S&P puts Hughes, PanAmSat on positive watch

Standard & Poor's put Hughes Electronics Corp. and PanAmSat Corp. on CreditWatch with positive implications including Hughes' $1.934 billion revolver due 2003 at BB- and PanAmSat's $125 million 6.875% debentures due 2028, $150 million 6.375% notes due 2008, $250 million 7-year revolver, $275 million 6.125% notes due 2005, $400 million term A loan due 2008 and $600 million term B loan due 2008 at BB- and $800 million 8.5% notes due 2012 at B-. The companies were previously on CreditWatch with developing implications.

S&P said the action follows Hughes' announcement that News Corp. Ltd. (BBB-/Stable) will acquire 34% of the company.

The previous developing watch had been to reflect uncertainty regarding Hughes' future ownership.

S&P said it views Hughes' DirecTV unit as a strategic element of News Corp.'s global satellite direct-to-home platform and believes that News Corp. will provide Hughes with operating and financial support, based on its track record with its other international direct-to-home investments, including British Sky Broadcasting Group plc.

Subscribers, revenue, and EBITDA at the U.S. DirecTV business continue to grow at double-digit percentage rates. The unit is also close to producing positive free cash flow as it focuses on acquiring more profitable customers with higher credit quality, S&P noted.

However, rival operator EchoStar Communications Corp. is following a similar plan, while also competing on price.

Despite the positive operating momentum at DirecTV, Hughes has been facing challenges and ongoing external cash needs at the corporate level, at the DirecTV Latin America unit, and at Hughes Network Systems. The new senior secured credit facility and senior unsecured notes at DirecTV Holdings LLC address these needs.

Following a review of Hughes' operating and financial prospects under its new ownership structure, a ratings upgrade could occur once the deal is completed, S&P said. However, the magnitude of a potential upgrade may be constrained in light of News Corp.'s minority stake.

S&P rates Fresenius notes BB+

Standard & Poor's assigned a BB+ rating to Fresenius AG's planned €300 million notes due 2009. The outlook is stable.

Fresenius is issuing the senior notes to refinance a portion of its existing debt. Although the company is a holding company that manages three divisions, the rating on the proposed issue is supported by Fresenius' major proportion of assets, which consist of investments in its various companies and inter-company loans, as well as the diversity in its cash flow, S&P said.

Even in the absence of cash flow of €55 million (dividends and rental income) from its biggest subsidiary - Fresenius Medical Care AG (BB+/Stable), which is 50.8% owned by Fresenius and represented 81% of consolidated EBITDA for the year ended Dec. 31, 2002 - Fresenius' remaining cash flow is still significant to cover the priority claims at its wholly owned subsidiaries, S&P added.

The remaining two wholly owned subsidiaries are Fresenius Kabi AG, which offers infusion and nutrition therapies for patients in hospitals and at home, and Fresenius Proserve GmbH, which is active in the field of hospital engineering and management.

The ratings on Fresenius primarily reflect the group's limited concentration in a single disease area, its exposure to cost-containment pressures and third-party reimbursement uncertainties, and its aggressive financial profile, S&P said. These challenges are partly mitigated by the stabilizing effects of a recurring revenue stream, its number-one market position in the North American dialysis services market, vertical integration benefits, its geographical diversity, and its attractive growth prospects.

For the year ended Dec. 31, 2002, Fresenius' lease adjusted EBITDA to net fixed-charge coverage and funds from operations to net debt (capitalized for operating leases) was 4.0x and 19.2%, respectively, which are in line for the current ratings, S&P added. In financial 2003, the group's sales were €7.5 billion with lease adjusted EBITDA of €1.5 billion.

S&P rates Iron Mountain notes B

Standard & Poor's assigned a B rating to Iron Mountain Inc.'s new $250 million senior subordinated notes due 2015 and confirmed its existing ratings including the senior secured debt at BB and subordinated debt at B. The outlook is stable.

S&P said Iron Mountain's ratings reflect the company's fairly aggressive, although moderating, financial policies regarding its growth strategies. These factors are offset by Iron Mountain's leading position as the world's largest records management company, its reliable internal growth generated from existing customers, its outsourcing of new customers' in-house storage operations, and modest debt capacity within the ratings to accommodate capital spending and acquisition activity.

Operating performance is relatively recession-resistant due to low customer attrition, a diverse client base, and annual and multi-year contracts that provide recurring monthly storage fees, S&P said.

Revenue growth is expected to be in the 9%-12% range in 2003. Revenue growth could be vulnerable to a slowdown in North American storage revenues, volatile recycled paper prices, and near-term foreign currency fluctuations.

The company generates modest positive discretionary cash flow due to heavy capital investment. Capital spending requirements for maintenance are not onerous, and there is a discretionary element to the company's growth-related capital spending. Digital initiatives are consuming small amounts of capital, and have yet to gain traction.

