Moody's downgrades Sierra Pacific, Nevada Power

Moody's Investors Service downgraded Sierra Pacific Resources senior unsecured ratings to B2 from Ba2 and its utilities, including Nevada Power Co.'s senior secured rating to Ba2 from Baa3 and commercial paper to Not Prime from Prime-3, and Sierra Pacific Power Co.'s senior secured rating to Ba2 from Baa3 and commercial paper to Not Prime from Prime-3. All ratings remain under review for possible further downgrade. A total of $3.9 billion of debt is affected.

Moody's said its downgrade reflects a myriad of factors since the "very harsh" decision in Nevada Power Company's deferred energy rate case, in which the Public Utility Commission of Nevada ruled on March 29 to disallow the recovery of approximately $438 million of the $922 million in deferred energy costs that had built up on Nevada Power's balance sheet during 2001. The Commission determined that the disallowed costs were not prudently incurred.

At the forefront of Sierra Pacific's challenges is a tight liquidity position, Moody's said.

Although the utility units' bank lines have been confirmed, they are now secured under the respective utility company general and refunding mortgage indentures, consistent with springing lien conditions in the related documents. The utility bank facilities, $200 million for Nevada Power and $150 million for Sierra Pacific Power, expire Nov. 28, 2002. However, the parent's $75 million credit line, which did not have any amounts outstanding, has been terminated.

Sierra Pacific is also taking other aggressive capital and operating and maintenance cost saving initiatives throughout the organization and has received cash from federal tax refund money.

"Notwithstanding these steps, the specter of demands for collateral from the utility company energy suppliers, which have been forestalled to date, looms on the horizon," Moody's said.

"In the event that ongoing efforts to assure suppliers that they will continue to be paid in a timely manner are not successful, the suppliers' willingness to forebear on requests for collateral might end. In this scenario, the utility companies would not be in a position to meet the significant collateral calls, and the suppliers would likely claim a default has occurred under the terms of the contracts."

S&P says AK Steel outlook revision on auto production

Standard & Poor's said it raised its outlook on AK Steel Holding Corp. to stable from negative - as reported Tuesday by Prospect News - in response to the expectation of increased auto production and pricing improvement in its spot cold-rolled product line following the implementation of restrictions on imports. S&P gives AK Steel a BB corporate credit rating.

The displacement of imports and increased auto demand should improve AK Steel's operating rates and financial performance from current weak levels, S&P said. In addition, financial measures should improve because AK Steel locked in low slab costs for 2002.

S&P noted AK Steel has only minimal exposure to commodity steel markets and sells the majority of its product line to automakers and appliance customers who demand high quality and specification for its product mix.

This focus on high quality, high margin steel, somewhat insulates AK from the threat of low cost minimills which have saturated the commodity steel spectrum and have trouble meeting the quality demanded by this customer base, the rating agency added.

S&P rates Corrections Corp.' loan B+, notes B-, still on positive watch

Standard & Poor's assigned a B+ rating to Corrections Corp. of America's new credit facility and a B- rating to its new $250 million senior notes due 2009. The ratings remain on CreditWatch with positive implications.

S&P said that once the current refinancing is completed it expects to raise the company's ratings by one notch.

The transaction will relieve the company of onerous near-term debt maturities, S&P said.

The rating agency added that the credit facilities derive strength from their secured position but S&P said it is not clear whether the distressed enterprise value would be sufficient to cover the entire loan balance when fully drawn under the agency's simulated default scenario.

The new senior unsecured notes are two notches below the expected corporate credit rating, reflecting their secondary position relative to the firm's relatively high level of secured bank debt, S&P added.

Moody's lowers Hudson Respiratory ratings

Moody's Investors Service downgraded Hudson Respiratory Care Inc. and gave the ratings a negative outlook. Lowered ratings include Hudson Respiratory's $100 million senior secured credit facilities, cut to Caa1 from B1, $115 million senior subordinated notes due 2008, cut to Ca from B3, senior implied rating, cut to Caa1 from B1, and senior unsecured issuer rating, cut to Caa2 from B2.

The downgrade is in response to the company's default under both its bank loan agreement and senior subordinated note indenture, Moody's said. The company failed to make an amortization payment to its banks on March 31, 2002 and was therefore blocked by its banks from making an interest payment on the notes on April 15.

"Moody's expects that an eventual restructuring of the company's capital structure will be needed as current operating results and cash flow may be inadequate to sufficiently cover the company's debt service," the rating agency said said. "The company currently is in negotiations with its financial stakeholders to determine the best long-term solution to its capital structure."

S&P downgrades Gateway

Standard & Poor's downgraded Gateway Inc. including cutting its $300 million revolving credit facility due 2004 to B+ from BB. The outlook is stable. Gateway has no debt outstanding.

S&P said it lowered Gateway because of extremely competitive industry conditions, a declining revenue base and the company's expectation that it will report pretax losses through 2002.

S&P noted Gateway has a good position in the U.S. consumer market but it has less geographic and product-line diversity than other major PC manufacturers.

S&P said the current rating is based on its expectation Gateway will restore operating profitability in fiscal 2003. The company also has cash balances of about $1 billion.

S&P puts HMV on positive watch

Standard & Poor's put HMV Group plc on CreditWatch with positive implications.

Ratings affected include HMV's £440 million senior bank facility rated B+ and its £211 million senior subordinated notes due 2008 at B-.

S&P takes Quezon Power off watch

Standard & Poor's removed Quezon Power (Philippines) Ltd. from CreditWatch with negative implications. The outlook is negative.

Ratings affected include Quezon Power's $215 million senior secured bonds due 2017 rated BB+.

S&P downgrades Farmland

Standard & Poor's downgraded Farmland Industries Inc. and put it on CreditWatch with developing implications. Ratings affected include Farmland's $100 million cumulative preferred shares series A, cut to CCC- from B-, and its $350 million revolving credit facility due 2007 and $150 million term loan due 2004, both cut to B from BB.

S&P said it cut Farmland because the company's disclosure that it doesn't expect to be in compliance with the financial covenant of its credit facility on May 31, 2002 could raise significant liquidity concerns.

The CreditWatch developing listing means the ratings could be raised, lowered or affirmed depending upon the outcome of Farmland's negotiations with lenders and S&P's expectations for future operating performance.

While S&P said it recognizes the recent improvement in business conditions, it added that it is concerned about the cooperative's ability to fund its working capital and debt service requirements over the intermediate term.

S&P puts Core-Mark on positive watch

Standard & Poor's put Core-Mark International Inc. on CreditWatch with positive implications.

Ratings affected include its $75 million 11.375% senior subordinated notes due 2003 rated B.

Moody's downgrades Hawk

Moody's Investors Service downgraded Hawk Corp. including cutting its $41 million of guaranteed senior secured bank credit facilities to B1 from Ba3 and $65 million 10.25% guaranteed senior unsecured notes due 2003 to B2 from Ba3. The outlook remains negative.

Moody's said the downgrade and negative outlook reflect Hawk's sharply deteriorated debt protection measures during 2001, attributable to a combination of the weak overall economy; the immediate and prolonged shock to Hawk's aerospace friction business generated by the Sept. 11 terrorist attacks, substantial out-of-pocket costs incurred in connection with several start-up operations including new plants in China and Mexico and Hawk's inability to completely absorb its fixed costs in the face of materially lower volumes, thereby causing 2001 margins to decline at a faster pace than revenues.

Hawk's management has furthermore indicated that while airline traffic during 2002 is expected to show steady improvement throughout the year, aerospace-related revenues will in any event remain at least 10% below 2001 levels, Moody's said.

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