S&P cuts Wackenhut, rates notes B, loan BB-

Standard & Poor's downgraded Wackenhut Corrections Corp. including cutting its $125 million term B loan due 2008 and $50 million revolving credit facility due 2007 to BB- from BB and assigned a BB- rating to its proposed $100 million term loan B due 2009 and $50 million revolving credit facility due 2008 and a B to its proposed $150 million senior unsecured notes. The outlook is stable.

S&P said the downgrade reflects Wackenhut's higher debt leverage and the debt servicing costs that would result from the proposed transaction. The downgrade also responds to Wackenhut's recent announcement that it will sell its 50% interest in U.K. joint venture Premier Custodial Group to the other 50% shareholder, Serco Investments Ltd. Wackenhut indicated that it may use proceeds from the sale of Premier Custodial to acquire a prison or mental health services business or otherwise expand those businesses, and this may introduce some potential integration risks.

Pretax proceeds of the sale of Premier Custodial are estimated to be about $80 million. Even if Wackenhut were to apply all net after-tax proceeds from the sale of Premier Custodial to repay debt, however, the company's credit protection measures would not improve to pre-transaction levels during the next few years, S&P said.

For the bank loan, S&P said in a simulated default scenario it believes that the proceeds from the liquidation of collateral in a distressed situation would be sufficient to fully cover the bank debt.

Wackenhut's ratings continue to reflect its narrow focus, limited size, customer concentration, political risk, and its leveraged financial profile, S&P said. Somewhat mitigating these factors are the company's favorable market position and demographic trends.

Pro forma for the proposed transaction, Wackenhut will be highly leveraged, S&P said. Lease-adjusted total debt levels will increase to about $420 million at closing of the transaction from about $297 million at March 31, 2003. Lease-adjusted EBITDA for the 12 months ended March 31, 2003, was $69 million. Lease-adjusted EBITDA to pro forma full-year lease-adjusted interest expense was about 2.2x. At closing, lease-adjusted total debt to EBITDA will be about 6.1x. Standard & Poor's expects these measures to improve by year-end 2003, with lease-adjusted EBITDA coverage of interest expected to be in the 2.2x-2.4x range and lease-adjusted total debt to EBITDA to decline to less than 6x.

Moody's confirms Wackenhut, rates notes B1, loan Ba3

Moody's Investors Service confirmed Wackenhut Corrections Corp.'s ratings including its senior secured bank credit facility at Ba3 and ratings its proposed $150 million senior secured credit line at Ba3 and proposed $150 million senior unsecured notes at B1. The outlook is stable.

Moody's said the stable rating outlook reflects Moody's expectation that Wackenhut will reduce its leverage caused by a common stock repurchase from its majority owner, Group 4 Falck, to a level that is closer to its historical level within a nine-month period, or make an accretive acquisition with the anticipated proceeds from Premier Custodial Group litigation settlement.

Moody's said it also acknowledges that the settlement with Premier Custodial curtails further legal costs, removes uncertainty and overhang from the dispute, and allows management to focus on operations.

The cost is the temporary transition of Wackenhut Corrections' participation in the British corrections market.

The ratings continue to reflect the company's continued solid historical performance, good growth potential and strong management team, high occupancy rate, diversified contracts, and business model that has more emphasis on managing properties than owning properties, which reduces the company's capital investment exposure, Moody's said.

Moody's stated that confirmation and assignment of the ratings also reflect the significant benefit Wackenhut will receive from the repurchase of Group 4 Falck ownership interest, as it will become a fully independent company. This transaction also eliminates the overhang created by Group 4 Falck's stated intention to divest its investment in Wackenhut and establishes operating autonomy, while eliminating distractions created by Group 4 Falck's involvement in corporate governance - all credit positives. In addition, it removes conflicts of interest arising from Group 4 Falck's separate prison management international business overseas.

These positive factors are offset by the inherent risks in the private correction facility services business, including reliance on government appropriations for payment of awarded contracts, contract renewal risk, facility lease liability, legislative risks, high employee turnover, and potential legal liability, Moody's said.

S&P cuts Winn-Dixie loan

Standard & Poor's downgraded Winn-Dixie Stores Inc.'s corporate credit rating to BB+ from BBB- and bank loan to BBB- from BBB. The BB+ senior unsecured rating was confirmed.

S&P said the senior unsecured rating had been rated one notch below the corporate credit rating to reflect a substantial amount of secured bank borrowings.

