S&P cuts HMP, Hunstman, rates notes B

Standard & Poor's downgraded HMP Equity Holdings Corp. and its subsidiaries including cutting HMP's senior secured discount notes to CCC+ from B-, Huntsman LLC's senior secured debt to B from B+, Huntsman International Holdings LLC's senior unsecured debt to CCC+ from B- and Huntsman International LLC's senior secured debt to B from B+, senior unsecured debt to B- from B and subordinated debt to CCC+ from B-. S&P confirmed Huntsman Advanced Materials LLC's senior secured notes at B. S&P assigned a B rating to Huntsman LLC's proposed $375 million senior secured notes due 2010. The outlook is negative.

S&P said the downgrade follows the disappointing first half operating results and reflects increasing concern that second-half 2003 cash flow generation will fall substantially short of earlier expectations, particularly given the still-uncertain business outlook and potential for additional raw material pressures in the petrochemical industry.

S&P said it has become increasingly concerned that second half 2003 results may result in additional pressure on liquidity levels, despite the potential for an improved debt maturity schedule following the sale of the proposed notes.

It is also clear that adverse business conditions facing the Huntsman companies have eroded prospects for any near-term reduction of its onerous debt burden and may result in bank loan covenant violations at both Huntsman LLC and Huntsman International Holdings LLC within the next several quarters, S&P warned. Near-term debt maturities at Huntsman LLC will remain a concern in the absence of the successful sale of the proposed notes and the ratings could be lowered again if the notes are not refinanced as expected.

Huntsman LLC's balance sheet is very aggressively leveraged with a ratio of total adjusted debt to total capitalization above 100%, S&P noted. Management plans to gradually improve the financial profile, but current operating results have not supported this objective. Capital spending is expected to be substantially below historical levels to maximize cash flow available for debt reduction and to preserve liquidity. At the current ratings, the key ratios of total debt to EBITDA and EBITDA to interest coverage are expected to approach 5x and 2x, respectively, over the next couple of years.

Moody's raises Dobson outlook, rates notes B3

Moody's Investors Service raised Dobson Communications Corp.'s to stable from negative and assigned a B3 rating to its planned offering of $600 million senior notes. Existing ratings were confirmed including its $300 million 10.875% senior notes due 2010 at B3, $354 million 12.25% senior exchangeable preferred stock due 2008 and $188 million 13.0% senior exchangeable preferred stock due 2009 at Caa2 and Dobson/Sygnet Communications Co.'s $200 million 12.25% senior notes due 2008 at B3.

Moody's said the improvement in the rating outlook to stable reflects the progress Dobson has made to improve its credit profile since Moody's lowered the rating outlook to negative in February of this year.

First, the change of control trigger in the DCC, LP loan has been successfully resolved. Second, the unrestricted subsidiary American Cellular, which had been in default of its obligations has been recapitalized without consuming too much of Dobson Communications' liquidity and financial flexibility. And lastly, the proposed refinancing of the two secured credit facilities of the company's main restricted subsidiaries greatly relieves amortization pressures for the next 5.5 years.

Taken together, these actions stabilize the company's financial position for at least the next 12 to 18 months, Moody's said.

Notwithstanding these improvements to the company's financial profile, Dobson Communications is still highly levered and not without operational risk. Total debt and preferred stock, pro forma for the pending refinancing but excluding American Cellular, is $1.9 billion compared to trailing 12 months revenues of $584.6 million and EBITDA of $265.6 million, Moody's noted.

While the company has outperformed its peer group in subscriber growth, this growth has subsided in the first two quarters of this year. Dobson already enjoys higher subscriber penetration levels than its peers, which limits its growth potential. Also, Dobson currently derives a substantial portion of its revenues from high margin roaming agreements with other wireless carriers (34% of revenues for the six months ended June 30, 2003), especially AT&T Wireless and Cingular. While the company has recently signed long-term agreements to maintain its preferred roaming partner status with those two carriers, for roaming revenues to grow roaming minutes from those carriers must grow substantially. Moody's does expect continued growth in roaming traffic but believes that the torrid volume growth is not sustainable.

