Moody's cuts Dynegy to junk

Moody's Investors Service downgraded Dynegy Inc. affecting $5 billion of debt. Ratings lowered include Dynegy Holdings Inc.'s senior unsecured debt, cut to Ba1 from Baa3, preferred stock,cut to Ba2 from Ba1, and commercial paper, cut to Not Prime from Prime-3; Illinois Power Co.'s senior secured debt was cut to Baa3 from Baa2, senior unsecured debt cut to Ba1 from Baa3 and commercial paper cut to Not Prime from Prime-3; and Illinova Corp.'s senior unsecured debt was cut to Ba2 from Ba1. The outlook is negative.

Moody's said it lowered the rating because of concerns about the company's current liquidity position and worries that operating cashflow is expected to be weak relative to existing debt levels. The negative outlook is in response to execution risk associated with the recently announced restructuring plan, a continuing lack of investor and counterparty confidence that has limited access to public debt markets and negatively impacted the company's marketing and trading businesses, the increased likelihood of effective subordination due to higher levels of secured debt, and uncertainty surrounding FERC and SEC investigations as well as legal challenges from Enron related to the termination of the merger agreement.

Moody's said Dynegy's current liquidity profile is considerably weaker than it has been historically.

Dynegy currently has approximately $370 million available under its committed bank facilities and $325 million of cash on hand, with $350 million of debt maturities (including amortization) in July and other expected uses of cash that will further reduce liquidity, Moody's noted. As a result, the company recently announced a restructuring plan aimed at increasing liquidity to $2.0 billion by year-end 2002.

However, the plan is also largely dependent on proceeds from asset sales, with the largest component being a 50% share of Northern Natural Gas (NNG), an asset purchased with cash provided by ChevronTexaco. While a sale of NNG would enhance short-term liquidity, it remains unclear how much of the proceeds will ultimately go to ChevronTexaco to deal with the $1.5 billion in preferred securities potentially coming due in November 2003, Moody's said.

In addition, the company has a $300 million revolver that matures in November 2002 and $1.6 billion of credit facilities maturing in April and May 2003, Moody's said. Given that Dynegy Holdings renewed its old $1.2 billion 364-day facility at a level of $900 million with no term-out option and chose to exercise the term-out option in the $300 million Illinois Power facility, Moody's said it believes future renewals are likely to be done at lower commitment levels under more restrictive terms and conditions.

Therefore, refinancing risk has increased and Moody's said it will evaluate any potential impact on ratings when those facilities are renewed.

Furthermore, by restructuring and securing the minority interest transaction (Catlin), Dynegy has increased the amount of secured debt in its capital structure by $800 million, thereby increasing the potential for notching due to effective subordination. Additional secured indebtedness will likely result in a downgrade of the senior secured and unsecured ratings or further notching of the senior unsecured debt of Dynegy Inc. and its subsidiaries, Moody's said.

In addition, the downgrade reflects Dynegy's reduced operating cashflow expectations for 2002 coupled with high financial leverage, and the likelihood that operating cashflow in 2003 may not be materially better, Moody's said. Previous operating cashflow estimates of $1.2 to $1.3 billion have been cut to approximately $1.0 billion, driven by a combination of weak power markets, reduced marketing and trading activity and asset sales.

Management's expectations also assume working capital will be flat for the balance of 2002 and the risk management activities adjustment will be around $75 million (e.g. $75 million of reported earnings will not convert to cash by year-end 2002), Moody's said.

Since Dynegy had large working capital uses in 2001 and a sizable negative risk management adjustment, and needs a relatively strong third quarter from its power generation and distribution assets, Moody's said it believes there is a reasonable chance Dynegy's operating cashflow could fall short of the $1.0 billion expected.

Additional negative cashflow pressure could also come from the company's telecom business, which continues to consume cash. Moody's added that it does recognize that a portion of Dynegy's cashflow is derived from physical assets, long-term contracts and regulated or fee based businesses, but some of these activities are still subject to volatility in volumes, which does impact cashflow. Furthermore, the level of operating cashflow accounted for by these activities is not consistent with an investment grade rating given Dynegy's current debt levels.

