Moody's raises Amazon senior implied

Moody's Investors Service upgraded Amazon.com, Inc.'s senior implied rating to B2 fro mB3 and confirmed its senior unsecured notes at B3 and subordinated notes at Caa2. The outlook is stable.

Moody's said it raised Amazon's senior implied rating because of its improved expectations for Amazon's cash flow generation based on performance through the first two quarters of this year, and confidence in management's intentions to continue to operate in a way that enhances the enterprise value and cash flow available to bondholders.

Moody's said it had previously expected that Amazon.com could be cash flow neutral to slightly negative for this year but now believes that the company is likely to generate positive net cash flow after accounting for working capital and capital expenditures.

Confirmation of the bond ratings reflects their structural subordination to the obligations of Amazon's operating subsidiaries, through which essentially all revenues and expenditures are run, Moody's said. The rated issues represent close to two-thirds of Amazon's consolidated liabilities, but almost none of its assets are located at the level of issuer. As Amazon's overall business activity has grown, the level of obligations at subsidiaries have increased and become a proportionately larger part of the capital structure.

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 USEC outlook

Standard & Poor's lowered its outlook on USEC Inc. to negative from stable and confirmed its ratings including its senior unsecured debt at BB.

S&P said the revision of USEC's outlook is in response to risks posed by efforts on the part of a consortium consisting of a competitor of USEC's and certain major customers to construct a new uranium enrichment facility in the U.S.

The consortium - called Louisiana Energy Services Inc. - which includes Urenco Ltd., one of USEC's European competitors, as well as several major nuclear facility operators, has announced that it intends to construct a new uranium enrichment facility in the U.S., with a start-up of production reportedly targeted for 2007, S&P noted. Considerable uncertainty exists about whether this plan will be realized, given the regulatory approvals that will be needed.

However, if this project goes forward, S&P said it could undermine the effectiveness of USEC's strategy for improving its competitive position, while also destabilizing industry pricing. Specifically, the ratings could be lowered if Louisiana Energy Services receives a license from the U.S. Nuclear Regulatory Commission for its proposed project.

USEC has leading market shares in North America and globally, but has little influence on prices, S&P noted. Competitive pressure from European-based producers caused prices for separative work units (SWUs, the standard unit of measure for uranium enrichment) to decline significantly during the late 1990s.

But prices have recently improved, reflecting better demand, the effect of favorable rulings in trade cases filed by USEC, and USEC's production capacity rationalization, S&P said. The rating agency now expects prices to remain at or near recent levels.

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.

Moody's confirms Dynex, withdraws ratings

Moody's Investors Service confirmed Dynex Capital, Inc.'s preferred stock at Ca and withdrew the rating.

Moody's said its rating reflects Dynex's stressed financial position, default on its preferred stock, and strategic flux.

The REIT intends to pursue strategic alternatives that will likely result in a marked change in its capital structure and business model, or even in the firm's liquidation, Moody's noted.

On July 15, Dynex repaid upon maturity the remaining $48 million of its senior unsecured notes (then rated Caa1), thereby removing restrictions associated with the notes' indenture, and giving the REIT greater financial and operating flexibility.

The ultimate recovery value of Dynex's preferred stock remains uncertain, Moody's said. The REIT is now in default on the dividends of this cumulative preferred stock.

However, Moody's said it anticipates that preferred stockholders should achieve a reasonable level of recovery upon conclusion by the REIT of its strategic review.

S&P raises Glimcher outlook

Standard & Poor's raised its outlook on Glimcher Realty Trust to stable from negative and confirmed its ratings including its preferred stock at B.

S&P said the revision reflects the completion of several financing transactions during the past 18 months, which have resulted in the expectation for stable to modestly improving debt coverage measures through the next year as the company continues non-core asset sales and uses proceeds to pay down debt.

The company made a strategic decision about three years ago to sell most of its community centers and all of its stand-alone assets; however, progress has been slower than anticipated, S&P said. The company has sold 46 properties and 15 outlots to date, generating $275 million of proceeds (realizing moderate gains, on average). Another roughly $100 million (nine non-core properties) in asset sales are pending. After the sale, malls will represent about 76% of gross leaseable area and 85% of total minimum rents, up from the current 66% and 74%, respectively.

The mall portfolio remained well occupied at 91.8% at June 30, 2002, but the community center portfolio occupancy has declined to 87% as a result of vacancies caused by retail bankruptcies (primarily Ames and Kmart), S&P said. However, the mall portfolio is highly concentrated, with a handful of larger assets (Jersey Gardens, Lloyd Center, and University Mall) accounting for a relatively high 21% of the company's net operating income. Tenant diversity is average, with the top 10 tenants representing 22% of total minimum base rent. Lease expirations within the mall portfolio average a manageable 10% (of base rents) per year, and new leases have generally been signed at per square foot rents that are greater than the average portfolio rent per square foot, mitigating the risk of rent roll-down exposure.

The company demonstrated good access to diverse sources of capital during the past 18 months with the completion of two common equity offerings, new mortgages, mortgage paydowns, the refinancing of a large construction loan, and the extension of its $170 million credit facility, S&P said. Following these capital transactions, leverage has declined modestly. While book value leverage remains high at 74%, after adjustment for the estimated value of the portfolio in excess of book value, leverage is probably closer to 63%, which compares with an average of 59% for retail REIT peers (all of which are more highly rated).

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.

Moody's raises DTE Burns Harbor outlook

Moody's Investors Service confirmed DTE Burns Harbor LLC's senior secured rating at Ba3 and raised the outlook to stable from negative.

Moody's said the outlook revision reflects continued operation by Bethlehem Steel Corp. of its Burns Harbor steel-making plant after its filing for Chapter 11 bankruptcy protection.

More importantly, Moody's noted that Bethlehem Steel has not attempted to reject the contract between itself and DTE Burns Harbor and continues to take the required levels of coke produced by the project and remain current in its payment, with the exception of an approximate $14.9 million pre-petition claim.

There is only one principal payment remaining on the senior secured bonds. This payment, scheduled for January 2003, has been collateralized by restricted cash on the project's balance sheet and a letter of credit that provides a debt service reserve, Moody's said. Moody's believes that the collateral substantially mitigates the risk of cash flow from operations being insufficient to make the last required bondholder payment.

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