S&P upgrades Dobson senior notes, rates new notes CCC+, loan B-

Standard & Poor's upgraded Dobson Communications Corp.'s existing $300 million 10.875% senior notes due 2010 to CCC+ from CCC, confirmed its other ratings including its corporate credit at B- and assigned a CCC+ rating to Dobson Communications's new $600 million senior notes due 2013 and a B- to Dobson Cellular Systems, Inc.'s new $700 million secured credit facility. The outlook is stable.

S&P said it upgraded Dobson's senior unsecured debt because the ratio of priority obligations relative to asset value has improved, primarily as a result of the increased asset base from the American Cellular restructuring, while secured debt has been reduced.

The new $700 million credit facility is rated the same as the corporate credit rating. S&P said that under a simulated stressed scenario there is a strong likelihood of substantial but not full recovery of principal.

Dobson Communications' ratings reflect the weakened fundamentals of the rural wireless industry, including continued declines in roaming yield, and the potential for increased competition when wireless number portability (WNP) is implemented, particularly from the national carriers, S&P said. Roaming revenue is about 30% of total revenue.

These factors are somewhat offset by Dobson Communications' 1.5% and American Cellular's 1.7% better-than-average churn rate and above-average EBITDA margin in the mid-40% area, S&P said. While the company's reliance on roaming exacerbates its already sizable business risk, this risk is somewhat mitigated by receipt of recent long-term roaming agreements with AT&T Wireless Services Inc. and Cingular Wireless LLC to cover global system for mobile communication (GSM) traffic.

In the second quarter of 2003, compared with the second quarter of 2002, Dobson Communications' total revenue increased about 8.4%, due primarily to increased penetration, S&P noted. Roaming revenue increased about 6% because of higher minutes of use, offset by declining roaming yield. Roaming yield declined to $0.22 per minute in the second quarter of 2003, compared with $0.25 per minute in the second quarter of 2002. American Cellular's total revenue increased only about 1% in the second quarter of 2003 year over year, due primarily to lower roaming revenue. Dobson Communications' monthly average revenue per unit (ARPU) of $42 was flat compared to the first quarter of 2003. American Cellular's ARPU was $39, slightly higher than the second quarter of 2002.

Pro forma for this transaction, debt to EBITDA is expected to be in the 4.5x area, S&P said.

Moody's cuts O'Sullivan

Moody's Investors Service downgraded O'Sullivan Industries, Inc. and its parent O'Sullivan

Industries Holdings, Inc. including cutting O'Sullivan Industries' $30 million senior secured revolving credit facility due 2005, $10.6 million senior secured term loan A due 2005 and $77.7 million senior secured term loan B due 2007 to Caa1 from B2 and $100 million 13.375% senior subordinated notes due 2009 to Ca from Caa1 and O'Sullivan Industries Holdings' $22.8 million senior discount notes due 2009 to C from Caa2. The outlook is negative.

Moody's said the action follows the company's release of material sales and profit declines in fiscal 2003 (ended June) due to challenging conditions in the ready-to-assemble furniture industry.

The downgrade reflects the expectation that O'Sullivan will continue to face a difficult operating environment going forward, further pressuring its debt repayment capacity and liquidity.

The ratings downgrade and negative outlook reflect the deterioration in O'Sullivan's profit and cash flow levels, as changes in the personal computer market have caused persistent operating pressures in the ready-to-assemble industry. In addition, the industry has been negatively impacted by challenging economic conditions; store closures and inventory reductions at certain key customers; and increased foreign competition.

These conditions have resulted in excess capacity for domestic manufacturers, which in turn has heightened competition and further constrained sales and margins.

Although management's historical and current efforts to control costs have partially offset these pressures, Moody's believes that the O'Sullivan may have little additional flexibility regarding cost savings should sales and profits fail to stabilize and notes that the company has material required cash outflows associated with its debt service and its tax-sharing agreement with RadioShack.

O'Sullivan's planned product extensions into Coleman branded garage storage items and commercial office systems make strategic sense, but will require the displacement of entrenched competitors in these markets and may require additional time and investment before benefits are realized.

Moody's projects little if any free cash flow in fiscal 2004 and believes that O'Sullivan may require additional amendments to its credit agreement.

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