S&P cuts Aquila to junk

Standard & Poor's downgraded Aquila Inc. to junk, affecting $3.6 billion of debt. The action includes cutting its senior notes and first mortgage bonds to BB from BBB-, premium equity participation securities to B+ from BB+, preferred stock to B+ from BB and convertible subordinated debt to BB- from BB+. The outlook remains negative.

S&P said the downgrade reflects the slower-than-expected recovery of Aquila's credit quality as the company exits the merchant energy business. Recent financial results revealed lower than anticipated operating cash flows and higher debt leverage numbers.

Despite significant progress in its plan to restore its financial strength, S&P said it believes that depressed power prices and negative spark spreads will continue to be a drag on Aquila's operating cash flows on the Network Utilities side of the business.

As the company transitions from a wholesale energy marketing and trading company to a traditional utility, Aquila will face continuing restructuring expenses curtailing cash flow improvement, S&P added.

Even though Aquila has taken steps to strengthen its balance sheet on the Networks Utilities side of their business, the numbers are weaker than we expected. Aquila's financial plan has not provided the level of sustainable cash flow necessary for investment-grade status, S&P said.

Aquila will be in violation of an interest coverage requirement contained in its $650 million credit facility and guarantees related to three synthetic leases until at least Dec. 31, 2003. Aquila has obtained waivers from the affected lenders from the interest coverage requirement from Sept. 30, 2002 until April 12, 2003. In exchange, Aquila paid down obligations of $158.6 million to those lenders and has agreed that 50% of any net cash proceed under $1 billion and 100% of any net cash proceeds above $1 billion received prior to April 12, 2003, from any further domestic asset sales would be used to pay off the lenders, S&P said.

Moody's rates Hughes credit facility Ba3, still on review

Moody's Investors Service assigned a Ba3 debt rating to Hughes Electronic Corp.'s newly amended $1.8 billion senior secured credit facility. The new rating is on review for possible downgrade and Hughes' existing ratings remain on review for possible further downgrade.

Moody's said the downgrade review is continuing pending the outcome of Hughes' proposed merger with EchoStar Communications Corp.

This senior secured facility, which amends and extends the company's current $2 billion senior unsecured revolving credit facility which matures on Dec. 5, 2002, will mature on the earlier of August 31, 2003 or at the close of Hughes' proposed merger with EchoStar .

The entire facility will be secured by the assets and capital stock of significant wholly owned subsidiaries, and exclude those assets and stock of its 81%-owned subsidiary PanAmSat Corp. and DIRECTV Latin America.

Uncertainty surrounding Hughes' proposed merger with EchoStar remains, and the prospects have dimmed significantly with the fairly recent announcements of opposition from the FCC and the Justice Department, Moody's said.

With increased signs that the merger is unlikely, the credit focus turns to liquidity and permanent financing for the company's long-term needs, the rating agency added.

The refinancing of the interim financing that matures on Dec. 5 offers temporary breathing room to August 2003, Moody's said.

An important consideration for the company's ratings will be the payment by EchoStar to Hughes of the $2.7 billion purchase price of Hughes' interest in Pan Am Sat, which is intended to occur even in the event of regulatory objections to an EchoStar-Hughes merger. In addition, the merger agreement calls for EchoStar to pay Hughes a $600 million termination fee upon failure of the merger due to regulatory opposition and rejection.

Clearly, the timely receipt of all payments due from EchoStar would permit the company to pay off all its outstanding debt by the August maturity, Moody's said. Without the timely payments, near-term refinancing risk would remain high until more permanent financing is executed.

S&P cuts American Buildings

Standard & Poor's downgraded American Buildings Co. Ratings lowered include American Buildings' $55 million revolving credit facility due 2004, $81.3 million term loan A due 2004 and $186.1 million term loan B due 2005, all cut to D from CC.

S&P said the downgrade follows American Buildings' failure to make a scheduled $8.4 million term loan principal payment on Nov. 15.

The company was not in compliance with its financial covenants at Sept. 30, 2002, but remains in discussions with its lenders to address these violations. In addition, American Buildings recently received a C$16 million capital contribution from its parent company, Onex Corp., in connection with a November 2001 bank amendment, S&P noted.

