S&P lowers Norske Skog Canada outlook

Standard & Poor's lowered its outlook on Norske Skog Canada Ltd. to negative from stable and confirmed its ratings including its corporate credit at BB.

S&P said the revision stems from concerns that Norske Skog Canada will be unable to meaningfully improve credit ratios in the near term with a slower recovery in pulp and paper demand than previously expected for 2004 and a narrowing of operating margins due to the significant strengthening of the Canadian dollar. Should these conditions persist, the company could have difficulty averaging credit ratios commensurate with the BB rating through the cycle.

Norske Skog Canada's ratings reflect its average cost position in groundwood papers and narrow revenue base, which expose the company to weak financial performance at the bottom of the cycle, S&P said. These risks are partially offset by the company's moderate financial policies.

NorskeCanada's profitability and cash flows are currently very weak for the ratings category. Recent performance reflects the company's average cost structure and vulnerability to pricing for newsprint, groundwood papers and pulp, which has squeezed operating margins significantly.

The company has made progress in improving its cost position with the achievement of C$80 million in annualized run rate savings as of June 30, 2003, on its C$100 million performance improvement program. Nevertheless, the effect of the program has been muted, and for the four quarters ended June 30, 2003, EBITDA interest coverage was weak at 1.0x and funds from operations to total debt was 2.0%.

S&P lowers Tembec outlook

Standard & Poor's lowered its outlook on Tembec Inc. to negative from stable and confirmed its ratings including its corporate credit at BB.

S&P said the revision is in response to concerns that Tembec will be unable to significantly improve credit ratios from very weak current levels in the near term and the company could be challenged to average levels commensurate with the ratings category through the cycle.

Although the economy has shown signs of improving, there are doubts about the legitimacy of the recovery and the extent and speed that it will translate into stronger pulp and paper consumption in 2004. Furthermore, any recovery will be partially offset by a sustained strong Canadian dollar; however, the company is less exposed than many of its Canadian competitors due to its significant hedging program, S&P added.

Tembec's ratings reflect its highly cyclical revenue exposure and currently aggressive debt levels that have resulted in very weak financial performance through the bottom of the current cycle, S&P said. These risks are partially offset by the company's competitive cost structure in certain segments; the aggressive, yet measured, growth strategy; and the degree of revenue diversity.

Tembec's performance continues to fluctuate because of its exposure to pulp, the most volatile forest product. Performance through the current cycle has been exceptionally weak as the company experienced pricing pressure across all its primary product lines, exacerbated by punitive lumber duties on its softwood lumber exports to the U.S. The benefits of acquisitions and cost-cutting initiatives of recent years, which were supposed to mitigate the cyclical effects of forest product prices and improve profitability through the cycle, have not yet fully materialized in the company's results.

Fitch rates Dillard's notes BB-

Fitch Ratings initiated coverage of Dillard's, Inc. and assigned a BB- rating to its senior unsecured notes a B- rating to the company's capital securities. The outlook is negative.

Fitch said the ratings reflect Dillard's broad market presence in growing areas of the country and significant real estate ownership position offset by negative operating trends and high financial leverage.

The negative outlook reflects the company's persistently weak sales as well as longer-term competitive pressures facing the department store sector.

Dillard's has experienced declining sales for several years due to the soft retail environment and weak demand for apparel, Fitch noted. Comparable store sales declined 3% in the eight months ended September 2003, following declines in 2000-2002. This has led the company to deemphasize underperforming national apparel brands and ramp up its private label offerings, which accounted for 18.8% of sales in the first half of 2003 compared with 16.2% in the first half of 2002. However, the private label effort has not yet developed to the point that it is driving floor traffic or margin improvement.

Dillard's cash flow from operations has historically been more than sufficient to cover capital spending, leaving a sizable level of free cash flow for debt reduction and share repurchases, Fitch noted. The company's share repurchase activity has been minimal the past two years, with free cash flow focused exclusively on debt reduction. Dillard's paid down more than $1 billion of debt over the past four years, though its financial leverage remains high due to softer operations. Adjusted debt/EBITDAR weakened to 5.1 times at Aug. 2, 2003 from 4.3x at year-end 2002, while EBITDAR/interest plus rents declined in the twelve months ended 8/2/03 to 2.4x from 3.0x in 2002.

S&P rates CFR BB-

Standard & Poor's assigned a BB- long-term corporate credit rating to Romanian rail infrastructure company CFR SA. The outlook is positive.

S&P said CFR's rating reflects its importance to and support from the central government of Romania (foreign currency BB/positive). Government support is reflected in state ownership, direct budget subsidies, commitment to improving track access charge regulation, state guarantees on almost all of CFR's existing debt and the potential to defer tax payments.