S&P cuts five airlines

Standard & Poor's downgraded five large U.S. airlines. Continental Airlines Inc.'s corporate credit rating was cut to B+ from BB- and a negative outlook assigned. Northwest Airlines Corp. and Northwest Airlines Inc.'s corporate credit rating was cut to BB- from BB and a negative outlook assigned. AMR Corp. and American Airlines Inc. has their corporate credit rating cut to BB- from BB, were removed from CreditWatch with negative implications and given a negative outlook. Delta Air Lines Inc. had its corporate credit rating cut to BB from BB+, was removed from CreditWatch with negative implications and given a negative outlook. UAL Corp. and United Air Lines Inc. had their corporate credit rating cut to B from B+ and the CreditWatch revised to developing.

S&P said the actions were in response to a disappointing revenue outlook and concerns over continued long-term risks relating to airport security, rising low-fare competition, increased use of discounted tickets by business travelers and limited flexibility to reduce labor costs.

"The pace and strength of the revenue recovery for large U.S. airlines has weakened, prolonging losses and further eroding their weakened balance sheets," said S&P credit analyst Philip Baggaley in an announcement explaining the action.

Although revenue measures are improving on a year-over-year basis, the industry was already deteriorating in early 2001, making the comparisons easier as the year proceeds, S&P said.

Compared against 2000, the last relatively healthy year for the industry, passenger revenue per available seat mile reported by the Air Transport Association in May 2002 was 16.8% lower than levels of two years earlier, versus only 9.6% lower in January.

Business traffic and ticket pricing remain soft, reflecting not only a cyclical downturn, but also an acceleration of existing trends unfavorable to the large hub-and-spoke carriers, in particular growing low-cost competition and increasingly widespread use of information technology to search for low fares, S&P added.

Increased inconvenience and costs imposed by security measures have added a further disincentive to air travel, especially on short flights.

As a result, and despite stringent cost-cutting efforts, second-quarter and full-year 2002 earnings expectations for the large airlines have slipped in recent months, S&P said.

Lowering the largest single expense, labor costs, requires negotiations with unions in most cases, and these have proven difficult so far, where attempted, despite the industry's clear financial distress, S&P continued.

Moody's rates Alliance Laundry's loan B1

Moody's Investors Service assigned a B1 rating to Alliance Laundry Systems LLC's proposed senior secured bank loan. The loan consists of a $193 million term loan due 2007 and a $50 million revolver due 2007. Furthermore, Moody's confirmed the company's $110 million 9 5/8% guaranteed senior subordinated notes due 2008 at B3, senior implied rating at B1 and senior unsecured issuer rating at B2. The outlook is stable.

The loan will be secured by a first priority lien on basically all assets and capital stock of the company and its domestic subsidiaries. Proceeds will be used to refinance the existing term loan that has an outstanding balance of $188 million. At closing $1.1 million of the revolver is expected to be drawn.

The ratings reflect Alliance Laundry's high financial leverage, thin interest coverage, low free cash flow generation, very weak balance sheet, and limited growth prospects, Moody's said. However it added that the ratings also recognize the company's leading market position, well-established distribution network, relatively stable revenues and cash flows as a result of low sensitivity to business cycles, good profit margins, and the expected benefits of its recently-completed restructuring initiatives.

Following the refinancing, pro forma debt will total about $306 million, or 5.6 times adjusted EBIDTA for the 12 months ended March 31.

Moody's cuts Viasystems notes

Moody's Investors Service downgraded Viasystems Group, Inc.'s $500 million 9¾% senior subordinated notes due 2007 to Ca from Caa3 and confirmed its $148 million guaranteed senior secured term loan B due 2007, $289 million guaranteed senior secured Chips term loans due 2005 and $150 million guaranteed senior secured revolving credit facility due 2005 at B3. The outlook was revised to stable from negative.

Moody's said it cut Viasystems' notes because of heightened uncertainty over the principal amount recoverable on the securities, whether based on the implicit valuation of equity to be exchanged for the notes under a proposed recapitalization, or on some combination of equity and reduced note principal, as subject to negotiation; and the recognition that agreement on a debt restructuring plan that commands the tacit approval of Viasystems' bank lenders could be difficult to obtain.

