Moody's puts U.S. Steel on review

Moody's Investors Service put United States Steel Corp. on review for possible downgrade affecting $900 million of debt including its senior unsecured global notes due 2008 and senior unsecured quarterly income debt securities due 2031 at Ba3.

Moody's said the review is in response to the announcement by U.S. Steel that it has signed an agreement to acquire substantially all National Steel Corp.'s steel-making and finishing assets for total consideration of approximately $950 million.

The transaction offers U.S. Steel an opportunity to participate in the consolidation of the U.S. domestic steel industry without incurring exposure to legacy environmental and labor liabilities at National Steel, Moody's said.

Nevertheless, it will meaningfully increase U.S. Steel's financial burden, the rating agency added.

Moody's said its review will consider the competitive opportunities and potential operating benefits that the company could derive from the proposed purchase of National Steel's assets.

The review will assess U.S. Steel's proposed funding of the asset purchase, the associated increase in financial leverage and resulting implications for its debt protection measures and overall financial flexibility, Moody's said. In addition, Moody's will evaluate the cash flow potential from the acquired assets relative to their purchase price, and the potential for U.S. Steel to achieve an estimated $170 million of combined annual cost savings from the transaction, as well as the likely impact on its financial metrics should such benefits be either delayed, or more moderate.

S&P puts U.S. Steel on watch

Standard & Poor's put United States Steel Corp. on CreditWatch with negative implications including United States Steel LLC's $535 million 10.75% senior unsecured notes due 2008 and $49 million 10% senior quarterly income debt securities due 2031 at BB.

S&P said the action followed the announcement that U.S. Steel plans to acquire substantially all of bankrupt National Steel Corp.'s steelmaking and finishing assets for approximately $950 million (including the assumption of $200 million of liabilities). U.S. Steel will not inherit National Steel's pension and retiree healthcare liabilities.

Although the acquisition of National Steel would improve the U.S. Steel's market position and result in annual synergies of $170 million in two years, S&P said it is concerned that these benefits may be more than offset by weaker credit protection measures given the increase in debt leverage, declining steel prices, and increasing pension costs at U.S. Steel.

Moreover, the acquisition of National Steel and the expected sale of U.S. Steel's more stable mining and transportation assets to Apollo Management LP would be somewhat detrimental to U.S. Steel's business profile, S&P added.

With National Steel, U.S. Steel's operating leverage will increase from already high levels and subject the company to greater pricing volatility, S&P said. Also, National Steel has under-invested in its facilities, which will require increased capital spending on behalf of U.S. Steel.

Given the recent decline in steel prices, these expenditures will likely challenge the company's ability to generate free cash in the intermediate term, S&P said. U.S. Steel is also seeking consolidation opportunities in central Europe, which could further affect the company's financial profile.

Fitch puts U.S. Steel on watch

Fitch Ratings put U.S. Steel on Rating Watch Negative including its senior unsecured debt at BB and senior secured bank revolver at BB+.

Fitch said its watch placement follows U.S. Steel's announced bid for certain assets of bankrupt National Steel.

Fitch said its action contemplates higher leverage in combination with softening conditions in several of U.S. Steel's key markets as well as an added reliance on those markets to generate profits following the acquisition.

Both U.S. Steel and National sell to service centers and direct into the automotive, construction and container industries, Fitch noted.

In concert with savings in selling, general and administrative expenses, and transportation, the business combination makes a reasonable argument that will strengthen U.S. Steel's position in the Midwest markets, Fitch said.

Fitch cuts Allegheny Energy, still on watch

Fitch Ratings downgraded Allegheny Energy, Inc. and its subsidiaries and kept it on Rating Watch Negative. Ratings lowered include Allegheny Energy's senior unsecured debt, cut to B+ from BB, West Penn Power Co.'s medium-term notes, cut to BB+ from BBB-, Potomac Edison Co.'s first mortgage bonds, cut to BBB- from BBB, and senior unsecured notes, cut to BB from BBB-, Monongahela Power Co.'s first mortgage bonds, cut to BBB- from BBB, and medium-term notes and pollution control revenue bonds, cut to BB from BBB-, Allegheny Energy Supply Co. LLC's senior unsecured notes, cut to B from BB-, Allegheny Generating Co.'s senior unsecured debentures, cut to B from BB-, and Allegheny Energy Statutory Trust 2001's senior secured notes, cut to B from BB-.

