Moody's rates Xerox notes B1

Moody's Investors Service assigned a B1 rating to Xerox Corp.'s proposed $1 billion senior unsecured notes and a Caa1 to its planned $650 million mandatorily convertible preferred stock, confirmed the existing ratings including the senior unsecured debt of Xerox, Xerox Credit Corp., Xerox Overseas Holdings Ltd. and Xerox Capital (Europe) plc at B1 and Xerox's subordinated debt at B3 and preferred stock at Caa1. The outlook is negative.

Moody's said it is continuing the negative outlook despite the positive aspects of the planned financing because of continued, although moderating, pressure on equipment revenues.

Moody's said it believes Xerox's revenues remain under pressure and, until reversed, may limit its ability to expand profitability and operating cash flows.

Growing equipment installations is critical to returning to overall revenue growth as this along with customer usage drive profitable post sale revenue, albeit on a lag basis from the installation of a machine, Moody's said. Equipment revenues have declined for nine quarters in a row, although the pace of year over year declines has moderated steadily over the last five quarters, with a 3% decline in the March 2003 quarter after excluding the beneficial impact of foreign exchanges rates.

An important element to a potential ratings outlook change will be the demonstration of profitable equipment installation and revenue growth, which would set the stage for higher margin post sale revenues and, subject to continued improvement in working capital management, improved operating cash flows.

Gross margins have been steady at slightly above 42% over the last year in spite of ongoing weak market demand and continued pricing pressure, reflecting good success at reducing manufacturing costs, which includes the outsourcing of office products manufacturing to Flextronics, Moody's said. Additionally, bad debt expense has benefited under a joint venture between Xerox and General Electric Capital Corp. that manages billing, collections and finance receivables underwriting in the U.S. Also, SG&A cost reductions, excluding bad debt expense, have shown steady improvement, with a $102 million year over year decline as of March 2003, even with additional pension expense being recognized in 2003.

While restructuring efforts have been successful at reducing the company's overall cost base, effecting these actions continues to consume cash, Moody's said. Xerox has expended about $450 million in the last 12 months, including $180 million in the March 2003 quarter, to reduce headcount and other operational costs.

Moody's believes that further reductions are necessary and could entail additional restructuring activity in the future, although likely less dramatic than the restructurings of the past few years.

Cash flow leverage for the non-finance operations has improved on an EBITDA basis, from an estimated 4.4 times at June 2002 to 3.8 times at March 2003, reflecting in part the progress in cost reduction efforts, Moody's said. Pro forma debt to EBITDA would improve to 3.1 times.

The successful execution of the proposed financing plan is positive in that it improves equity capitalization, terms out the existing $3.1 billion bank facility amortization and final maturity from 2005 to 2008, and reduces overall interest expense, Moody's added.

Moody's cuts Arch Coal, rates notes Ba2

Moody's Investors Service downgraded Arch Coal, Inc. and Arch Western Resources, LLC including cutting Arch Coal's $350 million senior secured revolving credit facility maturing in 2007 to Ba2 from Ba1 and $144 million perpetual cumulative convertible preferred stock to B2 from B1 and Arch Western Resources' $150 million senior secured term loan A due 2007 and $525 million senior secured term loan B due 2008 to Ba2 from Ba1 and assigned a Ba2 rating to Arch Western Resources' planned $700 million of guaranteed senior notes due 2013. The action completes a review begun on May 28. The outlook is stable.

Moody's said the downgrade of Arch Coal was prompted by factors that have increased the risk and volatility of its cash flow and by rising costs, especially at its eastern operations.

The strong ties between Arch Western Resources and the parent company dictate that Arch Western Resources' rating be equivalent to Arch Coal's, so it was similarly downgraded. However, Arch Western Resources' Ba2 rating appropriately reflects its high-quality mines and coal reserves, strong market position and strong cash flow, offset by its significant dependence on one mine, high leverage, and dependence on Arch Coal for certain coal leases and administrative services, as well as the promissory notes issued by Arch Coal to Arch Western Resources.

Arch Coal was lowered because of the company's increased risk and cash flow volatility due to increased exposure to spot coal prices, increased operating costs, forecasted depletion of several of its larger eastern U.S. mines over the next several years, the risks associated with developing replacement reserves and heightened regulatory risk and permitting uncertainties in the eastern U.S. In short, the profitability and scope of Arch Coal's eastern operations may decline unless coal prices increase sufficiently to offset recent negative trends in costs, reserve degradation and mine development costs, Moody's said.

While several factors are currently supportive of higher coal prices, prices are already relatively high compared to long-term averages so the durability of near-term price increases, should they occur, is uncertain. Furthermore, many electric utility companies are struggling to strengthen their financial performance and balance sheets, so obtaining steam coal price increases in this environment may be difficult.

Moody's puts NBTY on review

Moody's Investors Service put NBTY, Inc. on review for downgrade including its $150 million senior subordinated notes due 2007 at B1 and $50 million guaranteed senior secured credit facility due 2003 at Ba1.