S&P cuts Colt

Standard & Poor's downgraded Colt Telecom Group plc and removed it from CreditWatch with negative implications. The outlook is stable. Ratings lowered include Colt's $146 million 12% discount notes due 2006, €210.2 million 2% convertible notes due 2006, €275.7 million 7.625% notes due 2008, €292.7 million 7.625% notes due 2009, €292.8 million 2% convertible bonds due 2005, €305.8 million 2% convertible notes due 2006, €333.9 million 2% convertible notes due 2007, €72.7 million 8.875% notes due 2007 and £50 million 10.125% notes due 2007, all cut to B- from B+.

S&P said the downgrade is in response to persistent weak demand and falling prices in Colt's markets, which have resulted in Colt failing to grow revenues, gross profits, and operating cash flow in line with S&P's previous expectations.

Given the relative weakness of macroeconomic conditions in Colt's key markets and the ongoing competitive nature of Colt's markets, S&P said it considers that revenue growth rates will continue to be depressed and, as such, believes that it may be difficult for Colt to grow into its capital structure.

The stable outlook reflects S&P's expectation that reduced capital expenditures following the completion of Colt's core infrastructure and the measures taken to reduce costs will result in a much reduced rate of cash burn and improving profitability going forward.

Moody's puts Petroplus on review

Moody's Investors Service put Petroplus on review for downgrade including its senior unsecured debt at B1.

Moody's said the action follows Petroplus' announcement that its third quarter 2002 results will only show a fractional improvement on the second quarter.

They are therefore likely to fall below Moody's expectations, placing the company's already somewhat strained financial profile under further pressure, the rating agency said.

Moody's changed Petroplus's outlook from stable to negative on May 30, 2002 due to significantly and persistently lower than anticipated European refining margins in 2002, which resulted in a severe deterioration in the cash flow strength of the company over this period.

Whilst, on a cash flow level, Moody's is not expecting third quarter 2002 results to be as weak as those in the first and second quarters, the results are nevertheless anticipated to be below Moody's expectations.

This will therefore place further strain on the company's financial flexibility and required parameters may now fall below Moody's acceptable levels for the existing rating categories.

Moody's said it also remains skeptical about a medium-term sustained improvement in refining margins, towards mid-cycle levels, although the rating agency notes that industrial refining margin benchmarks have shown signs of reasonable improvement since October 2002.

Moody's cuts UFJ preferred stock to junk

Moody's Investors Service downgraded to Ba1 from Baa2 the preferred stock of two issuers related to UFJ Holdings, Sanwa International Finance (Bermuda) Trust and TB Finance (Cayman) Ltd. The outlook remains negative.

OPCO preferred securities issued by Tokai Preferred Capital LLC is unchanged at Baa2 as is UFJ's unsecured senior debt at A3 and senior and junior subordinated debt at Baa1. These ratings continue to have a stable outlook.

Moody's said the downgrade to the preferred stock reflects UFJ Bank's deteriorating fundamentals and greater uncertainty over the treatment of preferred stock in any potential re-capitalization of the bank and bank-holding company.

Moody's also believes, however, that measures for a high level of systemic support for deposit and debt-like subordinated and junior securities remain in place.

But Moody's said it is concerned about the potential negative impact on the bank's regulatory capital from the combined and simultaneous effect of any further declines in equity markets, ongoing regulatory demands for stricter asset assessments, and the gradual, but increasingly conservative assessment of the tangibility of deferred tax assets.

S&P puts Paiton Energy on positive watch

Standard & Poor's put Paiton Energy Funding BV's $180 million senior secured bonds due 2014 rated CC on CreditWatch with positive implications.

S&P said the action reflects parent company PT Paiton Energy Co.'s material progress in its restructuring, including amendments in power purchase and fuel supply agreements and restructuring of debts with commercial banks and export credit agencies, its current servicing of debt, the phased increase in electricity tariff from Perusahaan Umum Listrik Negara, the state-owned utility, and the continued growth in peak electricity demand at 9.2% per year since 1997.

