S&P puts Goodyear on watch

Standard & Poor's put Goodyear Tire & Rubber Co. on CreditWatch with negative implications including its senior notes, notes and bonds at BB-.

S&P said the watch placement reflects a likely significant increase in the proportion of secured debt in the company's balance sheet once current bank financing negotiations are completed.

Goodyear is expected to close on its secured bank facilities in late March or early April 2003, S&P noted. The new, secured facilities would effectively rank senior to the unsecured notes. The unsecured notes would likely be lowered to one notch below the corporate credit rating at that time, based upon the proposed proportion of secured debt. The unsecured notes are currently rated equal to the corporate credit rating, as almost all debt is unsecured.

Goodyear's lenders have granted the company waivers until April 4, 2003, to comply with certain covenants that would have required Goodyear to contribute about $500 million to its pension plans in excess of payment requirements arising from federal mandates. Under the waivers, the company has access to about $1.1 billion in two revolving credit facilities. The company has stated it will not announce fourth-quarter 2002 results until negotiations with its lenders are complete.

The ongoing bank negotiations are critical to stabilizing the company's near-term liquidity situation, so that management can focus on improving profitability at its North American Tire operations, S&P said. Without certain significant revisions to its credit facilities, Goodyear could face near-term liquidity issues.

Expected pension funding through 2005, together with significant near-term debt refinancing requirements would exceed internal cash generation if financial performance fails to improve. Debt maturities are scheduled to rise significantly in 2004, but completion of the pending bank financings will minimize maturities over the next two years.

Also, the company faces labor union contract negotiations in the spring of 2003 that could raise its ongoing cost structure and pension obligations, S&P said.

Goodyear has reported very disappointing financial results for the past four years owing to a number of factors including competitive pricing conditions; product shortages; product mix shifts; and depressed demand in key markets, S&P said. Recent profit pressures have been exacerbated by ineffective management of inventory in the face of demand and product mix shifts, primarily in the company's North American Tire business segment.

Fitch raises Nextel outlook

Fitch Ratings raised its outlook on Nextel Communications Inc. to positive from stable including its senior unsecured notes at B+, the senior secured bank facility at BB and preferred stock at B-.

Fitch said the positive outlook reflects its view that favorable financial and operating trends will continue over the next several quarters based on the positive momentum produced from the following factors during 2002: the significant improvement in operating performance through strong cost containment, low churn and solid ARPUs despite a somewhat unfavorable climate within the wireless industry and a weak economic environment; the reduction in financial risk due to the repurchase of $3.2 billion in debt and associated obligations; and a strong competitive position relative to other operators due to the unique push-to-talk application that allows Nextel to target higher-value and lower churn business users.

Expectations are for Nextel to strengthen credit protection measures further in 2003 to 3.4 times debt to EBITDA or less. The improvement in cash generation should lead to at least $500 million in positive free cash flow based on management's expectations for 2003, Fitch said. With past access to the equity market and a substantial cash position bolstered by free cash flow, Fitch expects Nextel management to consider additional debt reduction in the future, as it deems appropriate.

Nextel's strong cost controls, stable ARPU and solid net additions during 2002 have increased margins to 38% for the year compared to 29% for 2001 driving expected operating cash flow to $3.1 billion for 2002, an increase of $1.2 billion from 2001, Fitch noted. CCPU costs are down approximately 12% over the last year due to the outsourcing of customer care and back office support costs along with cost improvements associated with the new billing platform and the reduction in bad debt expense.

Even though Fitch expects Nextel's positive operating trends to continue during 2003, challenges and risks remain which, could moderate the pace of anticipated credit profile improvement, Fitch added. Shorter-term issues include the decision by the FCC on the 800 MHz consensus plan, weak economic environment and fundamentals within the wireless industry. From an intermediate to longer-term perspective, the concerns include the competitive threats to Nextel's Direct Connect offering, potential funding requirements of the 800 MHz consensus plan and technical viability of the iDEN platform.

Perhaps Nextel's biggest longer-term challenge is the competitive PTT threat from other wireless operators, Fitch said. While CDMA competitors have indicated the potential for a PTT service in the marketplace during 2003, Fitch believes near-term concerns have been exaggerated as competitive PTT services will clearly have their own hurdles to overcome.

S&P raises Petsmart outlook

Standard & Poor's raised its outlook on Petsmart Inc. to positive from stable and confirmed its ratings including its corporate credit at B+.

S&P said the revision reflects improving credit measures and solid operating performance over the past two years.

Petsmart's better results have significantly improved cash flow generation, with lease-adjusted EBITDA increasing to about $386 million in 2002 from $244 million in 2001, S&P noted. As a result, cash flow protection measures strengthened in 2002, with EBITDA interest coverage at about 2.7x in 2002, up from 1.9x in 2001. The company's debt leverage also improved with total debt to EBITDA at about 3.6x, down from 5.4x in 2001. In addition, the conversion of its $172.5 million convertible subordinated notes into common equity in early 2002 contributed to a meaningful improvement in its capital structure, with total debt to capital at 67% in 2002, down from 80% in 2001.