Moody's said the review follows the company's announcement of its planned acquisition of Rexall Sundown, Inc. from Royal Numico, NV for $250 million (estimated 6 times EBITDA multiple).

The review was also prompted by Moody's concerns over integration risks as the Rexall business encompasses multiple products and several manufacturing facilities. Moreover, Rexall is a large business with 2002 revenues of $455 million, representing almost half of NBTY's last 12 months revenues.

The review was also prompted by Moody's concerns over margin compression since Rexall's wholesale products have margins that are lower than NBTY's products.

NBTY has indicated that it would fund the acquisition through a new credit facility, which would include a new term loan and revolver. The prospective financing would more than double the company's current debt load of $175 million.

Moody's rates Graphic Packaging notes B2, B3, loan B1

Moody's Investors Service assigned prospective ratings to Graphic Packaging International, Inc.'s planned new debt including a B1 to its proposed $850 million term loan B due 2010, $350 million term loan A due 2009 and $400 million revolving credit facility due 2009, B2 to its proposed $425 million senior unsecured notes due 2011 and B3 to its proposed $425 million senior subordinated notes due 2013. The outlook is stable. Until the merger is completed, Moody's said Graphic Packaging Corp.'s ratings including its senior implied at Ba3 remains on review for downgrade and Riverwood International Inc. including its senior implied at B2 on review for upgrade.

Moody's said the proposed ratings reflect the combined company's relatively high leverage, on a pro forma basis, the uncertainty regarding any meaningful near term improvement in the difficult environment in which both companies currently operate, as well as the challenges that management will likely face with the integration of the two operations over the near term.

At the close of the merger, which is estimated to be in the third quarter of 2003, the combined company, on a pro forma basis, is expected to have leverage on a debt to EBITDA basis of about 5.0x and coverage on an EBITDA to gross interest basis of about 2.8x and EBIT to gross interest coverage of about 1.5x, Moody's said.

In part, the combined credit statistics reflect the difficult operating environment that both companies have experienced over the past several quarters as a result of weak demand, increased pricing pressures and greater competition. Moody's expects that the difficult operating environment will persist over the near term.

The ratings are supported by Graphic Packaging's sizable market position and strong operating margins in various product segments as well as increased selling opportunities with regards to long standing customer relationships and geographic extension of existing products, Moody's expectation that there will be a continued focus on cost containment over and above anticipated cost synergies and that the company will maintain a reasonable liquidity position.

S&P rates Mobile Mini notes BB-

Standard & Poor's assigned a BB- rating to Mobile Mini Inc.'s proposed $150 million senior notes due 2013. The outlook is stable.

S&P said Mobile Mini's ratings reflect its leading market position as a lessor of portable storage units and its respectable credit profile. However, this is offset by the company's small revenue base and the relatively small size of the mobile storage leasing sector in which Mobile Mini operates. The rating on the senior notes is one notch lower than the corporate credit rating based on a considerable amount (approximately 25%) of secured debt in the company's capital structure.

Most of Mobile Mini's credit ratios are comparable to those of similarly rated transportation equipment lessors, S&P said. Pro forma for the company's proposed financings, which will increase interest expense, pretax interest coverage is expected to average in the mid-2x area, EBITDA interest coverage in the mid-3x area, and funds flow to debt around 20%. The company's debt to capital is relatively strong - in the mid-50% area - well below that of the typical 70%-80% range of other transportation equipment lessors.

The company's financial flexibility is also relatively strong for a company of its size, with access to the public debt and equity markets, as well as its credit facilities, S&P said. The company has no debt maturities until 2008, and capital spending is almost all discretionary.

Moody's upgrades Scotts

Moody's Investors Service upgraded The Scotts Co. including raising its $575 million senior secured revolving credit facility due 2005, $107 million senior secured term loan A due 2005 and $241 million senior secured term loan B due 2006 to Ba1 from Ba3 and $323 million 8.625% senior subordinated notes due 2009 to Ba3 from B2. Moody's also assigned an SGL-3 speculative-grade liquidity rating. The outlook is stable.

Moody's said the upgrade is based on a sustainable improvement in Scotts' financial position since the start of fiscal 2002, as supported by its supply chain investments and its leading market position in attractive product categories.

The upgrade reflects the successful implementation of Scotts' North American restructuring program, which has resulted in improved free cash flow generation and credit measures due to profitability gains, working capital discipline (in turn, lower debt levels), and reduced interest burden. The realignment of its sales force and initiatives to maximize the efficiency of its supply chain have strengthened Scotts' relationships with retail partners and allowed the company to meet demands for improved service levels and just-in-time inventory requirements. Savings from headcount reduction and facility rationalization programs have been partially reinvested in brand support, product development and consumer education campaigns, which support Scotts' market leadership in its key product categories (market shares ranging from 40% to 60%).

Further benefiting the ratings is the favorable sales environment for lawn and garden products, which is led by retail store growth, leisure trends of an aging population and a strong home sales market, Moody's said.

