and economic weakness have reduced electricity demand and caused coal supply to outpace demand, Moody's added.

In response, Arch Coal and many other coal companies reduced production in 2002. As a result, Arch Coal's operating income declined to $29 million in 2002 from $62 million in 2001, and cash from operating activities just covered capex.

Because of anticipated higher capex and the heightened risks noted below, a continuation of these operating results could well lead to a downgrade, Moody's warned.

Furthermore, if Arch Coal's production volumes and spot market prices remain at current levels, Moody's said it expects that rising costs will pressure debt protection measurements and necessitate a downgrade.

Fitch starts American Airlines at CCC+

Fitch Ratings said it began coverage of American Airlines, Inc. and assigned a CCC+ rating its senior unsecured debt. The outlook is negative.

Fitch said the CCC+ rating reflects deepening concerns over American's ability to respond to the continuing industry revenue crisis by quickly overhauling its labor costs and renegotiating union contracts.

American management has made it clear that the current cost structure is unsustainable in light of the weak revenue environment and the changing competitive structure of the airline industry, Fitch noted. This conclusion is reinforced by the magnitude of the losses seen in the fourth quarter and the dismal outlook for 2003.

The industry revenue environment, characterized by persistent weakness in business travel demand and poor passenger yields, led American to report a discouraging 2% increase in revenue per available seat mile (RASM) in the fourth quarter on a 6% reduction in passenger yields, Fitch said. This performance fell short of the RASM performance of the other U.S. major carriers in the fourth quarter and reflected the vulnerability of American's network to low-fare competition in the domestic market and weak macroeconomic conditions in Latin America and the Caribbean, where the airline has a leading market share position.

In the domestic market, overlap with low-cost carriers such as Southwest, JetBlue and AirTran has now risen to approximately 82% of the U.S. routes that American serves, Fitch said. This does not reflect the route overlap with a potentially "new" United Airlines, against which American would be at a significant cost disadvantage following United's restructuring of labor and aircraft ownership costs under Chapter 11 bankruptcy protection.

The damage done to American's operating profile as a result of weak pricing and high costs has been compounded by a rapid deterioration of its balance sheet over the past two years, Fitch added. As part of an effort to shore up liquidity in anticipation of a revenue rebound, American has tapped the debt markets on several occasions since September 2001. In 2002 alone, the airline issued almost $3 billion in new debt - including a $675 million enhanced equipment trust certificate offering in December.

S&P rates Mobile Telesystems bonds B+

Standard & Poor's assigned a B+ rating to the $400 million bonds due 2007 to be issued by Mobile TeleSystems OJSC through Mobile Telesystems Finance SA.

Moody's confirms Tata Power

Moody's Investors Service confirmed Tata Power's foreign currency debt at Ba2, concluding a review begun on Nov. 26.

Moody's noted that Tata Power's core business is the licensee supply of electricity in Mumbai.

This regulated business is largely monopolistic and benefits from a cost plus tariff structure that also provides for a return on equity, Moody's said. This has resulted in a financial profile that has relatively modest leverage for an electric utility business.

The company's business profile is expected to change materially over the medium term as it grows through diversification, the rating agency added. In particular, it has undertaken significant capital expenditure in telecommunications, which may not generate material cashflow for a number of years.

This expansion will be funded largely through the liquidation of investments, resulting both in a decrease in guaranteed liquidity and an increase in net debt.

Moody's rates Isle of Capri Black Hawk's loan B1

Moody's Investors Service rated Isle of Capri Black Hawk LLC's $210 million secured bank loan at B1.

About $105 million of the term B loan will be an add-on to existing outstanding amounts and will be used to help fund the purchase of Colorado Central Station Casino and Colorado Grande Casino from International Game Technology, Inc. Security is a first priority perfected interest in all ICBH's assets and a lien on all other tangible and intangible assets. It will also be secured by a first priority perfected security interest in all capital stock and assets of the acquired properties.

The rating outlook is stable due to the expected continued growth of the Black Hawk market and the anticipation that the company will have the ability to meets debt service requirements and capital spending plans while maintaining debt/EBITDA at less than 4.0 times, Moody's said.

The credit facility consists of a $40 million secured revolver due 2005, a $28 million term loan A due 2005 and a $142 million term loan B due 2006.

Positively influencing the ratings is the company's increased market position and expansion opportunity due to the acquisition, Moody's said.

Ratings also reflect that the company, an unrestricted, non-recourse subsidiary of Isle of Capri Casino Inc., only operates in Black Hawk, Colo. Furthermore, despite long-term benefits from the acquisition, capital expenditures are expected to absorb free cash flow through the company's fiscal year-ended April 2004 and require some amount of additional debt funding, Moody's explained.

Moody's confirms HealthSouth

Moody's Investors Service confirmed HealthSouth Corp.'s ratings, affecting $3 billion of debt including its senior unsecured notes at Ba3 and senior subordinated notes at B2. The outlook is stable. The confirmation ends a review begun on Sept. 24.

Moody's said the confirmation is based on lower than expected fall-out from managed care contract negotiations to date which has helped to offset higher than expected declines in outpatient rehabilitation visits, actions taken to reduce expenses and an expected refocus on deleveraging in 2003 and beyond.