The risk lies in Viasystems' ability to strengthen its balance sheet and improve upon its free cash flow coverage of fixed charges, made all the more urgent by the company's missed June 1 interest payment on the notes, Moody's said.

A successful resolution would be contingent upon the company, its pre-IPO shareholder, Hicks, Muse Tate & Furst, and an ad hoc committee of noteholders coming to agreement on a proportion of equity ownership that could be exchanged for the notes, and possibly identifying sources for additional equity investment in the company, Moody's said. Secondly, the resolution would have to engender support from the remaining stakeholders, including those noteholders who haven't participated in the discussions to date, preferring not to submit to trading restrictions on the notes, as well as the company's vendors and bank lenders.

The risk is mitigated, to some degree, by the bank lenders' continued support, as evidenced by unanimous consent to a third amendment to the bank credit facility under which the banks agreed to forbear from exercising various remedies after the company failed to comply with its senior debt leverage covenant, Moody's added.

S&P cuts ITC^DeltaCom notes

Standard & Poor's downgraded ITC DeltaCom, Inc.'s $200 million 11% senior notes due 2007 and $160 million 8.875% senior notes due 2008 to D from C and confirmed its subsidiary Interstate FiberNet Inc.'s $160 million revolving credit facility at C and changed the CreditWatch to positive from negative on the loan.

S&P said the action follows ITC^DeltaCom's Chapter 11 filing.

Interstate FiberNet is an operating subsidiary of ITC but is not part of the bankruptcy filing, S&P noted. The CreditWatch positive listing indicates that the rating could be raised subsequent to the completion of ITC's reorganization plan and review of its new business plan.

Moody's cuts FertiNitro to junk

Moody's Investors Service downgraded FertiNitro Finance Inc.'s $250 million senior secured bonds to Ba3 from Baa3 and kept them on review for possible further downgrade. FertiNitro Finance Inc. is a financing vehicle whose debt is guaranteed by Fertilizantes Nitrogenados de Venezuela, FertiNitro, CEC.

Moody's said the downgrade reflects significantly weakened cash flow caused by poor operating performance, product prices that are below original expectations and higher debt levels resulting from cost overruns in the construction of the project.

Based on current fertilizer pricing expectations, Moody's said it expects FertiNitro to show negative operating cash flow after debt service in 2002 even if operating at 100% of capacity for the remainder of the year.

If feedstock gas supplies continue to come under pressure from PDVSA Gas, which reduced gas supplies in the first half of 2002 due to OPEC adherence and PDVSA delivery problems, cash flow could be further diminished, Moody's added.

Moody's raises Cinemark outlook, rates bank debt B1

Moody's Investors Service assigned a B1 rating to Cinemark USA, Inc.'s proposed new $150 million senior secured term loan due 2008 and $100 million senior secured revolver due 2007, confirmed its existing $105 million 8.5% senior subordinated notes due 2008, $200 million 9.625% senior subordinated notes due 2008 and $75 million 9.625% senior subordinated notes due 2008 at Caa2 and raised the outlook to positive from stable.

Moody's said the positive outlook reflects its expectation that Cinemark will continue to experience improved operating performance and a more comfortable liquidity position, and further takes into account the anticipated improvement in relative balance sheet strength pro forma for the successful completion of the proposed equity offering.

Upward rating momentum can be expected if management is able to demonstrate its ability to execute in accordance with targeted operating projections over the balance of the year, and subsequently achieve further reductions in its debt burden, Moody's said.

While the strong box office results over the last two quarters have notably improved Cinemark's (and most movie theater companies', more broadly) credit profile, Moody's cautioned that the box office can quickly swing in the other direction, thereby effecting an even quicker erosion of cash flows.

Ratings reflect high financial leverage on a consolidated and lease-adjusted basis, structural overcapacity within the theatrical sector, concerns about possible resumption of consolidation and new build activities industry-wide as theater operators emerge from reorganization, maturity and slow attendance growth of the industry, intense competition, dependence on movie studio output, box office risk and seasonality of film product, Moody's said.

