S&P cuts Corus to junk

Standard & Poor's downgraded Corus Group plc to junk. Ratings lowered include Corus' €2.4 billion bank loan and €307 million 3% notes due 2007, cut to BB from BBB-, and Corus Finance plc's €400 million 5.375% bonds due 2006 and £200 million 6.75% bonds due 2008, cut to BB from BBB-. The ratings were removed from CreditWatch with negative implications. The outlook is stable.

S&P said the downgrade reflects Corus' continuing poor operating profits despite a better pricing environment and improving exchange rates of the pound against the euro.

The company's business position remains weak despite its continuous efforts and progress in the restructuring of its U.K. and European operations, S&P said.

Operating margins and cash flow generation in 2003 are, however, expected to continue improving as the company gradually shows the benefit of these efforts, the rating agency added.

S&P said it expects Corus will continue to lag behind its main European competitors in terms of margins and return on capital.

Helping the ratings is a reduction in debt levels arising from the £456 million ($724 million) proceeds the company has already received from the disposals of its stakes in AvestaPolarit Oy and the Alouette smelter, and expected future disposal proceeds from, for example, Pechiney SA for the main part of Corus' aluminum assets in Europe, S&P said.

Moody's cuts Corus to junk

Moody's Investors Service downgraded Corus Group plc to junk including cutting its €400 million notes due 2006 and £200 million notes due 2008 to Ba2 from Baa3. The outlook is negative.

The action concludes a review begun on July 17.

Moody's said that although the CSN acquisition, which originally triggered the review, was terminated, the slower than anticipated performance improvement and return to operating profitability as well as Moody's expectation of a more prolonged market weakness prompted the downgrade.

Although Moody's said it recognizes the progress achieved in reducing costs as well as debt levels through asset disposals, the further prolongation of the operating loss situation and Corus' weak financial earnings profile, which continue to position the company outside its rating category, have resulted in the downgrade.

Moody's said it does not believe that one-time cash flow effects, including working capital measures as well as asset disposals, can be relied on to offset weak operating performance.

Therefore the rating agency believes a near-term return to profitability is critical to avoid an increase in debt levels and an erosion of the balance sheet after the completion of the disposal program.

S&P rates DigitalNet's loan B+

Standard & Poor's rated DigitalNet Inc.'s $125 million senior secured credit facility at B+. The outlook is positive.

"The ratings reflect moderate but predictable earnings and cash flow. Credit quality is constrained by the company's niche focus, aggressive debt leverage, and limited financial flexibility," S&P said.

"Long-term prospects are good, because of a high recurring revenue base and increasing levels of government expenditures as a result of the ongoing upgrading of federal IT systems. More than 20 of the company's top 30 contracts have remaining contract periods of three years or longer," S&P added. Furthermore, integration risks associated with the acquisition of Getronics Government Solutions LLC for $224 million are minimal.

The acquisition will be financed by a $100 million term loan, a $34 million bridge loan and equity investments.

The loan is secured by basically all assets. Based on the rating agency's default scenario, it is not clear whether collateral is sufficient to cover the entire loan in a distressed scenario.

Moody's rates DigitalNet's loan B1

Moody's Investors Service rated DigitalNet Inc.'s $25 million senior secured revolver due 2006 and $100 million senior secured term loan due 2007 at B1. The outlook is stable.

The bank debt, combined with $34 million of unrated six-year senior subordinated debt and PIK preferred, will be used to help fund the acquisition of Getronics Government Solutions.

Ratings reflect the company's high leverage, minimal common equity, modest revenue base, substantial level of intangibles, and the competitive nature of the government services industries, Moody's said. Furthermore, while the government may accelerate its computer upgrades as part of its homeland defense initiative, which may stimulate demand for DigitalNet services, this may also attract other companies into the market.

Ratings also reflect the company's "significant backlog based mainly on long term contracts, large diversity of customers and projects, long established customer relationships, high margins, and favorable industry outlook," Moody's said.

The company's 2002 EBITDA margins are expected to be in excess of 10% and leverage at closing is expected around 3.7 times with EBITDA coverage of interest around 3.1 times on a pro forma basis for 2002.

S&P cuts American Commercial Lines, on watch

Standard & Poor's downgraded American Commercial Lines LLC and put it on CreditWatch with negative implications. Ratings affected include American Commercial's $535 million credit facility, cut to B- from B, and $140 million 11.25% senior notes due 2008 and $116.507 million 12% pay-in-kind senior subordinated notes due 2008, cut to CCC- from CCC.

S&P said the action follows American Commercial's announcement that it is formulating a restructuring plan to resolve liquidity and covenant compliance issues and that it will likely default under its senior credit facilities and receivables facility if lenders do not accept a restructuring plan and reset covenants or waive compliance by the end of the first quarter of 2003.

American Commercial suffers from severely constrained liquidity position and an identifiable risk of default over the near term, S&P said.

Poor weather conditions and the economic downturn have negatively affected American Commercial's earnings over the past few years, S&P said.

American Commercial was recapitalized in 1998, leaving it with an onerous debt burden. Although American Commercial was recently acquired by Danielson Holding Corp. and recapitalized again in conjunction with the acquisition, it is still highly levered, S&P noted. Debt/EBITDA is currently estimated to be over 8 times. The company's heavy debt burden is making it especially vulnerable to current industry pressures.

