Moody's confirms GulfTerra

Moody's Investors Service confirmed GulfTerra Energy Partners, LP including its senior secured bank debt at Ba1 and senior subordinated debt at B1, concluding a review for possible downgrade. The outlook is negative.

Moody's said the review was begun in February after it downgraded El Paso Corp., the owner of its general partner. The review also reflected concern over the debt that GulfTerra had incurred in two large company-transforming acquisitions in 2002.

Moody's said the ratings are now confirmed because it believes El Paso's financial distress has not impaired GulfTerra's operating results or financial position, and that the worst of any negative impact have been weathered; that GulfTerra has taken meaningful steps to protect its credit from the risk of

substantive consolidation in event of an El Paso bankruptcy and to increase independence from El Paso in its corporate governance; and that GulfTerra is making progress in achieving satisfactory results from assets acquired in the two major acquisitions that doubled the size of the company last year.

GulfTerra's negative outlook reflects: leverage that is still high and moderate interest coverages; an aggressive distribution policy which increases its reliance on the bank and capital markets, and which inhibits debt reduction and internal equity formation; a high-growth business model that will likely entail both large internal growth projects and acquisitions, making it less likely GulfTerra will become self-funding or achieve a reduction in leverage; direct commodity-price exposure related to gas processing (about 15% of 2003 EBITDA, most of which is currently hedged over the near term) and indirect price exposure on volumes of the rest of its businesses; and a concentration in the Gulf of Mexico, where the potential upside is matched by higher costs and risks peculiar to offshore operations, and where rapid well declines accelerate the need to connect new wells to replace those volumes.

Credit strengths supporting GulfTerra's ratings include: a sizable, diverse portfolio of hard assets with good market positions and organic growth potential; geographic diversification among basins in Texas, the San Juan, and Gulf of Mexico that helps to mitigate volume exposure to drilling activity in those regions; strong profit margins (EBITDA-to-gross margin in the 70% range); a measure of predictability from fee-based and contracted revenues; and a proven track record in its niche of constructing and operating hydrocarbon-handling infrastructure offshore in the Gulf of Mexico.

With cash flow accruing from its new businesses and following a few equity issuances, GulfTerra's debt coverage measures are recovering, though still weaker than those of many of its peers, Moody's said. On-balance sheet debt-to-EBITDA is down from 7x in 2002 to 4x for the six months ended June 30, annualized. EBITDA-to-interest (adjusted for rent) is up from 2.9x in 2002 to 3.1x for the six months ended June 30, 2003. Adjusted debt (debt plus operating leases capitalized)-to-gross cash flow (cash flow from operations before working capital changes) has historically ranged from 7 to 12 times, depending on the timing of acquisitions.

S&P says Von Hoffman unchanged

Standard & Poor's said Von Hoffmann Corp.'s ratings are unchanged including its corporate credit at B+ with a stable outlook in response to the company's announcement that it had agreed to acquire Lehigh Press Inc. for approximately $110 million.

While the transaction will be funded with cash, the source of the cash was not disclosed. However, if 100% debt financing were assumed, the effect on cash flow protection and debt leverage measures would be modest, S&P said. In addition, as part of the transaction, DLJ Merchant Banking Partners II LP, a CSFB Private Equity fund and owner of Von Hoffmann, has committed to invest $20.0 million in Von Hoffmann Holdings Inc., the parent of Von Hoffmann Corp., to be used for general corporate purposes, including the repurchase of existing indebtedness.

This acquisition fits with Von Hoffmann's strategy to increase product offerings to its customer base and to provide greater capabilities, ranging from design and prepress through manufacturing, fulfillment and distribution, S&P added.

Moody's cuts B/E Aerospace liquidity

Moody's Investors Service downgraded B/E Aerospace's speculative-grade liquidity rating to SGL-4 from SGL-3.

Moody's said the downgrade reflects its assessment of the company's weakening liquidity profile, particularly due to the passage of time and in light of an increased likelihood of a violation of bank financial maintenance covenants, even after its February 2003 amendment.

B/E's liquidity rating could be restored to SGL-3 if the company were to successfully negotiate amendments of terms in these facilities that would give the company adequate cushion relative to covenant levels though at least the forward 12 to 15 month period, without significant reduction in total revolving credit facility availability or cash balances. Absent such amendments, the company's SGL-4 rating will likely remain in place for the company.

B/E's operations continued to generate negative cash flow through the first half of 2003 (six months ended June 30), Moody's noted. On six-month revenues of $307 million, the company generated EBITDA of $25 million (8% of revenues), and $44 million (14% of revenues) after adjustments for non-cash items and one-time cash expenses. Cash flow generated in the quarter were lower than Moody's expected, as the company's gross profit margins were slightly below historical averages. Profit margins are expected to improve over the remainder of the year while cash flows are expected to be neutral to slightly positive, as B/E will have completed its facilities consolidation program, and plant capacity should be more in line with production requirements.

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