Supporting the ratings is the company's large size and modern theater base, advantage due to operations in smaller, less competitive suburban markets and expectations of cash flow growth and net free cash flow generation.

Fitch cuts Allegiance

Fitch Ratings downgraded Allegiance Telecom's 11¾% senior discount notes due 2008 and 12 7/8% senior notes due 2008 to CCC from B and its $500 million secured credit facilities to CCC from B+. The outlook was changed to negative from stable.

Fitch said Allegiance faces questions about its ability to meet its bank covenants in 2002.

The covenant requires $755 million in revenue for 2002, with quarterly requirements of $155 million, $180 million, $200 million and $220 million in 1Q'02, 2Q'02, 3Q'02 and 4Q'02, respectively, Fitch noted.

While revenue of $162 million in the first quarter of 2002 was above the covenant, Fitch said it had expected more.

Fitch added that it is concerned about the company's ability to continue to generate strong growth in its core business, and its ability to exceed the future revenue covenants by comfortable margins.

Importantly, Allegiance's recent purchase of WorldCom's customer premise equipment provisioning and maintenance businesses for $30 million is expected to add incremental revenue of $30 million each quarter, of which $15 million can be applied to the bank covenant, Fitch noted.

While this additional revenue should provide a cushion to Allegiance to remain in compliance with the covenant, Fitch said it is concerned that without this purchase in the coming quarters the company may have violated the covenants, as it is unclear to what extent the core business growth is slowing.

S&P puts Hollywood Casino's ratings on CreditWatch

Standard & Poor's placed Hollywood Casino Corp.'s $310 million 11.25% senior secured notes due 2007 and $50 million floating-rate senior secured notes due 2006 rated B on CreditWatch with developing implications. Furthermore, Hollywood Casino Shreveport's $150 million 13% contingent interest notes due 2006 and $39 million 13% senior secured notes due 2006 rated B- were put on CreditWatch with developing implications.

The action follows Hollywood's announcement it has been exploring strategic alternatives with its financial advisor, Goldman Sachs, to maximize shareholder value, S&P said. Over the past several months, the company has conducted an extensive sale process that has resulted in several indications of interest. Standard & Poor's will monitor the ongoing process and will evaluate the impact on credit quality upon the announcement of any such transaction.

Currently, the company has about $550 million in consolidated debt outstanding.

Fitch expects to cut Xerox senior unsecured, trust preferred

Fitch Ratings said Xerox Corp.'s announced restatement of its financial results for the 1997-2001 periods were within its expectations and already factored into the company's existing ratings.

Although over $6 billion of equipment revenue, on a cumulative basis will be restated during this period, the issue is strictly the timing of revenue recognition in this period, Fitch noted.

However Fitch said it expects to downgrade Xerox Corp. and its subsidiaries' BB senior unsecured and B+ convertible trust preferred ratings at least one notch to reflect the structural subordination due to the security granted under the company's new $4.2 billion amended and restated credit agreement.

Fitch expects to release a final action next week pending a detailed review of the company's 10K and 10Q statements.

Moody's cuts Encompass

Moody's Investors Service downgraded Encompass Services Corp. and removed it from watch list status. The outlook continues as negative. Ratings affected include Encompass' $130 million senior secured term loan A due 2006, $170 million senior secured term loan B due 2006 and $300 million senior secured revolving credit facility due 2005, all lowered to B2 from B1, its $335 million 10.5% senior subordinated notes due 2009, lowered to Caa2 from B3 and its $295 million accreted amount 7.25% mandatorily redeemable convertible preferred stock, lowered to Caa3 from Caa1.

Moody's said the downgrades and negative outlook reflect continuing strains on Encompass' profitability from the protracted slow down in non-residential construction.

Although a new amendment to the company's bank credit agreement provides covenant flexibility below the low end of the company's revised EBITDA guidance for 2002, Moody's said it is concerned that if Encompass' markets continue to erode, the company's prospective ability to comply with its covenants may yet come under pressure.

The company has again lowered its guidance for 2002 revenues, to a range of $3.4 to $3.6 billion, which Moody's said it below its previous expectations for its performance. Similarly, EBITDA guidance was reduced to a lower-than-expected range of $130 to $160 million.