The monopoly nature of CFR's business and importance to the Romanian rail sector will require ongoing financial support, S&P said. The company's stand-alone profile is too weak to survive without it.

CFR has poor operating efficiency, aggressive capital expenditure plans, very weak financial performance and high counterparty risk, S&P said. CFR relies on the ability of the state budget to support its activities. So far, it has not received sufficient subsidies to carry out its ambitious overhaul and modernization program.

The positive outlook reflects that on the sovereign, S&P added.

S&P withdraws ENA rating

Standard & Poor's withdrew its ratings on Empresa Nacional de Autopistas SA including its senior unsecured debt at BB+.

S&P said the withdrawal results is because insufficient information has been made available to substantiate the rating. S&P said it has made many unsuccessful requests to obtain the information necessary to provide an accurate and timely rating assessment. Requests made to the consortium led by Spanish construction company Sacyr-Vallehermoso and to ENA, among others, have unfortunately not resulted in the required information being provided.

Sacyr-Vallehermoso, supported by Banco Santander Central Hispano, SA and a group of Spanish savings banks, has won the bid for ENA's privatization. S&P understands that a €1.2 billion loan is currently being syndicated among a large group of banks that is to fund the privatization payment to state-owned Sociedad Estatal de Participaciones Industriales.

The terms and conditions of this loan, or any alternative financing, are crucial in determining the accuracy of ENA's rating, and could have resulted in a downgrade or upgrade.

Moody's rates Stratus notes B3

Moody's Investors Service assigned a B3 rating to Stratus Technologies, Inc.'s proposed $170 million 5-year senior unsecured notes. The outlook is stable.

Moody's said the rating reflects its concern regarding overall demand for the rarified niche market of fault-tolerant systems, the company's inconsistent ability to generate either bottom-line profitability or positive free cash flow and the limited visibility into future information technology spend levels.

The ratings are limited by the company's weak balance sheet as evidenced by its high financial leverage, negative shareholder's equity and material intangibles. The ratings reflect Stratus' predominant historical free cash flow deficit position, less-than-transparent earnings (restructuring related), modest liquidity profile, limited operational diversity and niche-like scale. The ratings also reflect concerns surrounding the finality of Stratus' restructuring activities in response to reductions in global technology spend. Finally, the ratings take into account product line execution risk related to ftServer (inclusive of potential lack of sales channel control involving revenues generated via resellers) and the proposed further impairment of the company's equity capital base as a result of the contemplated distribution to majority investors.

In the near-to-intermediate term, Moody's said it expects leverage and cash flow levels to moderately improve, with the possibility for material strengthening based on the company's evolving success with the ftServer solution combined with a steadying in performance from the legacy Continuum line.

Positive considerations supporting the ratings include Stratus' emerging market position within this fastest growing segment of the global server marketplace. Furthermore, the company has developed clear competitive differentiation through its unique fault tolerant solution (Intel processor-based servers for Windows- and Linux-based operating systems) that runs applications in an unmodified manner, integrates seamlessly into existing IT infrastructure and requires minimal IT staff support, all while occupying approximately one-half the physical space and costing one-half the price of predecessor fault-tolerant systems. As a result, the company has been successful in securing and retaining an established, internationally diversified customer base operating within the financial services, telecommunications, government/public safety, retail and gaming sectors, Moody' said.

Pro forma interest coverage to adjusted EBITDA is expected to be healthy at approximately 2.7x, while adjusted EBITDA less capital expenditures to interest expense is expected to be approximately 2.0x, Moody's added.

Moody's rates Dollar Financial notes B3

Moody's Investors Service assigned a B3 rating to Dollar Financial Group, Inc.'s $200 million senior unsecured notes due 2011. The outlook is stable.

Moody's said the rating reflects the company's substantial leverage, its aggressive expansion over the past few years and the relatively large size of the senior note in comparison to the total capital structure.

However, the rating also incorporates the growing need for the company's services amid a large, cash-dependent population.

Moody's pointed to other positive factors, such as Dollar Financial's position as a consolidator in a fragmented check-cashing industry, its experienced management, and an improved infrastructure - all advantages that help limit losses and provide operating efficiencies.

Dollar Financial targets customers that are asset limited and income constrained, Moody's noted. These are generally working individuals or families earning an hourly wage, often from multiple jobs. Demand for the company's services has climbed because commercial banks have changed their pricing practices, which has made banks' fee schedules more expensive than check-cashing charges. Also, banks have been less represented in low-income neighborhoods.

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