Moody's cuts Millennium Chemicals, still on review

Moody's Investors Service downgraded Millennium Chemicals Inc. including cutting Millennium America Inc.'s $1.2 billion guaranteed unsecured notes due 2006 through 2023 to Ba3 from Ba1 and $175 million guaranteed senior secured revolver due 2006 and $49 million guaranteed senior secured term loan due 2006 to Ba1 from Baa3. Moody's kept the ratings on review for downgrade.

Moody's said the downgrade reflects Millennium's high leverage with debt (including securitized receivables) to last 12 months EBITDA of 6.1 times as of March 31, 2003, modest coverage of interest expense, weaker than anticipated titanium dioxide (TiO2) demand, and potential covenant compliance issues.

The downgrade also reflects Moody's opinion that a protracted recovery in the TiO2 business will limit the company's ability to improve free cash flow, indicating a high potential for continued weak credit metrics over the intermediate-term.

The review for downgrade continues pending a meeting with Millennium management to discuss accounting errors and prospective financial report restatements, covenant compliance under the bond indenture and secured credit facility, and the company's revised outlook for its business, Moody's added.

Moody's said it is also concerned that the company could violate the leverage covenant under the credit facility in third or fourth quarter of 2003, and noted the covenants were negotiated as recently as April 2003.

However, Moody's said it also recognizes that Millennium is beginning to take steps to address its weak operating performance and cash flow. In July 2003, the company announced its plan to suspend its dividend, which totaled $35 million in 2002. Additionally, the company will embark on a restructuring plan that will reduce employment by roughly 5%. This action is expected to produce annual savings of $20 million.

S&P raises Tesoro outlook

Standard & Poor's raised its outlook on Tesoro Petroleum Corp. to stable from negative and confirmed its ratings including its senior secured debt at BB and subordinated debt at B.

S&P said the outlook revision reflects improved liquidity and meaningful debt reduction following completion of a refinancing of its bank credit facilities.

Subsequent to the refinancing, the company has liberated more than $150 million previously trapped in early payments and prepayments of inventory and has applied this cash, along with modest free cash flow during the first half of 2003, to debt reduction. Tesoro's deleveraging efforts have better positioned the company to sustain itself during the low points of the refining cycle and have significantly alleviated S&P's concerns about liquidity.

The ratings for Tesoro reflect its position as a highly leveraged, independent oil refiner and marketer operating in a very competitive, erratically profitable industry burdened by high fixed costs, S&P added. These weaknesses are partly offset by strong asset quality, advantaged operating locations, and a limited degree of retail-derived margin stability.

As of June 30, 2003, Tesoro's debt to total capital was 65%, improved from the near-70% level at year-end 2002, but still quite high given the highly cyclical, highly volatile, working capital-intensive nature of refining, S&P noted. Management's debt-reduction plan should allow Tesoro to improve leverage to the low-60% range by year-end 2003. Assuming midcycle crack spreads for the year, EBITDA to interest coverage should improve to near 3x for 2003 with funds from operations to total debt between 15% and 20%, which are more appropriate levels for the rating category than the very thin coverage measures of 2002.

Moody's rates Pilgrim's Pride notes B1

Moody's Investors Service assigned a B1 rating to Pilgrim's Pride's $100 million add-on senior unsecured note offering and confirmed its existing ratings including its $200 million 9.625% senior unsecured notes due 2011 at B1. The outlook is stable.

Proceeds from the offering will partially fund Pilgrim's previously announced acquisition of ConAgra's chicken business.

Moody's said Pilgrim's ratings reflect the incremental leverage relative to the cash flow associated with the ConAgra transaction, integration challenges in almost doubling the company's scale and risk in projecting run-rate operating performance for the acquired business, which has not been operated as a stand-alone business and has experienced earnings weakness.

Pilgrim's leverage has remained high due to chicken market weakness in fiscal 2002 ending September 2002, flock disease in fiscal 2002 and a product recall in fiscal 2003, which delayed debt reduction after the company's $285 million debt-funded acquisition of WLR Foods in January 2001.

Material debt reduction is not expected over the near term following the ConAgra acquisition.

S&P changes Tropical Sportswear watch to negative

Standard & Poor's changed its CreditWatch on Tropical Sportswear International Corp. to negative from developing including its $100 million 11% senior subordinated notes due 2008 at B- and $95 million senior secured revolving credit facility due 2006 at BB-.

S&P said the revision comes as a result of the firm's announcement that it has concluded its review of strategic alternatives.

Tropical's board of directors has determined that the firm should continue to pursue its "present strategic business plan." Moreover, the firm has announced that it will terminate members of senior management, including the current chief executive officer and chief financial officer, effective Aug. 15.

S&P cuts Alaska Communications

Standard & Poor's downgraded Alaska Communications Systems Group Inc. including cutting its $150 million 9.375% subordinated notes due 2009 to B- from B and $150 million tranche A loan due 2006, $150 million tranche B loan due 2007, $160 million tranche C loan due 2007 and $75 million revolving credit facility due 2006 to B+ from BB-. The outlook is stable.

S&P said the downgrade reflects its concern about heavy competitive pressure in the core incumbent local access line operations, reduced business and cash flow diversity following Alaska Communications' sale of its high-margin directories business, slower-than-anticipated progress in generating revenue from the integrated services contract with the state of Alaska, and the potential for increased competition in the wireless segment following Dobson Communications Corp.'s acquisition of AT&T Wireless Services Inc.'s Alaskan properties.

Alaska Communications improved its financial profile by repaying debt with directories business proceeds in May 2003. The company also recently announced an agreement with EchoStar Communications Corp. to market and sell that company's DISH Network satellite television service in Alaska, which should improve Alaska Communications' competitive position in consumer markets.

However, S&P said it Poor's believes these factors only partially temper the competitive challenges the company faces within the slow-growing Alaska market.

Alaska Communications' EBITDA margin is in the low 30% area, compared with the upper 40% margins of many of its peers, S&P noted. Lower margin wireless operations, losses at the long-distance and Internet segments, and competitive pressure in local access are factors in the subpar profitability. Pro forma for the directories sale, EBITDA to interest is roughly 2x and debt to EBITDA is approximately 4.7x, or about 4.1x on a net debt basis.

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