S&P cuts AEP Industries

Standard & Poor's downgraded AEP Industries Inc. including cutting its $200 million 9.875% senior subordinated notes due 2007 to B- from B and $85 million revolving credit facility due 2004 to BB- from BB. The outlook is stable.

S&P said the action follows AEP's weaker-than-expected financial performance for the fiscal year 2003, which has led to a deterioration in the company's already sub-par financial profile and has eroded its liquidity position.

In response to the steep rise in plastic resin prices witnessed from January through March 2003, AEP raised its selling prices, but has been unable to fully pass through higher plastic resin costs to customers, resulting in operating margins declining to single-digit percentage levels from their historic double-digit levels. In addition, overcapacity in various product segments, sluggish economic conditions, and volume declines and intensified competition in its European operations have adversely affected earnings.

The ratings on AEP reflect the firm's heavy debt burden and limited financial flexibility, which more than offsets a below-average business risk profile that recognizes solid competitive positions in a number of flexible packaging niches, S&P said.

AEP is very aggressively leveraged, and profitability and cash flow in 2003 are being negatively affected by increased plastic resin costs, due in part to elevated natural gas prices, as well as lower-than-expected volumes in U.S. and European operations. AEP has remained cash flow positive for the past four years, however, weak operating profitability precluded free cash generation in fiscal 2002. Although capital spending is expected to be curtailed (to about 50% of depreciation), the company is unlikely to generate material free cash for debt reduction in 2003.

Key credit measures of funds from operations to total debt (adjusted for capitalized operating leases) of about 8% and EBITDA to interest coverage of 1.5x for the 12 month period ended April 30, 2003, are sub-par and expected to improve to appropriate levels in the 10% to 15% range, and about 2x in the intermediate term, supported by a gradual economic recovery and moderating resin prices, S&P said.

Moody's rates Burns Philp notes B2

Moody's Investors Service assigned a B2 rating to Burns Philp's new $100 million senior unsecured notes due 2011 and confirmed its existing ratings including A$100 million senior secured revolving credit maturing 2007, A$1.3 billion senior secured term loan A maturing 2007 and $375 million senior secured term loan B maturing 2009 at B1 and $150 million senior subordinated notes due 2011 and $400 million senior subordinated notes due 2012 at B3. The outlook remains negative.

Moody's said Burns Philp's ratings are constrained by significant leverage taken on to fund the March 2003 acquisition of Goodman Fielder and the potential that deleveraging could be slowed by challenges in improving Goodman Fielder's long-term profitability or adverse market conditions.

The ratings gain support from a relatively stable and diversified revenue base, durable cash flow, and healthy operating margins provided by the combination of Burns Philp and Goodman Fielder, Moody's said. Stability in the company's core yeast business is underpinned by stable demand for bread and bakery products and Burns Philp's leading market shares in most areas of operations.

The ratings outlook remains negative based upon the limited time to date that Burns Philp has been in control of Goodman Fielder, a company that has had a history of write-offs and asset sales, which makes run-rate earnings difficult to ascertain.

Burns Philp management reports that much of the projected cost savings (roughly A$50 million/year) has been implemented, Moody's noted.

S&P rates Worldspan bonds B-, loan BB-

Standard & Poor's assigned a B- rating to Worldspan LP's planned $315 million senior notes due 2011 and $84 million senior subordinated notes due 2011 and a BB- rating to its $100 million secured term loan and $50 million secured revolving credit facility, both maturing 2007. The outlook is stable.

S&P said the ratings are based on Worldspan's leading market position in on-line travel distribution, the fastest-growing segment of the travel distribution industry, offset by a weak financial profile due to the company's leveraged acquisition.

The ratings on Worldspan's secured credit facilities are one notch higher than the corporate credit rating due to expectations that the company's enterprise value should be sufficient, even in a bankruptcy scenario, to permit full recovery for bank lenders, while the senior unsecured notes are rated two notches lower than the corporate credit rating due to the high proportion of intangible assets and goodwill in Worldspan's capital structure, combined with a fairly high level of claims that would be senior to the notes in the event of a default, S&P said.

Moody's rates Iron Mountain notes B2

Moody's Investors Service assigned a B2 rating to Iron Mountain Inc.'s new $150 million guaranteed senior subordinated notes due 2016 and confirmed its existing ratings including its $250 million senior secured and guaranteed term B credit facility due 2008 at Ba3 and $220 million 8.75% guaranteed senior subordinated notes due 2009, $150 million 8.25% guaranteed senior subordinated notes due 2011, $405 million 8.625% guaranteed senior subordinated notes due 2013 and $431 million 7.75% guaranteed senior subordinated notes due 2015 at B2 and Pierce Leahy Command Co.'s $135 million 8.125% guaranteed senior unsecured notes due 2008 at B2. The outlook remains stable.

Moody's said the new notes will have no overall rating impact.

The ratings are supported by the company's dominant market share of the stable record management business; a diversified customer base; and consistently strong gross margins. The lower business risk embodied in the core domestic storage business partially offsets the risk associated with the company's high leverage and the company's geographic and product expansion.

