Fitch cuts Houghton Mifflin notes

Fitch Ratings downgraded Houghton Mifflin Co.'s $600 million 8.25% senior unsecured notes due 2011 to B- from B and the $400 million 9.875% senior subordinated notes due 2013 to CCC+ from B-. The BB- rating for the company's $325 million senior secured bank facility due 2008 and $137 million senior secured notes, with maturities from 2004 through 2011, were confirmed. The outlook is stable.

Fitch said the action reflect the increased risk profile of Houghton Mifflin's senior unsecured notes and senior subordinated notes following HM Publishing's recent $265 million senior unsecured discount debt issuance due 2013, which has a current accreted value of approximately $151 million. Proceeds from the debt issuance were used to fund a dividend payment to the shareholders, investment firms Thomas H. Lee, Bain Capital and The Blackstone Group.

While Houghton Mifflin's existing bond indentures contain covenants that restrict its ability to make dividend payments and inter-company transactions and place limits on raising additional debt, Fitch believes that debt at the holding company level hinders the company's ability to enhance liquidity and financial flexibility and reinvest in operations.

Confirmation of the company's BB- senior secured debt incorporates the excess cash flow sweep requirements under the bank facility and the strong collateral support.

The ratings also reflect the company's high debt balance and weaker credit protection measures compared to the other three major U.S. educational publishers, and significant working capital requirements associated with pre-publishing costs. Further, Fitch continues to be concerned that current budgetary pressures at the state level, partially offset by increased federal funding associated with the No Child Left Behind Act, will constrain educational spending in the near term.

Due to aforementioned concerns, Fitch does not anticipate significant improvement in credit protection measures over the near term. Pro forma for the transaction at June 30, 2003, Fitch estimated total debt-to-EBITDA less pre-publication and publishing rights amortization to be at 10.0 times and pro forma interest coverage at approximately 1.5x. It is important to note that the prepublication amortization was significantly higher than the prepublication capital expenditures due to the revaluation of the company's assets.

Fitch rates Hovnanian notes BB+

Fitch Ratings assigned a BB+ rating to Hovnanian Enterprises, Inc.'s new $215 million 6.50% senior unsecured notes due January 2014. The outlook is stable.

Fitch said Hovnanian's ratings are based on the company's successful execution of its business model, conservative land policies and geographic, price point and product line diversity.

The company has been an active consolidator in the homebuilding industry which has led to above average growth during the past six years, but has kept debt levels somewhat higher than its peers.

Management has also exhibited an ability to quickly and successfully integrate its acquisitions. In any case, now that the company has reached current scale there may be less use of acquisitions going forward and acquisitions are likely to be smaller relative to Hovnanian's current size.

Risk factors include the inherent (although somewhat tempered) cyclicality of the homebuilding industry. The ratings also manifest the company's aggressive, yet controlled growth strategy and Hovnanian's capitalization and size.

The company's EBITDA and EBIT to interest ratios tend to be similar to the average public homebuilder, while inventory turnover tends to be moderately stronger. Hovnanian's leverage is somewhat higher and debt to EBITDA ratio is slightly below the averages. Although the company has certainly benefited from the generally strong housing market of recent years, a degree of profit enhancement is also attributed to purchasing design and engineering, access to capital and other scale economies that have been captured by the large national and regional public homebuilders in relation to non-public builders.

Moody's rates Mail-Well loan Ba3

Moody's Investors Service assigned a Ba3 rating to Mail-Well 1 Corp.'s $300 million senior secured bank credit facility and confirmed its existing ratings including its $350 million of 9 5/8% senior unsecured notes due 2012 at B1, $300 million senior secured revolving credit facility due 2005 at Ba3 and $300 million 8¾% senior subordinated notes due 2008 at B3. The outlook remains stable.

Moody's said the action, which is taken to regularize its ratings, includes a re-assignment of the senior implied and issuer ratings to Mail-Well 1 Corp. previously assigned to Mail-Well Inc.

The ratings reflect Mail-Well's significant leverage and vulnerability to continuing softness in customer spending on envelopes and commercial printing, especially spending which is related to direct-mail or advertising, Moody's said. The ratings are supported, however, by Mail-Well's adequate liquidity and relatively steady margins and cash flows, which have held up over the past year largely as a result of cost-cutting and restructuring initiatives.

At the end of June 2003, Mail-Well recorded trailing 12 months leverage of approximately 8.0 times EBITDA, Moody's noted. However, this includes the impact of charges involved in Mail-Well's recently concluded restructuring program. Absent these restructuring costs, Mail-Well's adjusted June 30, 2003 trailing 12 months leverage stood at 5.8 times.

Moody's said it expects to see a normalization of Mail-Well's leverage profile, to less than six times on a sustainable basis, from the combination of moderate free cash flow generation and the elimination of significant recurring costs which have been trimmed from Mail-Well's business model.

Pressure is greatest for Mail-Well's envelope sales to the direct-mail sector, which has experienced six consecutive quarters of contraction. Management believes that its envelope sales to direct mail marketing customers is poised for a rebound, due to the impact of the National "Do-Not-Call " Registry, increasing public calls for control of "spam" advertising on the Internet, and recent pension negotiations by the USPS that are expected to hold postal rates stable for the intermediate term, Moody's said.

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