Petsmart has made significant progress in turning around its operations, resulting in solid same-store sales increases of 9.6% and 6.5% in 2002 and 2001, respectively, S&P added. This is attributed to Petsmart's successful store reformatting, expanded focus on pet services, and improved operating efficiency.

Still, Petsmart's historical operating performance has been inconsistent and the pet food supplies and services industry remains highly competitive, S&P said.

Moody's confirms Interpool

Moody's Investors Service confirmed Interpool, Inc.'s ratings including its senior debt at Ba2.

Moody's said the confirmation is in response to Interpool's announcement that it would restate its earnings and financial statements for the periods spanning 2000 through the third quarter 2002 for a cumulative accounting adjustment totaling approximately $4 million after tax.

According to Interpool, the firm's financial restatements will be limited to the accounting treatment of several finance lease transactions entered into during 2000 and 2001 and the reclassification of its computer-leasing segment as part of continuing operations, Moody's said. In addition, Interpool expects to record a non-recurring charge of approximately $10 million in its 2002 financial statements relating to the write-down of its investment in this segment. The company says that no other material accounting issues have arisen with KPMG, Interpool's new auditor.

In Moody's opinion, the accounting changes and cumulative restatements do not represent a significant change in the company's earnings or credit profile. Moody's says that the proposed revisions would reduce Interpool's tangible capitalization, but would not weaken its debt protection measures.

S&P rates Knowledge Learning's loan B+

Standard & Poor's rated Knowledge Learning Corp.'s proposed $235 million senior secured term loan B due 2010 and $25 million senior secured revolver due 2008 at B+. The outlook is stable.

Security for the loan is perfected first-priority liens on substantially all tangible and intangible property of Knowledge Learning and its subsidiaries. Proceeds from the term loan, combined with a $40 million seller note and an equity investment, will be used to acquire Aramark Educational Resource from Aramark Corp. for approximately $265 million.

Ratings reflect recent weak demand trends, the company's limited financial resources and lack of history in successfully operating as a much larger organization, S&P said, adding that "these factors overshadow the company's position as the second-largest provider in the highly fragmented early child-care and educational services industry."

The company's leverage is about 4.4 times lease-adjusted total debt to EBITDA.

S&P cuts Interpublic to junk, still on watch

Standard & Poor's downgraded Interpublic Group of Cos., Inc. to junk and kept it on CreditWatch with negative implications. Ratings lowered include Interpublic's $375 million five-year revolving credit facility due 2005, $500 million senior unsecured 364-day credit facility due May 2003, $500 million 7.25% senior unsecured notes due 2011, $500 million 7.875% notes due 2005 and $610.4 million zero-coupon senior notes due 2021, cut to BB+ from BBB-, and $361 million 1.87% convertible subordinated notes due 2006, cut to BB from BB+.

S&P said it cut Interpublic because of the company's recent record of weak profitability and higher debt to EBITDA, and the likelihood that restoring earnings prospects and a financial profile commensurate with prior ratings could take longer than anticipated.

In addition to the turnaround required at a number of business units, significant management attention is being consumed as it strives to rebuild liquidity, S&P said.

The CreditWatch resolution will depend on the company's plans to refinance its zero-coupon convertible note issue that is putable to the company for cash on Dec. 14, 2003, at the accreted vale of $587 million, and the May 2003 expiration of the company's currently unused $500 million revolving credit facility.

The ratings will be removed from CreditWatch and affirmed at the BB+ level if management is successful in executing its anticipated capital markets transaction, S&P said.

For the year ended Dec. 31, 2002, EBITDA coverage of interest expense was about 5.8x, S&P noted. Lease-adjusted EBITDA coverage of interest expense was about 3.8x. EBITDA margins were about 13.6%, compared with closer to 20% in 2000 and previous years.

At Dec. 31, 2002, total debt plus acquisition-related earn-out payments and potential puts plus contingent obligations under guarantees and letters of credit, to EBITDA was approximately 3.7x. Lease-adjusted total debt, including acquisition-related earn-outs and potential puts and contingent obligations, to EBITDA was about 4.4x. Total debt has gone down about 10%, while EBITDA declined by about 24% in 2002, compared with 2001, S&P said.

Moody's puts EchoStar on upgrade review

Moody's Investors Service put EchoStar Communications Corp. and its EchoStar DBS Corp. subsidiary on review for possible upgrade including EchoStar's $1 billion 4.875% convertible subordinated notes due 2007 and $1 billion 5.75% convertible subordinated notes due 2008 at Caa1 and EchoStar DBS' $1.625 billion 9.375% senior unsecured notes due 2009, $700 million 9.125% senior unsecured notes due 2009 and $1 billion 10.375% senior unsecured notes due 2007 at B1.