Since the bank term loan is paid off and revolving credit borrowings are expected to be minimal, S&P said it no longer believes senior unsecured debt is disadvantaged in the capital structure.

The downgrade of Winn-Dixie is based on disappointing sales and cash flow, which is hindering expected improvement in operating and credit measures, S&P said. Management now expects identical store sales to decline by 3&-4% for the fourth quarter ending June 25, 2003, adjusted for the Easter timing impact. Net earnings excluding nonrecurring items for the fourth quarter are expected to be about 20% lower than previous guidance. This follows a trend of declining operating margins beginning in the second quarter of fiscal 2003, and only marginal improvement in EBITDA coverage.

Although Winn-Dixie's store retrofit program and restructuring program benefited the operating margin in 2002, this measure was pressured in 2003 by weak sales and increased costs for information technology and customer loyalty card initiatives, S&P said. The margin remains below average for the industry.

Management's willingness to repay funded debt from discretionary cash flow has supported credit measures, S&P said. The company repaid $234 million in bank debt in the first three quarters of 2002 and funded debt now totals only about $330 million. Nevertheless, Winn-Dixie's $2.3 billion in operating lease equivalents are very substantial, resulting in total debt/EBITDA of about 3.5x. EBITDA coverage of interest expense was 2.8x for the 12 months ended March 2003 and, for the full fiscal year 2003, is expected to be about even with 2002's 2.7x coverage.

S&P confirms AAR off watch

Standard & Poor's confirmed AAR Corp.'s ratings including its $50 million 7.25% notes due 2003 and $60 million 6.875% notes due 2007 at BB-, removed it from CreditWatch negative and assigned a negative outlook.

S&P said the confirmation is based on AAR's improved liquidity following the completion of a $30 million secured (by inventory) revolving credit facility with Merrill Lynch Capital and partial prepayment of $50 million of notes due October 2003.

The company's cash and equivalents exceed the remaining $22.6 million balance of these notes.

AAR's ratings reflect the risks associated with very difficult conditions in the firm's primary market, the airline industry, weak profitability, and subpar credit protection measures, S&P said. Those factors are partly offset by the company's established business position and moderately leveraged capital structure.

The Sept. 11, 2001, attacks, a sluggish economy, the lingering effects of the Iraq war, and the outbreak of severe acute respiratory syndrome (SARS) have had a severe impact on commercial aviation, leading to a decline in air travel, reduction in capacity, and deep losses by many air carriers, especially those in the U.S., S&P said As a consequence, AAR's revenues and earnings have been significantly affected through fewer aircraft in service, reduced schedules, a large number of parked or retired planes, and airlines' efforts to conserve cash. Another risk arises from ongoing efforts by original equipment manufacturers to increase the aftermarket activities of their business. With the exception of moderate debt to capital of about 50%, credit protection measures are below average for the rating.

S&P rates Aviall notes BB

Standard & Poor's assigned a BB rating to Aviall Inc.'s planned $200 million senior unsecured notes due 2011.

S&P said Aviall's ratings reflect its position as the leading independent distributor of new aircraft parts and moderate debt leverage, but are limited by the weak commercial aerospace market and the reliance on one contract for a large proportion of sales.

Declines in the commercial aerospace market have been more than offset by increased revenues to the corporate and military markets from new product offerings, S&P noted.

The company's most significant distribution agreement is with Rolls Royce plc and involves exclusive rights to distribute parts for its T56 turboprop engine, which has an installed base of over 8,000 engines worldwide. The T56 contract represented over 30% of Aviall's 2002 sales and will likely be a driver for growth for the company over the contract's 10-year life. In addition, the contract reduced the company's reliance on the depressed commercial aircraft market.

Revenues increased over 60% in 2002, due largely to the T56 contract. Operating margins (before depreciation) improved to almost 11% in 2002 from around 7.5% in 2001.

The likely lower coupon of the new notes is expected, in combination with solid profitability, to improve the company's pretax and EBITDA coverage of interest to around 3x and 4x, respectively, in 2003 from 2.4x and 3.2x in 2002, S&P said. Debt to capital is expected to remain essentially unchanged at around 45%. Cash protection measures are expected to be solid, with funds from operations to debt in the low-30% area.

S&P lowers Merisant outlook, rates notes B, loan BB-

Standard & Poor's assigned a B rating to Merisant Co.'s planned proposed $200 million senior subordinated notes and a BB- rating to its proposed $320 million bank loan facilities, confirmed its existing ratings including its corporate credit at BB- and lowered the outlook to stable from positive.

