S&P cuts MGM Mirage to junk

Standard & Poor's downgraded MGM Mirage to junk including cutting its corporate credit rating and senior secured debt to BB+ from BBB- and subordinated debt to BB- from BB+. The outlook is stable.

S&P said the downgrade follows MGM Mirage's announcement that it has continued to repurchase shares of its common stock in its third quarter, prolonging the time frame in which credit measures will remain weak for the rating.

The company has balanced share repurchases with debt reduction, having repaid $106 million in debt during the first six months of 2003. However, the timing for reducing debt leverage has been extended beyond S&P's previous expectations.

While economic conditions appear to be improving and the operating environment in the gaming industry is expected to be better in 2004, the new rating level provides MGM Mirage with additional debt capacity to accomplish its growth objectives or to repurchase additional shares of its stock, S&P said. MGM Mirage is one of the leading companies in the industry and is likely to participate in industry consolidation and/or expansion opportunities.

MGM Mirage's ratings reflect its high-quality, relatively new and well-located assets on the Las Vegas Strip, experienced management team and leadership position in the high-end segment of the gaming industry, S&P said. These factors are offset by its high reliance on one market, and the likelihood that cash flow available for debt reduction will be reduced by the company's investment opportunities, including possible share repurchases, during the next few years.

As of June 30, 2003, leverage, as measured by total debt to EBITDA, is in line with the new rating at 4.6x, S&P said. Leverage is expected to decline only slightly for the remainder of 2003, as the potential for EBITDA growth will be somewhat affected by disruptions associated with expansions and renovations at such properties as Bellagio and Treasure Island.

Moody's puts Caremark on upgrade review

Moody's Investors Service put Caremark Rx, Inc. on review for possible upgrade and confirmed AdvancePCS. Moody's currently rates Caremark's senior secured credit facility and senior notes at Ba2 and AdvancePCS's senior secured credit facility at Ba1 and senior notes at Ba2.

Modoy's said the actions follow the announcement that Caremark will acquire AdvancePCS in a $5.6 billion transaction to be financed 90% with Caremark common stock and 10% with cash.

Moody's said its review will consider the anticipated opportunities associated with the proposed merger, such as larger script volume and drug spend, the potential to achieve purchasing and expense synergies and the opportunities to increase mail order utilization within the AdvancePCS block of business.

The rating review will also consider possible risks associated with the merger, including the integration of complex systems and pharmaceutical formularies, the potential for client turnover and the impact of greater exposure to managed care and health plan clients, which are typically less profitable than employer clients.

Moody's will also examine the legal structure, capital structure and liquidity profile of the combined entity, focusing on the treatment of existing debt, bank agreements and asset securitization programs, and a review of the company's cash flow generation and working capital patterns.

Confirmation of the AdvancePCS ratings reflects Moody's belief that credit quality should be supported by becoming part of the larger, combined entity, with stronger cash flow generation. Currently, Moody's rating outlook on the AdvancePCS ratings is stable, based on the likelihood that the Caremark merger will not close until 2004 and that the success of the merger will not be demonstrated until sometime after that.

Over time, should a successful merger with Caremark result in significant client retention, healthy cash flow generation and prudent financial policies, Moody's will consider the potential for positive action in the rating and/or the rating outlook.

Moody's added that it continues to believe that the PBM industry faces certain risks that may limit upward rating action, including the unproven longer term sustainability of pharmaceutical rebates, margin pressure resulting from clients demanding greater share of rebates, the uncertain impact of a Medicare drug benefit, and uncertainty that the shift from brand to generics is beneficial to PBMs, particularly for retail scripts.

Moody's rates Alliance Gaming loan B1; raises outlook

Moody's Investors Service rated Alliance Gaming Corp.'s new $375 million senior secured credit facility at B1 and raised the company's ratings outlook to positive from stable.

The credit facility consists of a $100 million revolver due 2008 and a $275 million term loan due 2009. Security is assets and capital stock of restricted subsidiaries.

The change in ratings outlook reflects the anticipated completion of a refinancing initiative that the company announced in July 2003, as well as several other actions taken over the past few years designed to improve the company's asset profile, reputation, growth prospects, operating margins and free cash flow generating ability, Moody's said.

In July 2003, the company also announced that it has agreed to sell United Coin Machine Co. Assuming positive trends continue, and management maintains its relatively conservative financial policy, the completion of the sale of United Coin would likely result in a ratings upgrade since Moody's views the sale as the last in a series of restructuring activities that will allow management to focus its attention on its most profitable opportunities going forward.

Moody's rates Hanger Orthopedic Group's revolver B1

Moody's Investors Service rates Hanger Orthopedic Group Inc.'s $75 million senior secured revolver at B1. Also, Moody's confirmed the company's $200 million 10.375% senior notes due 2009 at B2, $150 million 11.25% senior subordinated notes due 2009 at B3 and $72 million 7% redeemable preferred stock due 2010 at Caa1. The outlook is stable.

Ratings reflect high leverage and modest coverage, historically weak cash flow generation, challenges facing the industry, high level of competition, low barriers to entry, high attrition rate for practitioners and past operational issues, Moody's said.

Supporting the ratings is recent improvement in the company's credit profile and financial performance, increased focus on operational improvements, leading market share position and positive demographic trends, Moody's said.

The stable outlook reflects the expectation for modest improvements in the company's credit profile.

S&P cuts Key Components outlook

Standard & Poor's lowered its outlook on Key Components, LLC to stable from positive and confirmed its ratings including its senior unsecured debt at B-.

S&P said the outlook revision is based on the reduced likelihood of Key Components' credit protection measures improving in the intermediate term to a level supportive of a higher rating, as a result of weaker-than-anticipated cash generation.

In addition, there is a high likelihood that the company may violate bank covenants in the near term, which would require it to obtain either a wavier or amendment to its bank credit facility.

S&P said the ratings reflect Key's respectable positions in niche markets and an aggressive financial profile.

High financial risk results from a leveraged capital structure, weak cash flow protection and an aggressive growth plan, S&P said. Key Components is exposed to cyclical markets; however, the diversity of its businesses has limited volatility. In the past, the company has been fairly acquisitive; however, it has been able to cut costs, close down unprofitable operations and reduce redundant overhead. However, the expected improvement in credit protection measures has been limited due to weaker-than-anticipated operating results due to soft market conditions.

For the six months ending June 30, 2003, EBITDA to interest coverage was about 2.7x and total debt to EBITDA was about 4x, S&P said. EBITDA to interest coverage is expected to be about 3x, and total debt to EBITDA should range from 3.5x to 4.0x.

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