The ratings also consider Scotts' high lease-adjusted leverage and moderate coverage of fixed charges (interest, rent and minimum fees under Roundup agreement), which somewhat limit the company's financial flexibility, Moody's said. These rating constraints are exacerbated by the working capital needs associated with Scotts' high seasonality, which are in turn impacted by unpredictable weather conditions and retailers' desire to carry lower average inventory levels.

The SGL-3 liquidity rating incorporates the expectation that Scotts' $575 million revolving credit facility provides sufficient capacity to meet the seasonal working capital needs of its business. Nonetheless, the liquidity rating is materially constrained by a significant financial covenant step-up in the credit agreement at the end of December 2003, which could restrict Scotts' borrowing access if not addressed prior to this period.

S&P cuts Great Lakes Dredge loan

Standard & Poor's downgraded Great Lakes Dredge & Dock Corp.'s $40 million term loan due 2005 and $80 million revolving credit facility due 2005 to B+ from BB- and confirmed its corporate credit at B+ and subordinated notes at B-. The outlook remains stable.

The rating downgrade reflects the likely shift in the firm's capital structure to one that is more senior debt-intensive, including meaningful secured debt-like obligations structured as operating leases, S&P said. When executed, this shift will reduce recovery prospects for the senior lenders in the event of a default or bankruptcy.

Recently, Great Lakes was able to obtain an amendment that enables it to repurchase up to $58 million of its $155 million subordinated notes by using up to $40 million of the revolving credit facility, S&P noted.

Despite the increased use of secured debt, senior secured bank lenders are expected to realize a meaningful recovery of principal in the event of a default or bankruptcy scenario, despite potentially significant loss exposure.

Great Lakes Dredge's ratings reflect its leading positions in moderate-size markets, offset by a very aggressive financial profile and modest liquidity, S&P said.

The financial risk assessment reflects the company's very aggressive financial profile and thin cash flow protection measures, S&P said. Total debt, adjusted for operating leases, to EBITDA was approximately 4.1x, and EBITDA to interest coverage was 2.2x at March 31, 2003. Modest operating cash flow generation will primarily be used for capital expenditure needs. In the intermediate term, total debt to EBITDA in the 4x-5x range, and EBITDA to interest coverage in the 2x-3x range, are expected, consistent with current credit quality.

S&P raises Juno Lighting outlook, loan

Standard & Poor's upgraded Juno Lighting Inc.'s bank debt including raising its $35 million senior secured revolving facility due 2005, $40 million term A loan due 2005 and $50 million term B loan due 2006 to BB- from B+, confirmed its other ratings including its subordinated debt at B- and raised the outlook to positive from stable.

S&P said the outlook revision reflects Juno's improving financial profile.

Good profitability and limited fixed capital investments requirements have enabled the firm to consistently generate free cash flow, which has largely been used to reduce debt balances, S&P noted. Juno has reduced total debt by approximately 20% since its leveraged recapitalization in 1999, while increasing operating income by 22%. As a result, total debt to EBITDA has improved to 3.6x from 5.1x over that time frame.

The upgrade of the senior secured bank loan reflects Juno's continuing pay-down of its $90 million term loans (total outstanding was $34 million at Feb. 28, 2003), which has improved the senior lender's position, S&P said. Based on S&P's enterprise value analysis, senior lenders now can expect a strong likelihood of full recovery of principal in the event of a default or bankruptcy.

Moody's rates new Lamar convertible B2

Moody's Investors Service assigned a B2 rating to the $250 million of senior convertible notes issued by Lamar Advertising Co., parent of Lamar Media, and confirmed the existing ratings. The outlook is stable.

Ratings continue to reflect relatively modest business risk associated with operating a large portfolio of outdoor advertising assets in small to medium-sized markets, counterbalanced by the high financial risks associated with the debt capitalization and significant operating leases, Moody's said.

The rating on the convertible reflects meaningful subordination, structural and contractual, to the balance of Lamar's debt.

S&P rates new Lamar convertible B

Standard & Poor's assigned a B senior unsecured debt rating to Lamar Advertising Co.'s $250 million 2.875% convertible notes due 2010. The outlook is stable.

Ratings reflect significant debt levels, attributable to growth through acquisition over the years, S&P said. Adjusted for operating leases, debt to EBITDA is in the high-5x area.

This is tempered by strong and geographically diverse market positions and an emphasis on the better-margin and more stable local advertising revenues.

Also, with very strong operating cash flow margins, manageable capital expenditures and minimal cash taxes, Lamar generates healthy levels of free operating cash flow, S&P said.

In March, Lamar replaced its bank credit facility with a new $225 million revolving credit facility, $300 million term loan A and $675 million term loan B. As of early May, about $180 million was available under the revolver. As a result of the new credit facility, debt maturities are minimal over the next two years.

The outlook reflects the expectation that, given Lamar's acquisition growth strategy, the overall financial profile will not change meaningfully in the intermediate term.

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