S&P cuts Anvil preferreds to D

Standard & Poor's downgraded Anvil Holdings Inc.'s senior exchangeable preferred stock to D from CCC and confirmed Anvil Knitwear Inc.'s senior unsecured debt rating at B-. The outlook is stable.

The downgrade of the preferred stock follows the Board of Directors' decision not to declare or pay the quarterly cash dividend due on June 15, 2002, on the exchangeable preferred stock, S&P said. Prior to June 15, 2002, dividend payments were paid-in-kind.

Anvil's ratings reflect the company's highly leveraged financial profile, its participation in the highly competitive imprinted segment of the activewear market, its exposure to raw material price fluctuations, and customer concentration risk, S&P said. Somewhat offsetting these factors is the low fashion risk involved with the company's basic items, such as T-shirts, sweatshirts, and knit sport shirts as well as Anvil's niche product offerings.

Moody's cuts US Airways

Moody's Investors Service downgraded US Airways Group and its subsidiaries including lowering the senior implied rating to Caa2 from Caa1 and keeping it on review for possible downgrade. Various secured aircraft financings (ETC's and EETC's) were also lowered but are excluded from the ongoing review.

Moody's said the rating actions were prompted by the continued deterioration in the company's financial performance, its decision to defer select payments, principally for non-publicly traded aircraft loans and leases, as part of its restructuring efforts, the weakened market values for aircraft securing certain ETC's and EETC's, and the potential for the company to seek relief in Chapter 11 bankruptcy reorganization if it is unable to receive approval for a government guaranteed loan from the Air Transport

Stabilization Board (ATSB).

Although the company has stated that payment deferrals are an attempt to accelerate the process of obtaining concessions from creditors and not a symptom of cash flow difficulties, Moody's said it does indicate a lack of commitment to make timely and full payment on its obligations.

In addition, the action raises the potential for cross default claims as well as tightening of terms by trade creditors, either of which would add to the company's financial difficulties, Moody's said.

Moody's raises Jafra outlook

Moody's Investors Service raised its outlook on Jafra Cosmetics International SA de CV and Jafra

Cosmetics International, Inc. to positive from stable. Ratings affected include Jafra's $75 million 11.75% senior subordinated notes due 2008 at B3 and $65 million senior secured revolving credit facility due 2004 and $25 million senior secured term loan due 2004 at B1.

Moody's said it revised Jafra's outlook in response to the substantial and continued improvements in Jafra's operating results and credit statistics, as well as its use of free cash flow for debt reduction.

From fiscal year 2000 to 2001, EBITDA improved to $64 million from $53 million (EBITA to $60 million from $48 million), largely due to consultant increases and higher gross margins, with continued strength in Mexico and improved profitability in Mexico, US and Europe, Moody's said.

Similarly, Jafra's EBITDA interest coverage rose to 5.4x from 3.7x (EBITA coverage to 5.0x from 3.4x), Moody's noted.

Jafra continues to apply its excess cash to pay down debt. As such, total funded debt declined to $93 million from $109 million and debt-to-EBITDA declined to 1.5x from 2.1x (to 1.6x from 2.3x on an EBITA basis).

S&P cuts Net Servicos

Standard & Poor's downgraded Net Servicos de Comunicacao SA including lowering its $185 million 12.625% notes due 2004 to CCC+ from B+. The ratings remain on CreditWatch with negative implications.

S&P said the downgrade follows the company's announcement of an amendment to the capitalization protocol signed by shareholders.

The capitalization protocol attested the shareholders' commitment to capitalize Net in an amount equivalent to Brazilian Real 1 billion, but the amendment now conditions such commitment to a successful negotiation of an extension in the maturity of short-term third-party debt.

"This new funding was crucial to resolve part of the company's refinancing needs for 2002, and to sustain the rating at the B+ level. However, the announced amendment leaves room for shareholders to pull back on their earlier commitment, and brings significant uncertainties as to whether the capitalization will actually happen," stated Standard & Poor's credit analyst Milena Zaniboni.

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