The outlook revision reflects the company's higher debt leverage and debt servicing costs that would result from the proposed transaction, S&P said. The transaction adds about $170 million of incremental debt, however Merisant has significantly delevered its balance sheet by paying down approximately $140 million of debt since March 2000, when the company was spun-off from Monsanto.

S&P said that bank lenders are unlikely to realize full recovery in the event of a bankruptcy, though meaningful recovery of principal is likely.

Overall Merisant's ratings reflect its narrow product focus, its supplier and customer concentration, and its leveraged financial profile. Somewhat mitigating these factors are the company's leading market share in the global low-calorie sweetener segment of the overall sweetener industry, as well as favorable industry growth prospects and relatively stable cash flows.

Merisant has experienced stable organic growth during the past few years with sales growing at a compound average growth rate of about 2% from 2000 to 2002. During that period, the company sustained EBITDA margins of more than 30%, S&P said. Strong performance has been aided by the company's ability to charge a premium for its branded products. However, margins may come under pressure because of increasing competition from alternative branded low-calorie sweeteners such as Johnson & Johnson's sucralose-based Splenda.

Pro forma for the transaction, Merisant will be highly leveraged, following two years of deleveraging. Lease-adjusted total debt will increase to about $487.8 million at closing from $306 million at March 31, 2003. Lease-adjusted EBITDA was $109.2 million for the 12 months ended March 31, 2003, and lease-adjusted EBITDA to pro forma full-year lease-adjusted interest expense is about 2.4x, S&P said. At closing, lease-adjusted total debt to EBITDA is about 4.5x. Although these credit protection measures are somewhat weak for the current ratings, S&P said it expects them to improve, with lease-adjusted EBITDA coverage of interest expected to rise to more than 3x and lease-adjusted total debt to EBITDA expected to decline to less than 3.5x during the next 12 months.

S&P keeps Allegheny Technologies on watch

Standard & Poor's said Allegheny Technologies Inc. remains on CreditWatch negative including its senior unsecured debt at BBB.

S&P said "there is a strong likelihood" the ratings will be lowered to junk.

S&P began the watch on April 15 due to concerns about the company's growing unfunded postretirement benefit liabilities, including defined benefit pension and retiree medical liabilities, and its very weak operating and financial performance.

Allegheny's recent announcement that it has arranged a $325 million four-year senior secured revolving credit facility (secured by accounts receivable and inventory) to replace its $250 million unsecured facility is a prudent step by management in preserving its liquidity given the currently extremely challenging market conditions, S&P said.

Still, the company's credit protection measures are subpar and are expected to remain so due to its increasing pension and OPEB costs (mostly noncash) and the persistent weakness in its key aerospace and power generation markets, which is likely to remain a factor at least through 2004, S&P added.

Moody's rates Worldspan notes B2, Caa1, loan B1

Moody's Investors Service assigned a B1 rating to Worldspan's $150 million secured bank credit facility, B2 rating to its $315 million guaranteed senior notes due 2011, and Caa1 rating to its $84 million subordinated notes due 2012. The outlook is stable.

Moody's said the ratings are based on: Worldspan's aggressive capital structure, which contributes to high debt leverage, its modest cash position and reliance on revolving credit facilities with tight financial covenants, the financial duress of its airline customer base, uncertainty as to the timing for a meaningful recovery of the travel and lodging industries, and airline client concentration within its IT services business.

Financing necessary to purchase Worldspan from its seller airlines, American Airlines, Delta, and Northwest, contributes to high leverage for Worldspan pro forma the transaction of 3.5x debt to EBITDA less capital expenditure and 1.2x fixed charge coverage, Moody's said.

Factors which mitigate credit risk include: the essential nature of global distribution system services to the airlines as the primary mechanism for travel distribution, which supports payment of fees as a preference item even while airlines operate under the protection of Chapter 11 of the Bankruptcy Code, the company's market leadership position as an online global distribution system services provider, and the company's partnership relationships with major online travel agencies and airlines, Moody's said.

The stable rating outlook reflects Moody's expectation that the company will continue to increase its airline and other booking market share within the online travel market and that airline travel appears to be stabilizing in the wake of the events of September 11, 2001, the protracted economic downturn, and more recently, the war with Iraq and the outbreak of severe respiratory syndrome throughout eastern Asia and Toronto.

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