S&P rates U.S. Steel convert at B

Standard & Poor's assigned a B rating to United States Steel Corp.'s proposed $250 million series B mandatory convertible preferred and put it on negative watch.

Pittsburgh-based U.S. Steel had about $1.4 billion in debt at Dec. 31.

Existing ratings remain on negative watch (senior unsecured at BB) where they were placed on Jan. 9 on the company's plan to acquire substantially all of bankrupt National Steel Corp.'s steelmaking and finishing assets for $950 million.

Although AK Steel Corp. recently established a new agreement to acquire National Steel at a higher price than U.S. Steel, U.S. Steel remains interested in acquiring National and could make an additional offer, S&P noted.

The bidding process in the AK agreement indicates that a formal auction will be held after March 17, providing U.S. Steel the opportunity to submit a new bid.

S&P is concerned that potential acquisitions, together with increasing pension costs at U.S. Steel, weakened steel prices and higher interest costs from debt-financed acquisitions will weaken its financial profile.

Moreover, despite its greater size and improved steel market position, S&P deems a possible acquisition of National and the expected sale of more stable mining and transportation assets to Apollo Management LP to be somewhat detrimental to U.S. Steel's business profile.

S&P also is concerned about worsening trends in the U.S. steel industry by the re-emergence of almost all of the 10 million tons of idled steel sheet capacity in 2001, weakening demand and continued high levels of imports that have driven prices lower.

Fitch rates Northrop convert at BB

Fitch Ratings initiated coverage of Northrop Grumman Corp. and assigned a BBB- rating to the senior unsecured debt and bank facilities, a BBB- rating to the senior unsecured debt of Litton Industries Inc. and a BB rating to Northrop's convertible preferred. The outlook is stable.

Ratings are supported by strong top-line growth, strong liquidity and an experienced management team with a successful track record of acquisition integration, Fitch said. The benefits of the recent TRW acquisition also support the ratings.

Concerns focus on the uncertainty regarding the amount, timing and method of debt reduction with divestiture proceeds. Low free cash flow and high debt levels also are a source of concern.

Liquidity at the end of 2002 is estimated at $3.6 billion, consisting of $1.4 billion in cash and complete availability under the $2.5 billion credit facility, offset by an estimated $322 million in current maturities.

The expected $3.7 billion to 3.9 billion in cash proceeds from the TRW Automotive divestiture will significantly increase liquidity.

Assuming the use of all divestiture proceeds and excess cash to reduce debt, Fitch projects 2003 leverage will be about 2.3x and adjusted for operating leases around 3.0x.

Moody's cuts Hanover Compressor

Moody's Investors Service downgraded Hanover Compressor Co.'s ratings, including the 4.5% convertible senior notes due 2008 to B2 from B1 and the convertible preferreds to B3 from B2.

The outlook is negative, pending amendment of bank credit facilities, and would likely be moved to stable upon execution of the amendments.

The downgrades better reflect the challenges to reduce leverage, continued tightness in certain bank covenants and expected 2003 leverage and cash flow, Moody's said.

The ratings and outlook reflect high leverage, reduced liquidity and the uncertain 2003 pace of recovery in oilfield capital spending for natural gas compression.

S&P cuts Fleming ratings

Standard & Poor's lowered Fleming Cos. Inc.'s ratings, including the 5.25% convertibles due 2009 to B- from B+, and is keeping the ratings on negative watch.

The downgrade reflects increased challenges facing Fleming now that the Kmart Corp. supply contract has been terminated, as well as ongoing difficulties with the integration and exit of other business units.

Moreover, Fleming still needs to fully integrate the CoreMark International Inc. acquisition, complete the sale of its retail assets and reduce debt, S&P said.

The company has sufficient room under its $550 million revolving credit facility for further borrowings if needed, although further covenant relief may be required in the future.

Fleming is currently in negotiations to revise its bank loan agreement to focus on asset-based measures for financial covenants.

S&P puts Hilton on negative watch

Standard & Poor's placed the ratings of Host Marriott Corp. (senior unsecured at BB-) on negative watch, reflecting ongoing weakness in the lodging industry and that credit measures are not likely to improve soon.

Debt leverage at Sept. 30 was weak for the rating at 7.5x.

Based on management's guidance of additional revenue per available room declines expected for the first quarter of 2003 and additional margin deterioration in 2003, material improvement in credit measures is not expected in 2003, S&P said.

S&P puts FelCor on negative watch

Standard & Poor's placed the ratings of FelCor Lodging Trust Inc. (senior debt at BB- and preferreds at B-) on negative watch, following fourth quarter 2002 earnings.

The watch reflects ongoing weakness in the lodging environment and the expectation that credit measures are not likely to improve in the intermediate term.

Debt leverage was weak for the rating at 6.6x as of Dec. 31, and given management's guidance for 2003 EBITDA of $277 million to $289 million, little improvement in credit measures is expected in 2003, S&P said.

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