Fitch cuts CMS

Fitch Ratings downgraded CMS Energy and its subsidiaries, Consumers Energy Co. and CMS Panhandle Eastern Pipe Line Co. All the ratings were kept on Ratings Watch Negative except Panhandle Eastern which is on Rating Watch Evolving. Ratings lowered include CMS Energy's senior unsecured debt, cut to B+ from BB- and preferred stock and trust preferred securities to CCC+ from B-, Consumers Energy's senior secured debt to BB+ from BBB, senior unsecured debt to BB from BB+ and preferred stock and trust preferred securities to B from BB, Consumers Power Financing Trust I trust preferred securities to B from BB- and Panhandle Eastern senior unsecured debt to BB from BB+.

Fitch said the watch on CMS and Consumers is due to continuing concerns about CMS' weak liquidity position, high parent debt levels and limited financial flexibility. They will remain on watch pending a meeting with CMS management within the next several weeks to review the company's updated business plan.

The evolving watch on Panhandle Eastern reflects CMS' announcement that it is exploring the sale of the unit and related assets, including CMS Field Services, Trunkline Pipeline and the LNG facility.

Fitch said it downgraded CMS and Consumers because of concerns about projected cash constraints at each of the companies for the remainder of the year.

Consumers' operating cash flow is forecasted to be negatively impacted over the next several months due to high capital expenditure requirements for environmental compliance, gas purchases made during the summer months and a $103 million dividend to CMS in October, Fitch said. Consumers is expected to spend between $230-270 million between 2002 and 2004 on environmental compliance costs, and the utility is currently unable to recover these costs through rates due to the rate freeze in place through Dec. 31, 2003.

Consumers and CMS continue to be constrained by the inability to access the capital markets due to CMS' need to restate its 2000 and 2001 financial statements to eliminate the effects of 'wash trades' with other energy companies, Fitch continued.

Consumers will need to access the capital markets in order to meet its dividend payment to CMS, as well as a $128 million of debt payments in November, Fitch said. CMS relies on cash distributions from the utility to service its debt. Alternative financing plans, including a bridge loan or accessing the bank syndication markets, are currently being reviewed should Consumers be unable to tap into the public debt markets.

S&P lowers MSX outlook

Standard & Poor's lowered its outlook on MSX International Inc. to negative from stable and confirmed its ratings including its senior secured bank loan at BB- and subordinated debt at B.

S&P said the outlook change to MSX is in response to continuing weak credit protection ratios and the lack of visibility for intermediate-term improvement.

MSX has experienced a significant deterioration in profitability in recent quarters, due to reduced volumes (primarily in the engineering segment), unfavorable sales mix (primarily in the information technology staffing segment), and increased spending in sales, marketing, and product development, S&P noted.

Revenues for 2001 declined 10% from 2000 levels and net income was down dramatically to $0.5 million compared with $14.9 million in 2000. Demand weakness has continued into 2002, with sales down 16% for the first half of the year compared with the first half of 2001, due to lower demand and selected price reductions, S&P said. MSX reported a net loss of $2.6 million for the first half of 2002, excluding the cumulative effect of the accounting change for goodwill impairment.

MSX's credit ratios are weak for the rating, given the company's inadequate operating performance in the past year, S&P said, adding that it does not see favorable prospects for improved credit measures over the near term, given the continuing weak economy and the likelihood that MSX will make no material debt pay down during 2003.

Debt to EBITDA for the 12 months ended June 2002 is more than 4.5 times and funds from operations to debt is near 10%, S&P said.

S&P rates GenCorp's loan BB+

Standard & Poor's rated GenCorp Inc.'s $338 million secured credit facility at BB+. The loan consists of an existing $137 million revolver due 2005, an existing $76 million term loan A due 2005 and a new $125 million term loan B, which will be used to fund the purchase of General Dynamics' space propulsion business and to pay down revolver borrowings.

Security for the loan is substantially all the assets of GenCorp and all of the assets and stock of its material domestic subsidiaries, as well as 67% of the stock of material foreign subsidiaries.

Furthermore, S&P confirmed the company's BB corporate credit rating, reflecting improvements in business position due to the acquisition and increased debt.

The rating outlook is stable since, "management, although acquisitive, is expected to preserve GenCorp's financial flexibility and a financial risk profile consistent with current ratings," S&P said.

Fitch confirms GenCorp, rates new loan BB

Fitch Ratings confirmed GenCorp's existing ratings including its bank facilities at BB and subordinated convertible notes at B+ and assigned a BB rating to its proposed $125 million term loan B. The outlook is positive.

Fitch said the ratings and outlook reflect GenCorp's improved financial performance in 2002 resulting from restructuring initiatives; the favorable military spending environment; a fully funded pension plan; and the potential cash flow to be realized from the monetization of GenCorp's real estate holdings.

Concerns include GenCorp's intention to grow through acquisitions, potential integration issues, and environmental liabilities, Fitch added.

The ratings and outlook also consider the benefits to be derived from its acquisition of General Dynamics space propulsion business and the impact to credit protection measures from the increased level of debt related to the acquisition, Fitch said.

The acquisition will position GenCorp as a significant player in all three space propulsion markets (solids, liquids, and spacecraft), Fitch said. The acquisition provides GenCorp with complimentary businesses and little program overlap, mitigating some of Fitch's integration concerns.

The addition also diversifies GenCorp's revenue base, reducing the company's reliance on the automotive sector, which currently represents 72% of revenues.

Moody's rates Gray notes B3, loan Ba3

Moody's Investors Service assigned a B3 rating to Gray Communications Systems, Inc.'s new $100 million guaranteed senior subordinated notes due 2011 and a Ba3 rating to its proposed $75 million senior secured revolving credit due 2009 and proposed $375 million senior secured term loan due 2010 and confirmed its existing $180 million senior subordinated notes due 2011 at B3 and $250 million of senior secured bank facilities at Ba3. The outlook is stable.

The bank rating assignments assume the closing of Gray's acquisition of Stations Holding Co. which is comprised of 15 of Benedek Broadcasting's stations. Following the acquisition, Gray's existing bank ratings will be withdrawn as will all of Benedek's debt ratings.

However, because Gray's new bank agreement is contingent upon the contribution of at least $225 million of capital, the company would not be able to finance the acquisition of Stations Holding without a successful equity offering.

Therefore, if the transaction does not close, Gray's new bank agreement would no longer be necessary.

Following the acquisition, Gray's ratings will continue to be constrained by the company's high leverage and thin cash flow coverage of interest and capital expenditures, the likelihood that the company will continue to acquire opportunistically, and the challenges associated with the integration of 16 new television stations (including the most recently announced KOLO-TV acquisition) which double the company's revenue base, Moody's said.

Additionally, over the next few years, Gray's capital expenditures will be unusually high as the company is obliged to upgrade its facilities for digital television ($30 million+ over the next 3 years), Moody's said.

The ratings also reflect a lack of diversity in the company's television portfolio which, even when including the Benedek stations, is still dominated by CBS (15 of 29 stations, about 55% of broadcast cash flow).

Leverage by year end is expected to be lower than 2001 by approximately one turn - to about 6 times, Moody's said. Leverage for the combined company is expected to be below 6 times. Interest coverage after capital expenditures is likely to be thin given the larger digital expenditures the company needs to make over the next three years. Pro forma for the combined company and as of June 30, 2002, leverage as measured by total Debt/EBITDA is high at 6.6 times (7.1 times including preferred stock) and is expected to decrease by year-end. (EBITDA-CapEx, including digital)/Interest is thin at 1.8 times.

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