The ratings are constrained by the company's continued appetite for acquisitions which decreases free cash flow and sustains high leverage, Moody's said.

Total debt, inclusive of operating leases, is approximately 5.5 times the trailing 12 months ending March 31, 2003 EBITDAR, and over 2 times trailing 12 months revenues. The ratings also incorporate the company's negative tangible equity of approximately $600 million and a modest fixed charge coverage of 1.13 times, inclusive of operating leases and current portion of long term debt for the trailing 12 months ending March 31, 2003.

Fitch upgrades Allegheny Energy

Fitch Ratings upgraded Allegheny Energy Inc. including raising its senior unsecured debt to BB from B+, West Penn Power Co.'s medium-term notes to BBB- from BB+, Potomac Edison Co.'s first mortgage bonds to BBB from BBB- and senior unsecured notes to BBB- from BB, Monongahela Power Co.'s first mortgage bonds to BBB from BBB-, medium-term notes and unsecured pollution control revenue bonds to BBB- from BB and preferred stock to BB+ from BB- and Allegheny Energy Statutory Trust 2001-A senior secured notes to B+ from B.

Fitch also assigned a BB rating to Allegheny Energy's credit facility maturing 2005 a BB- to Allegheny Energy Supply Co. LLC's secured credit facilities with first priority lien, B+ to its secured credit facilities with a second priority lien and a B to its unsecured credit facilities. Allegheny Energy Supply's senior unsecured notes remain at B, Allegheny Generating Co.'s senior unsecured debentures at B, West Penn Funding LLC's transition bonds at AAA and Allegheny Energy Supply Co. LLC's pollution control bonds (MBIA-insured) at AAA were left unchanged. The ratings were put on Rating Watch Evolving.

Fitch said the upgrade of Allegheny Energy's senior unsecured debt was triggered by a thorough analysis of the recovery prospects of the company based on the strong net equity value of its three regulated utilities.

Fitch estimates that the net equity value of Allegheny Energy's utilities covers Allegheny Energy's current debt and potential exposure to Allegheny Energy Supply sufficiently.

The upgrade of Allegheny Energy permits the corresponding upgrade of its regulated utilities, whose ratings are currently constrained by those of its parent.

Allegheny Energy's ratings are supported by stable dividend stream from its regulated subsidiaries Monongahela Power, West Penn Power and Potomac Edison, Fitch said. Allegheny Energy has low parent leverage and has suspended dividend payments to its common shareholders. As a result, Allegheny Energy's standalone liquidity is adequately supported by dividend distributions received from its regulated subsidiaries.

Allegheny Energy's ratings also reflect the company's exposure to its unregulated subsidiary Allegheny Energy Supply Co., Fitch said.

The Rating Watch Evolving reflects the current status of Allegheny Energy Supply, whose ratings are contingent upon the outcome of several upcoming events, Fitch added.

Fitch said the evolving watch incorporates its expectation that events in the next few months could have either positive or negative implications on the company's ratings. Allegheny Energy Supply's parent holding company Allegheny Energy Inc. has yet to complete the restatements of its 2002 quarterly financial statements and issue its 2002 financial statements, without which the Allegheny Energy or Allegheny Energy Supply cannot access the public capital markets, sell certain assets, or secure approval from the SEC to issue additional secured debts.

Secondly, Allegheny Energy Supply has made some progress on its plan to monetize its CDWR Contract with the recent settlement with CDWR. While execution risk exists, the timely monetization of the CDWR Contract at a reasonable price will provide not only the proceeds to meet the 2003 amortization schedule but also free up cash used to post collaterals for hedges.

Lastly, external funding before year end 2003, either in the public or private placement markets, may be needed to maintain liquidity, Fitch said.

The newly assigned ratings of Allegheny Energy Supply's secured bank facilities reflect the strong asset coverage afforded by the security package and the stringent terms and conditions that govern the bank credit agreement and the A-Notes indenture.

Fitch says no rating actions from gaming tax changes

Fitch Ratings said it does not anticipate taking any rating actions from proposed changes in gaming taxes.

The new tax increase on the gaming industry in the State of Illinois could effectively shrink the tax base, as casinos respond by reducing the headcount, hours of operation and promotional expenses and shut down lower-margin table games, Fitch said.

While other states, such as Iowa, Missouri, Nevada and New Jersey have proposed gaming tax initiatives to plug budget shortfalls, Illinois' tax increase is by far the most severe with the highest marginal tax rate raised to a top tier of 70% on revenues over $250 million, Fitch noted.

The proposed and approved tax plans nationwide will have an adverse effect on the cash flows and credit measure of all operators under Fitch coverage, particularly those with exposure to Illinois and New Jersey.

Companies least affected are those in stable regulatory environments, such as Las Vegas (i.e. MGM Mirage and Station Casinos) and those that are geographically diversified, such as Harrah's Entertainment, Park Place Entertainment, and Boyd Gaming.

Conversely, Ameristar Casinos and Trump Holdings suffer fairly significant credit deterioration due to a lack of diversity and heavy exposure to Illinois and Atlantic City, respectively, Fitch said.

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