For the fiscal year ended Dec. 31, 2002, operating lease adjusted EBITDA coverage of interest expense plus imputed interest was 2.2x, S&P said. Present value of operating leases plus total debt, including synthetic leases, to operating lease adjusted EBITDA was about 5.9x at Dec. 31, 2002. The company enjoys a healthy EBITDA margin of about 27% and some positive discretionary cash flow.

Moody's confirms Iron Mountain

Moody's Investors Service confirmed Iron Mountain Inc.'s 7.75% guaranteed senior subordinated notes due 2015 which the company is increasing by $250 million, for total outstandings of $381 million and also confirmed its existing ratings including its $250 million term B credit facility due 2008 at Ba3, $220 million 8.75% senior subordinated notes due 2009, $150 million 8.25% senior subordinated notes due 2011 and $405 million 8.625% senior subordinated notes due 2013 at B2 and Pierce Leahy Command Co.'s $135 million 8.125% senior unsecured notes due 2008 at B2. The outlook remains stable.

Moody's said Iron Mountain's ratings are supported by its dominant market share of the stable record management business; a diversified customer base; and consistently strong gross margins. The lower business risk embodied in the core domestic storage business partially offsets the risk associated with the company's high leverage and the company's geographic and product expansion.

The ratings are constrained by the company's high leverage, inclusive of operating leases, of approximately 5.7 times the trailing 12 months ending Dec. 31, 2002 EBITDAR, and over 2 times annual revenues; negative tangible equity of over $600 million; and low fixed charge coverage of 1.04 times, inclusive of operating leases and current portion of long term debt, Moody's added.

The company reported its first modestly positive free cash flow, as measured by cash flow from operations less capital expenditures, for fiscal 2002. Further improvement in the rating would be predicated on improved cash generation, significant debt reduction and no decapitalization of the company, Moody's said.

Moody's does not expect Iron Mountain to use increases in free cash flow to substantially reduce total debt in the near term. To the extent that the company is able to deleverage using internally generated funds, the ratings may be affected positively. However, failure to sustain meaningful free cash flow generation, increased leverage or decapitalization of the company may result in a downgrade.

S&P rates Amphenol loan BB+

Standard & Poor's assigned a BB+ rating to Amphenol Corp.'s new $125 million revolving credit facility due 2008, $125 million term A loan due 2008 and $500 million term B loan due 2011. The outlook is stable.

S&P said Amphenol's ratings reflect the company's leveraged financial profile, offset by solid positions in two target markets, electronic connectors and broadband cable, and relatively consistent earnings and cash flow performance in the face of weak technology markets.

The company's business profile benefits from geographic and market diversity, which provides overall earnings stability and tempers potential cyclicality in any single end-market. Operating performance has been consistent in the face of weak overall technology markets. Revenues in 2002 declined 4%, from $1.1 billion in 2001. Revenues in the December and September 2002 quarters, however, increased 3% and 6% year-over-year, respectively, suggesting an improving trend.

Connectors (84% of total revenues in 2002) continue to perform better than broadband cable, because of selective strength in certain connector end markets, such as wireless telecommunications and automotive. Relatively strong performance in connectors has offset softness in the cable business, which is suffering from a weak capital-spending environment among cable-televisions systems operators, S&P said.

While Amphenol remains leveraged, debt protection metrics are adequate for the rating level. Total debt-to-EBITDA was 3.2x for 2002 compared to 3.1x for 2001. The $38 million year-over-year decline in EBITDA, to $208 million in 2002, was offset by a $76 million reduction in debt outstanding. Modest increases in profitability, coupled with further reductions in debt outstanding, are expected to lead to debt protection improvements in 2003, S&P said.

For the bank facility, S&P said that even though the loans are secured, recovery prospects in default are still mediocre, as nearly half of the company's assets are goodwill, which is why the corporate credit and bank credit facilities are rated the same.

S&P raises Guitar Center outlook

Standard & Poor's raised its outlook on Guitar Center Inc. to positive from stable and confirmed its ratings including its corporate credit at B+.

S&P said the outlook revision is based on Guitar Center's improved operating performance and credit measures. Guitar Center has been able to improve its credit protection measures while expanding its store base and significantly upgrading its infrastructure and technology systems.

The company increased lease-adjusted EBITDA to $83 million in 2002 from $73 million in 2001. As a result, EBITDA coverage of interest rose to 3.3x from 2.9x the year before, S&P said.

Liquidity is adequate, reflecting $5.9 million in cash and $77 million of availability on a $200 million revolving credit facility subject to borrowing base limitations. The credit facility matures in 2005; the company's senior notes mature in 2006.

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