Moody's lowers Head outlook

Moody's Investors Service lowered its outlook on Head Holding GmbH to negative from stable and confirmed its ratings including its senior notes at B1.

Moody's said the revision is in response to Head's third quarter results, which showed still challenging market conditions and slightly declining operating performance. The outlook also factors in possible debt-financed acquisitions or additional share buy-backs.

Head continues to be affected by difficult conditions in its sporting goods markets linked to sluggish consumer spending, reductions in vacation travel affecting diving and overall declining tennis rackets markets, S&P said. Despite Head's launch of innovation and marketing initiatives and while the management had expected a recovery in its operating performance for this year, it recently indicated that the 2002 operating profit would be slightly below last year's.

Moody's considers that Head's debt protection measurements remain adequate for its rating category in particular owing to the fact that Head's year-end debt position is linked to significant seasonal working capital financing needs.

But Moody's said it is concerned that Head's financial structure could weaken in case of deteriorating operating performance since Moody's expects the operating environment to remain challenging in the coming months or in case the management would achieve an acquisition in a new market segment of the sporting goods industry.

S&P takes Alliance Laundry off positive watch

Standard & Poor's took Alliance Laundry Systems LLC off CreditWatch with positive implications and confirmed its ratings including its $110 million 9.625% senior subordinated notes due 2008 at CCC+ and $193 million senior secured term loan due 2007 and $45 million revolving credit facility due 2007 at B. The outlook is stable.

S&P said the action follows Alliance Laundry's decision to withdraw its plans for an initial public offering through a Canadian Income Trust due to market conditions. Expected proceeds from the planned transaction would have improved the company's financial profile.

The ratings for Alliance Laundry reflect its high debt leverage and thin credit protection measures, factors partially mitigated by the company's solid market position in the mature commercial laundry equipment market, S&P said.

While growth in the commercial laundry equipment sector has been historically stable (about 1% since 1993) and largely recession resistant, continued weak economic conditions could continue to soften demand and limit future pricing flexibility, S&P noted.

However, given the high capital expenditures necessary to establish production, together with the company's longstanding trade relationships, barriers to entry are high, thus Alliance Laundry's overall market position has remained largely intact, S&P said. Another strength is the company's manufacturing efficiencies gained from restructuring efforts in the past few years that are expected to sustain lease-adjusted operating margins at more than 20% (before D&A).

Nevertheless, Alliance Laundry's heavy debt burden significantly limits the company's ability to respond to competitors' actions, economic changes, or higher raw material costs, specifically steel, S&P added. Pro forma for the recent debt refinancing, Standard & Poor's expects at least 1.7 times EBITDA coverage of interest in 2002 and lease-adjusted debt to EBITDA of about 6x.

S&P puts Petroplus on watch

Standard & Poor's put Petroplus International NV on CreditWatch with negative implications including Petroplus Funding BV's €225 million 10.5% notes due 2010 at B+.

S&P said the action follows Petroplus' announcement that its third-quarter financial results will be weaker than expected.

S&P said the watch placement reflects its concern over the timing and extent of the expected recovery in Petroplus' credit measures.

Despite the expectation of a significant recovery, third-quarter results will likely show a fractional rebound on very weak second-quarter earnings, S&P said. Even though earnings are expected to rebound strongly in future quarters, on a rolling basis Petroplus will be challenged to achieve credit measures in line with the current ratings - such as EBITDA net interest coverage of about 3 times and net debt to capital at 65% - well into 2003.

At year-end 2002, interest coverage will be considerably below required levels for the current rating, despite an improved operating environment for refining operations and the upcoming start of the desulfurization unit at the company's Antwerp refinery, S&P added.

S&P raises Corrections Corp. outlook

Standard & Poor's raised its outlook on Corrections Corp. of America to positive from stable, affecting $1.1 billion of debt including its senior secured debt at B+ and senior unsecured debt at B-.

S&P said the revision reflects faster than expected progress made by management to improve Corrections Corp.'s operating performance.

The company has a high degree of operating leverage, S&P noted. Corrections Corp.'s focus on cost controls and improving utilization of its facilities (now more than 90% compared with mid-80% in 2001) has improved its operating margins.