Healthsouth's negotiations with managed care companies, to date, have not resulted in wide-scale adoption of Medicare's methodology on reimbursing for group versus individual therapy, Moody's saod. The impact from managed care companies has been less than what management assumed when it projected a $175 million pre-tax reduction in revenues for 2003.

The lower-than-expected fall-out from these negotiations has helped to offset higher-than-anticipated volume declines in outpatient rehabilitation and diagnostics, Moody's added.

In order to address both reimbursement and volume declines, the company is closing about 200 outpatient rehabilitation centers as part of a cost reduction program which will eliminate about 2% of current positions and is expected to result in savings of about $80-90 million. Furthermore, an increase in accounts receivable from about 78 to 85 days during 2002 has resulted in increased working capital demands which management expects will begin to return to more moderate levels in 2003.

Assuming the company is successful in maintaining current levels of operating cash flow and capex spending drops from 2002 levels, Healthsouth should be able to begin deleveraging in 2003 even without asset sales, Moody's said.

S&P cuts United Pan-Europe

Standard & Poor's downgraded United Pan-Europe Communications NV's corporate credit rating to D from SD and lowered its remaining senior unsecured debt issues to D from C including its $401 million 12.5% discount notes due 2009, $478 million 13.375% senior discount notes due 2009, $512 million 13.75% senior discount notes due 2010 and €191 million 13.375% senior discount notes due 2009. UPC Distribution Holding BV's $500 million term loan due 2009, €2.75 billion delayed draw term loan due 2009 and €750 million reducing revolving credit facility due 2009, all at C, were revised to CreditWatch with developing implications from CreditWatch with negative implications.

S&P said the downgrades follow the the company's recent bankruptcy filing.

For UPC Distribution, S&P noted the company obtained waivers and amendments that eliminate the cross default provision under the bank agreement and continues to service the bank facility.

Upon United Pan-Europe's emergence from bankruptcy, the rating on this bank facility would be raised, S&P said.

Moody's rates Anchor Glass B2

Moody's Investors Service assigned a B2 rating to Anchor Glass Container Corp.'s proposed $300 million senior secured notes and upgraded its senior implied rating to B2 from Caa2 and senior unsecured issuer rating to Caa1 from C. The outlook is stable.

Moody's said the upgrades reflect the improvement in Anchor's financial profile pro forma for the completion of the proposed refinancing since emerging from bankruptcy in late August/early September

2002.

Proceeds from the proposed notes are intended to repay existing debt including Anchor's existing $150 million 11.25% first mortgage notes due 2005, rated Caa2, to partially fund capital improvements in excess of normal maintenance expenditures and to pay accrued interest and related fees.

Moody's said Anchor's ratings reflect its weak financial condition, albeit much improved post-bankruptcy and the Pension Benefit Guaranty Corp. agreement, evidenced by high financial leverage, minimal free cash flow and modest coverage of interest expense pro forma for the proposed refinancing.

The ratings incorporate concerns about Anchor's ability to sustain the operational efficiency and enhanced business fundamentals which the company has recently exhibited, Moody's added.

Moody's said it believes pro forma liquidity should be adequate although remaining fairly tight with effective availability under the $100 million committed, borrowing base revolver limited by modest cushion under the bank covenant (Moody's does not rate Anchor's bank debt).

The ratings continue to reflect significant customer concentrations (i.e. top 10 customers account for approximately 76% of net sales through August 2002), constrained capacity requiring additional investment likely debt financed, and critical inventory management needed to remain competitive, Moody's said.

Positive include the strength of the domestic glass industry, resilience of the glass beer bottle (Anchor's primary product category) to other forms of packaging, and Anchor's established long term customer relationships, Moody's added.

S&P upgrades LIN, rates loan BB

Standard & Poor's upgraded LIN Holdings and LIN Television Corp. and assigned a BB rating to its planned $175 million term loan due 2008. Ratings raised include LIN Holdings' $100 million senior discount notes due 2008 and $325 million 10% senior notes due 2008, raised to B from B-, and LIN Television's $150 million incremental credit facility due 2009, $175 million senior secured term loan due 2008 and $235 million revolving credit facility due 2008, raised to BB from BB-, $210 million 8% notes due 2008, raised to B+ from B, and $300 million 8.375% senior subordinated notes due 2008, raised to B from B-. The outlook is stable.

S&P said the upgrade is based on expectations that LIN will further improve its financial profile in the near term given its meaningful use of equity for acquisitions and its use of cash flow to repay debt.

LIN is likely to be a consolidator of TV stations in mid-size market, and acquisitions are expected to be financed in a manner that maintains leverage ratios consistent with the rating, S&P said.

Given that currently favorable trends in TV advertising could be vulnerable to economic cycles and escalating political tensions overseas, adherence to a de-leveraging financial policy will be important to the stability of key credit ratios.