American Commercial recently reported that its EBITDA for the first nine months of 2002 was $39.5 million, a decline of $38.8 million from the comparable period of 2001. (The $78.3 million in reported EBITDA for the first nine months of 2001 included $18.8 million of gains on property dispositions.)

S&P keeps Fleming on watch

Standard & Poor's said it is keeping Fleming Cos. Inc. ratings on negative watch, including the senior unsecured debt at B+, subordinated debt at B and senior secured bank loan at BB. reflecting uncertainties related to the divestiture of its retail division.

A new concern is Fleming's announcement on Wednesday that it is the subject of an informal inquiry by the SEC into vendor trade practices, second quarter 2001 adjusted EPS data, accounting for sales in discontinued retail operations and comparable-store sales in discontinued retail operations, S&P said.

Liquidity remains adequate with sufficient room under its $550 million revolving credit facility for further borrowings if needed. Fleming has no debt maturities until 2007.

S&P puts MedPointe on watch

Standard & Poor's put MedPointe Healthcare Inc. on CreditWatch with negative implications. Ratings affected include MedPointe's $35 million senior secured revolving credit facility due 2007, $40 million senior secured term A loan due 2007 and $150 million senior secured term B loan due 2008, all at B+.

S&P said the actions are in response to the continued underperformance of the MedPointe's main product, the nasal antihistamine Astelin, as well as the lowered sales expectations of the company's prescription cough and cold franchise for the second half of its current fiscal year (ending March 31, 2003).

Astelin's sales growth has been hindered by a reorganization and expansion of MedPointe's sales force, S&P said. Meanwhile, more aggressive than expected generic competition and the delay of the launch of two new formulations have resulted in a dramatically lowered sales estimate for the company's prescription cough and cold products.

MedPointe has completed the reorganization and expansion of its sales force. Also, a co-promotion agreement entered into with Sepracor for Astelin may help improve sales.

However, the company faces tightening bank covenants in near-term future quarters, S&P said.

S&P cuts Key3Media, on watch

Standard & Poor's downgraded Key3Media Group Inc. and put it on CreditWatch with negative implications. Ratings affected include Key3Media's $150 million revolving credit facility due 2004, cut to CCC from CCC+, and $300 million 11.25% notes due 2011, cut to C from CC.

S&P said the action follows Key3Media's announcement that it is exploring various strategic alternatives to alleviate the burden of its current capital structure, including a possible debt restructuring or sale of the company. Key3Media also said that these steps could be accompanied by a Chapter 11 filing.

These developments highlight the severity of the challenges facing Key3Media due to the considerable problems being experienced in its technology end markets and the decline in business travel and trade show participation after the Sept. 11 terrorist attacks, S&P said.

S&P said it is concerned that these actions may be detrimental to bondholders, and would consider any debt restructuring or exchange at less than par value as tantamount to a default.

S&P cuts PG&E National Energy

Standard & Poor's downgraded PG&E National Energy Group. Ratings lowered include PG&E National Energy's $1 billion 10.375% senior unsecured notes due 2011 and $625 million revolving credit facility tranche A due 2003, cut to D from B-, PG&E Gas Transmission-Northwest's $150 million 7.8% senior debentures due 2025 and $250 million 7.1% senior notes due 2005, cut to CCC from BB-, USGen New England, Inc.'s $100 million unsecured credit facility due 2003 and $413.643 million passthrough certificates series 1998, cut to C from B-, and Attala Generating Co. Inc.'s $258 million passthrough certificates due 2023, cut to C from B-.

S&P said the follow the PG&E National Energy's announcement that it would allow defaults to occur on obligations as they come due over the next several months.

Fitch raises Nextel outlook

Fitch Ratings raised its outlook on Nextel Communications Inc. to stable from negative including its senior unsecured notes at B+, senior secured bank facility at BB and preferred stock at B-.

Fitch said the revision reflects Fitch's view that favorable financial trends will continue over Nextel's current rating horizon based on the positive momentum created from the accelerated improvement in operating performance, significant reduction in debt and associated obligations and strong cost containment despite a somewhat unfavorable climate within the wireless industry and weak economic environment.

Fitch added that it believes Nextel's operating performance, improvement to its capital structure and remaining liquidity offsets existing credit risk leaving a margin of safety consistent with a stable B+ rated credit.

Expectations are for Nextel to further strengthen credit protection measures in 2003 to 4.0 times debt-to-last 12 months EBITDA or less. The improving cash flows should lead to at least a free cash flow neutral position for 2003, Fitch said.

Nextel's strong cost controls, stable ARPU and solid net additions over the last three quarters have increased margins to 39% compared to 29% during the third quarter of 2001 driving expected operating cash flow to at least $3.1 billion for 2002, an increase of $1.2 billion from 2001, Fitch said. CCPU costs are down approximately 13% year-over-year due to the outsourcing of customer care and back office support costs along with cost improvements associated with the new billing platform. Additional improvement in costs of equipment sales with lower priced handsets have contributed to stronger cash flows.

These cost enhancements and further scaling of operations can be seen through the amount of revenue growth falling to EBITDA, which has averaged 75% over the last two quarters, Fitch said. The strength in ARPU is attributable to Nextel's differentiated push-to-talk feature and high value business customers, which depend on Nextel's ability to provide lifeline type services for their operations.

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