Fitch said the downgrade assumes Allegheny Energy and Allegheny Energy Supply successfully complete negotiations to replace existing credit facilities with new secured bank facilities.

Allegheny Energy Supply's new ratings reflect the expected subordination of its senior unsecured debt to approximately $1.8 billion of new secured bank financing.

The new ratings also incorporate Fitch's view that Allegheny Energy Supply's continued solvency over the next two years will depend on a stabilizing economy and recovering wholesale energy markets, the smooth restructuring of its trading operations and access to additional sources of funding or asset sales proceeds to repay secured loans.

Positively, the majority of Allegheny Energy Supply's revenues going forward are projected to come from supplying the provider of last resort obligation load to its regulated utility affiliates, since the contribution from trading and marketing activities will fall precipitously compared to previous forecasts, Fitch said.

Fitch expects Allegheny Energy Supply's coverage ratios to be around the 1.5 times range and its debt-to-EBITDA ratio to be above 8x due to higher leverage and interest expenses.

Allegheny Energy's ratings are based on the collective cash flows of its three regulated utility companies, West Penn, Monongahela Power, and Potomac Edison, and those of unregulated generation company Allegheny Energy Supply. Allegheny's downgrade reflects the weakened profile of Allegheny Energy Supply and Allegheny Energy's potential exposures to Allegheny Energy Supply through $230 million of financial guarantees, Fitch said.

Regulated subsidiaries were downgrade because of linkage to the lower-rated parent.

Once the new bank facilities are closed and the risks associated with the defaults is resolved, Fitch said it expects to assign a negative outlook to the Allegheny group to reflect the uncertainties surrounding the outlook of Allegheny Energy Supply.

S&P rates Cascades notes BB+, loan BBB-

Standard & Poor's assigned a BB+ rating to Cascades Inc.'s planned $450 million senior unsecured notes due 2013 and a BBB- rating to its new C$500 million revolving credit facility due 2007 and put Cascades Boxboard Group Inc.'s $125 million 8.375% notes due 2007 rated B+ on CreditWatch with positive implications. The outlook on the new ratings is stable.

S&P said the ratings on the new notes are based on the assumption that the exchange of the new notes for the outstanding 8.375% senior notes issued by Cascades Boxboard Group will be successful.

ascades' bank credit facility is rated one notch higher than the corporate credit rating, reflecting good prospects for recovery in a default scenario, S&P said.

Cascades' ratings reflect its good product diversity in paper, packaging, and tissue; its leading market positions across several geographic and product markets; and its relatively stable earnings and cash flow generation through the industry cycle, S&P said. These strengths are offset by the company's use of debt to support an aggressive growth strategy.

Cascades' diverse revenue base has historically mitigated the cyclical volatility in earnings experienced by many of its peers, S&P noted.

Cascades continues to grow its business in packaging and tissue, with substantial capital expansion and acquisitions completed, the most recent being the purchase of two tissue mills from American Tissue Inc. in July 2002, S&P added.

Industry consolidation in both containerboard and boxboard has prevented prices from dropping as severely as other sectors during the current cyclical downturn. The company further benefits from its less cyclical tissue operations and its modest geographic diversity, with a strong European boxboard position and a European presence in specialty products, S&P said.

For the 12 months ending Sept. 30, 2002, EBITDA interest coverage was 5.4x and funds from operations to total debt was 22.2%, both of which are healthy for the rating, S&P said. Nevertheless, to maintain the rating, credit protection measures should remain stable with debt to EBITDA averaging in the 2.5x to 3.5x range, and funds from operations to debt averaging greater than 20%, through the cycle.

Moody's confirms Madison River

Moody's Investors Service confirmed Madison River Capital, LLC including its $200 million 13¼% senior notes due 2010 at Caa2. The outlook is negative. The action concludes a review begun in March 2002.

Moody's said the confirmation is based upon the stability and defensibility of Madison River's RLEC business, as well as the effects of cost containment in its CLEC business.

The rating is supported by the incumbent strength of Madison River's core rural local exchange service operations, regulatory pricing protection, substantial barriers to competition and the company's close relationship with the Rural Telephone Finance Cooperative, Moody's said. In addition, the rating recognizes that Madison River has recently attained positive free cash flow results.