LIN's roughly 40% EBITDA margin for the last 12 months ended Sept. 30, 2002 (up from about 35% in 2001) is benefiting from favorable advertising trends and cost controls related to personnel and programming, S&P noted. EBITDA coverage of total interest, including non-cash interest on the holding company's 10% senior discount notes, was in the mid-1x range for the last 12 months ended Sept. 30, 2002. EBITDA coverage of cash interest was in the 2.5x area for the same period. A 2x bank interest covenant, excluding holding company debt, provides some cushion.

Operating company debt to EBITDA was about 3.5x at the end of the 2002 third quarter, compared with a 6.0x covenant, S&P added. Total debt to EBITDA was more than 6x at quarter-end. LIN Television is allowed to transfer cash to service the parent company's interest payments, if it is in compliance with its covenants. Total debt plus debt guaranteed by LIN's ultimate parent company, LIN TV Corp., divided by consolidated EBITDA was approximately 7x at Sept. 30, 2002.

S&P puts Cone Mills on watch

Standard & Poor's put Cone Mills Corp. on CreditWatch with negative implications including its $100 million 8.125% debentures due 2005 at CCC+.

S&P said the watch placement reflects Cone Mills' plan to initiate an offer exchanging an equal principal amount of its new notes for any and all of its $100 million notes due March 15, 2005. The bondholders will be asked to extend maturities and make other modifications to their agreements.

Although the proposed terms were not publicly disclosed, S&P said it expects that Cone Mills may not be able to meet all of its obligations as originally promised under the note issue and fund its Mexican expansion strategy at the same time.

The proposal to exchange notes was contemplated as part of Cone Mills' overall plan to recapitalize its balance sheet, and it gives current common stock holders the right to purchase up to $27 million of convertible notes, which will bear interest at 12% per year and be convertible into common stock at $1 per share.

S&P upgrades AMI Semiconductor loan

Standard & Poor's upgraded AMI Semiconductor Inc.'s $175 million term loan due 2006 and $75 million revolving credit facility due 2006 to BB from BB- and confirmed its corporate credit at BB- and subordinated debt at B.

S&P said the upgrade follows the closing of the company's $200 million senior subordinated notes issue. A portion of the note proceeds will be used to repay $112 million of AMI's bank term loan, leaving $48 million outstanding.

The facility is rated one notch above AMI's corporate credit rating, reflecting a strong likelihood of full recovery of principal in the event of default or bankruptcy, S&P said.

S&P said AMI"s ratings continue to reflect its good niche-market position, its sole-source long-term agreements to provide semiconductor chips, with a diversified customer base, and its broad end-markets presence, offset by increasing competition in its markets and near-term integration concerns.

The recent acquisition of Alcatel SA's mixed signal ASIC unit is expected to enhance AMI's mixed-signal process technology and market position and increase sales of mixed-signal ASICs to more than 50% of total sales, S&P added.

S&P said it expects AMI to improve profitability at its new mixed-signal business unit through headcount reductions, improved manufacturing, materials efficiencies, and a migration of test activities to AMI's lower-cost facility in the Philippines.

The company is expected to report total sales for 2002 of about $400 million, including the mixed-signal business, and operating margins slightly above 15%, S&P said. Total debt-to-EBITDA is expected to be 2.7x in 2002 and rise above 3x in the March 2003 quarter because of higher debt levels. EBITDA interest coverage is expected to be about 4x in 2002, trending lower in 2003, due to higher interest costs from the new subordinated issue.

S&P rates Cascades notes BB, off positive watch

Standard & Poor's assigned a BB rating to Cascades Inc.'s planned $325 million notes due 2013, confirmed its existing ratings including Cascades Boxboard Group Inc. $125 million 8.375% notes due 2007 at B+ and removed them from CreditWatch with positive implications. The outlook is stable.

S&P said the actions are in response to Cascades' termination of its offer to exchange part of the $450 million notes for Cascades Boxboard's 8.375% senior notes outstanding. Cascade had previously planned $450 million of new notes which S&P had rated BB+.

The rating on the new notes is now one notch lower than the corporate credit rating, which reflects the structural subordination of the senior unsecured notes to the indebtedness and liabilities of Cascades Boxboard, as well as to the secured creditors of the company, S&P said.

S&P rates Arch Coal convert at B+

Standard & Poor's assigned a B+ preferred stock rating to Arch Coal Inc.'s $150 million of perpetual cumulative convertible preferred stock and affirmed its existing ratings.

The ratings reflect a diversified base of reserves but high costs of production in the eastern U.S., S&P said.

Arch Coal's 50% debt leverage, taking into account the new convertible, is acceptable for the ratings but S&P noted that it also has post-retirement and reclamation obligations totaling $455 million. Further obligations include ongoing minimum royalty payments of which $63 million are due in 2003.

At Dec.31, liquidity was $253 million, consisting of $10 million in cash and $243 million available under its $350 million revolver that matures in 2007. With the use of the proceeds from the convertible to pay down the revolver, liquidity will increase by $65 million.

S&P said it expects cash flow from operations to be sufficient to meet capital expenditures and minimum royalty payments.

The outlook is stable in that Arch Coal will continue to benefit from a relatively stable cash flow and diversified reserves. However, it remains exposed to high costs, repricing risks and weak economic conditions.

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