Moody's said it began the review because it believes EchoStar's credit profile may have improved by a sufficient degree to warrant less speculative ratings over the forward period.

Specifically the former developing outlook is less likely to be appropriate as the prospect of a rating downgrade has diminished considerably following the regulatory blockage of the company's proposed merger with Hughes, the strong remaining liquidity position after payment of the merger breakup fee, and further evidence of continued strength in operating performance, Moody's said.

S&P cuts Millennium Chemicals to junk

Standard & Poor's downgraded Millennium Chemicals Inc. to junk including cutting Millennium America Inc.'s senior secured bank loan rating to BB+ from BBB- and senior unsecured debt to BB+ from BBB-. The outlook is negative.

S&P said the downgrade reflects renewed concerns that substantially higher raw material costs and lingering economic uncertainties are likely to limit Millennium's ability to generate the free cash flow necessary to substantially improve the company's financial profile.

The financial profile has been stretched by adverse business conditions during the past couple of years, which has forestalled Millennium's efforts to reduce its sizable debt burden, S&P added.

S&P said it also recognizes that adverse business conditions in the petrochemical industry, including recent escalation in raw materials costs, are likely to limit cash distributions from 29.5%-owned Equistar Chemicals LP this year.

At the current ratings, credit protection measures are expected to improve over the next two years, with funds from operations to total debt approaching 25%, from approximately 10%, S&P said. Total debt to total capitalization (adjusted to capitalize leases) is above 70%, compared with the appropriate 55%.

S&P said the ratings could be lowered again if lackluster business conditions fail to improve, or if other issues, including substantially higher raw material costs or adverse developments related to lead paint litigation, impair Millennium's ability to reduce debt and preserve access to untapped credit capacity.

Moody's puts UnumProvident on review

Moody's Investors Service put UnumProvident Corp. on review for downgrade including its senior debt at Baa3.

Moody's said that the review will focus on the quality of the company's investment portfolio, the potential for credit impairments, the resolution of the company's current discussions with the SEC about the investment portfolio, the ability of the company to raise new equity and equity-like capital, and the level and quality of statutory capital particularly in light of the substantial amount of intercompany loans from the operating life insurance companies to the holding company.

Moody's said it will also examine the cash flows available to the holding company to service its cash needs and the increased pressure on the life companies' ability to upstream dividends to the holding company.

In addition, Moody's said that it will review UnumProvidant's operations, the ability of the life companies to generate statutory capital internally through earnings, and the ability to free up capital through de-risking measures.

S&P cuts Sirius notes

Standard & Poor's downgraded Sirius Satellite Radio Inc.'s senior secured rating including cutting its $116 million 15% senior discount notes due 2007 and $200 million 14.5% senior secured notes due 2009 to D from CCC-.

S&P said the action follows the exchange of most of Sirius' debt and all of its preferred stock for common stock.

S&P said it views the terms and nature of the exchange to be tantamount to a default.

But it added that the restructuring is beneficial to Sirius because it improves its near-term liquidity and substantially reduces its interest burden and the size of its repayment obligations, S&P said. The corporate credit and debt ratings will be reevaluated based on the company's new capital structure and its prospects for successfully establishing its satellite radio business.

S&P lowers La Quinta outlook, rates notes BB-

Standard & Poor's lowered its outlook on La Quinta Corp. to negative from stable and assigned a BB- rating to its proposed $250 million senior notes. Existing ratings were confirmed including La Quinta's senior unsecured debt at BB- and preferred stock at B-.

S&P said the outlook revision reflects its expectation that La Quinta's financial credit measures will weaken further during 2003.

For the first quarter of 2003, La Quinta expects a 6% decline in RevPAR compared with the same period in 2002, and anticipates to generate $31 million in EBITDA, S&P noted. In addition, the company is assuming a recovery in the lodging sector will take place in the second half of the year and hence is projecting flat RevPAR for the full 2003 and annual EBITDA between $155 million - $160 million.

At the end of 2002, La Quinta's total debt to EBITDA leverage was the high-3x area and its EBITDA to interest coverage ratio was in the high-2x area, S&P said. Based on the company's forecasts for 2003, debt to EBITDA is expected to be in the mid- to high-4x area and interest coverage in the mid- to high-2x area at the end of 2003.

The ratings on La Quinta reflect expectations that the company's hotel portfolio will generate a more steady level of cash flow as management progresses in rebuilding its lodging business and as the lodging environment recovers, S&P said. This is offset by the portfolio's geographic concentration, reliance on a single brand (which has yet to achieve strong national brand recognition) and single price segment.

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