Moreover, the firm generated about $110 million of free cash flows for the nine months ended Sept. 30, 2002, compared with about $55 million for the same period in 2001. In addition, S&P said it expects EBITDA coverage of interest to improve to more than 2 times in 2002.

Still, Corrections Corp. continues to be highly leveraged. For the 12 months ended Sept. 30, 2002, total debt (including preferred stock) adjusted for leases to EBITDA was about 6x, S&P added.

Moody's cuts PerkinElmer to junk

Moody's Investors Service downgraded PerkinElmer, Inc. to junk, affecting $590 million of securities including its senior unsecured debt to Ba2 from Baa3. The outlook is stable.

Moody's said the downgrade reflects its concern that PerkinElmer continues to generate low returns on its asset base, which has expanded due to past acquisition activities, and concern that the company's weakened earnings and cash flow generation, which have been impacted by low levels of capital expenditures in the markets the company serves, will continue over the intermediate-term.

The rating action also reflects PerkinElmer's high debt levels, which will now take much longer to reduce than originally planned because of the company's decision to defer the sale of its Fluid Sciences unit, Moody's said.

The rating action anticipates, however, that the company will successfully execute its plan for improving profitability and cash flow in light of the weakened business environment, and that the long-term prospects for revenue will improve through new product introductions and a high level of recurring business.

While the company anticipates continued free cash flow generation, it does face a degree of refinancing risk and must execute on the financial plan announced on October 29, Moody's said. The stable outlook reflects expectation that the company will successfully implement its refinancing and profit improvement strategies in the near-term.

Moody's cuts McLeodUSA's senior debt

Moody's Investors Service downgraded McLeodUSA Inc.'s senior secured debt and left its other ratings unchanged including its senior unsecured rating at Ca. Ratings lowered include McLeod's $158.4 million senior secured revolving credit facility due 2007, $255.6 million senior secured multi-draw term loan A due 2007 and $534.4 million senior secured term loan B due 2008, all cut to Caa3 from Caa2. The outlook remains negative.

Moody's said the downgrade to the secured facilities reflects its concern that the company will continue to be challenged by the issues that plagued it prior to its January 2002 reorganization, in particular, negative revenue growth and negative cash generation.

Moody's said it believes that the continuation of these problems may lead to intermediate-term liquidity pressure.

The ratings reflect Moody's concern that positive free cash flow will not be achieved within the intermediate term and that the company will need to rely upon cash on hand and bank borrowings to support its operations.

The rating also incorporates Moody's belief that asset coverage for the secured facilities is weak and that the current debtholders would be deeply impaired given the poor recovery prospects for wireline assets of distressed companies.

S&P cuts Acceptance Insurance

Standard & Poor's downgraded Acceptance Insurance Companies, Inc. including cutting AICI Capital Trust's $94.875 million 9% preferred securities to D from CC.

S&P said the action follows Acceptance Insurance's announcement that it had incurred an estimated after-tax loss of $131 million for its third quarter ending Sept. 30, 2002.

It also announced that it was deferring interest payments on the junior subordinated debentures that constitute the sole source of dividend payments on the trust-originated preferred securities, making it virtually certain that the next dividend installment due on Dec. 31, 2002, will be deferred.

Although the investor agreement governing dividend payments permits such deferrals for up to five years, S&P policy is to assign a rating of D to instruments of this type if there is an arrearage in payment.

S&P cuts Hollinger Participation

Standard & Poor's downgraded Hollinger Participation Trust's $490 million 12.125% senior notes due 2010 to B- from B. The outlook is stable.

S&P said the downgrade reflects the recent downgrade on CanWest Media Inc. (B+/Stable).

The rating on the participation notes reflects the credit quality of the underlying notes, which are subordinated to CanWest Media's senior secured bank facility and senior subordinated notes, S&P said.

Moody's cuts Holley Performance

Moody's Investors Service downgraded Holley Performance Products, Inc., concluding a review for downgrade begun on Sept. 19. The outlook is stable. Ratings lowered include Holley's $150 million 12.25% guaranteed senior unsecured notes due September 2007, cut to Caa3 from Caa2.

Moody's said its review looked at Holley's ongoing credit quality factored in the recent $15 million cash infusion by an investment fund managed by Holley's indirect parent Kohlberg & Co., LLC, which enabled the company to satisfy its past-due interest within the grace period provided under the senior notes indenture.

Moody's also considered Holley's current weak business fundamentals and sub-par operating cash flow performance over the past year, combined with its evaluation of the prospects for a turnaround effort under Holley's new management team.

The downgrade reflects Holley's extremely poor 2002 operating performance, driven by a combination of several significant factors which included (i) weakened end markets reflecting recessionary economic conditions; (ii) efforts by Holley's customers to reduce inventories; (iii) a significant amount of excess production capacity; (iv) ineffective discounting practices; and (v) the need for SKU rationalization.

Holley's total book equity has materially declined by $25 million year-to-date, down to negative $17.5 million at Sept. 30, Moody's said.

While Holley will likely have the ability to service its debt for the next year as a by-product of

Kohlberg's $15 million cash infusion combined with availability under Foothill's amended senior secured credit agreement, the company needs to dramatically reduce its cost structure in order to generate the positive cash flows necessary to service its debt from core operations on a going-forward basis, Moody's said.

Moody's cuts Oakwood Homes

Moody's Investors Service downgraded Oakwood Homes Corp. including cutting its $125 million 7.875% senior unsecured notes due 2004, $175 million 8.125% senior unsecured notes due 2009 and $2.6 million unsecured reset debentures due 2007 to C from Caa2.

Moody's said the action reflects Oakwood's recent bankruptcy filing and the limited recovery value estimated for the post-restructuring common stock to be received by the note holders.

The double-dip downturn in the manufactured housing industry, the exit of major floor plan and consumer finance lenders from the industry, the unprofitability of Oakwood's own retail dealer network, and the poor performance of its loan portfolio all served to force the company's bankruptcy filing in order to stanch its cash burn, Moody's noted.

Moody's puts LIN on upgrade review

Moody's Investors Service put LIN Television Corp. and LIN Holdings on review for possible upgrade including LIN Television's $192 million senior secured revolver at Ba3, $210 million senior notes at B2 and $300 million senior subordinated notes at B3 and LIN Holdings' $425 million senior discount notes at Caa1. The SGL-1 speculative grade liquidity rating remains unchanged.

Moody's said the review follows the significant steps taken by LIN management during recent periods to strengthen the company's balance sheet.

Following LIN's acquisition of STC, the company raised $400 million in the equity markets, thereby reducing LIN's post-acquisition leverage from over 11 times at year end 2001 to about 6 times at Sept. 30, 2002, Moody's noted.

As a public entity yet again, management's commitment to maintaining a more conservative capital structure, including the repayment of debt with cash raised in the IPO process, as well as a disciplined approach to financing likely future acquisitions with an appropriate mix of debt and equity, will be critical to any consideration that may be given for potential upgrading of the company's debt ratings, Moody's said.

Fitch cuts TXU Europe

Fitch Ratings downgraded TXU Europe Ltd. to D from C.

Fitch said the action follows the default by subsidiaries of TXU Europe on interest payment payments and the guarantee of interest payments. The default relates to expiry of a 30-day grace period on interest payments not met for a $200 million bond issued by Energy Group Overseas BV and guaranteed by The Energy Group Ltd.. Both of these entities are owned by TXU Europe Ltd., and default under these obligations cross-defaults to the group's remaining capital markets debt.

The ratings also reflect today's decision by TXE to place several of its units into temporary administration, Fitch added. This decision affects TXU Europe Ltd., The Energy Group Ltd., TXU Europe Group plc, TXU (UK) Holdings Ltd., TXU Acquisitions Ltd. and TXU Europe Energy Trading Ltd. (TXUEET).

Finally, the rating reflects the low estimated recovery on financial indebtedness - a D rating indicates that Fitch's expectation for ultimate recovery for financial creditors of TXU Europe Ltd. lies below 50%.

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