Nevertheless, the negative rating outlook expresses our concern that intermediate-term cash flow generation could prove insufficient to meet maturing debt obligations, particularly $31 million in RTFC lines of credit that expire in March 2005, Moody's added. The potential re-amortization risks are mitigated by the continuity of funding support provided by the RTFC, even during times when Madison River's credit profile was substantially weaker than at present.

During 2002, Madison River's quarterly cash flow improved significantly on a year-over-year basis. For the 12 months ending Sept. 30, 2002, Madison River recorded positive free cash flow results (as measured by cash provided from operations less capex) that reflected lower operating expenses and the benefit of changes in working capital, Moody's said.

Management has taken steps to effectively address the overhang related to the Coastal put and has minimized the cash flow dilution of its CLEC operations.

Largely through the reduction of CLEC-related operating and capital expenses, Madison River has reduced leverage during 2002. Nevertheless with debt at 9.2 times EBITDA for the 12 months ending Sept. 30, 2002 (8.2 times on an adjusted EBITDA basis); leverage remains the highest of the RLEC peer group rated by Moody's.

Moody's rates Jack in the Box's loan Ba2

Moody's Investors Service rated Jack in the Box Inc.'s $300 million secured bank loan at Ba2. The rating outlook is stable.

The loan consists of a $175 million 3-year revolver and a $125 million 4½ -year term loan B. It is secured by a first priority lien on all assets of the company and its operating subsidiaries. Proceeds will be used to refinance the existing revolver and for general corporate purposes, permitted acquisitions, and fees & expenses.

Ratings reflect long-term pressures on the hamburger sector of the quick-service restaurant industry, ongoing changes to the company's previously stable operating and financial strategies, weak debt protection measures relative to investment-grade restaurants and the company's geographic concentration relative to larger competitors, Moody's said.

Ratings also reflect the company's industry-leading restaurant performance, the company's well-recognized trade name, success at expanding into new markets, effective marketing programs and ability to produce higher margins and average unit volumes than many competitors due to the ability to differentiate the value menu from the full-price menu, Moody's added.

Moody's upgrades Fisher Scientific, rates notes B2, loan Ba3

Moody's Investors Service upgraded Fisher Scientific International Inc. and assigned a (P)B2 rating to its planned $150 million add on to its 8.125% senior subordinated notes due 2012 and a (P)Ba3 rating to its planned $600 million senior secured credit facilities. The ratings are contingent on successful completion of the refinancing. Ratings upgraded include Fisher Scientific's $150 million 8.125% senior subordinated notes due 2012, to B2 from B3. Fisher's $150 Million 7.125% senior notes due 2005 were confirmed at B1. The outlook remains positive.

Moody's said the upgrade reflects the continued progress achieved by the company in strengthening its credit profile and in reducing debt from its 1998 recapitalization level.

In addition to the improving credit metrics, the upgrade reflects the company's consistent and favorable operating performance, its strong brand name and market positions, the diversification of revenues across numerous products lines, customers and geographic locations and the high percentage of revenues attributable to sale of consumables (approximately 80%), Moody's said.

Moody's also noted that the proposed refinancing will reduce interest expense considerably and will result in an immediate improvement in interest coverage.

Limiting factors include the company's moderate leverage, its negative tangible equity, the company's partial reliance on acquisition activity for growth, the limited pricing power for the distribution industry, the high level of competition and modest growth expected for the clinical laboratory segment (3-4%), Moody's added. The potential negative impact on growth from an uncertain economy and a softening life science research market is also a concern.

The positive outlook anticipates continued favorable performance driven by modest organic growth in the mid-single digit range and modest acquisition activity, Moody's said.

Fisher's leverage will not change materially as a result of the refinancing. However, the company's new debt structure will impact the notching of the various debt instruments. Currently, the ratings on the senior secured debt are notched up one level from the senior implied rating since the secured debt represents only 16% of total debt, and because collateral coverage is good. After the refinancing, the senior secured debt will represent almost 60% of total debt and collateral coverage will be diluted. As a result, the new senior secured debt will be rated at the senior implied level, Moody's said.

Leverage (debt/EBITDA) has dropped from approximately 3.8 times for the year ended Dec. 31, 2001 to 3.0 times for the 12 months ended Sept. 30, 2002, Moody's said. Coverage as measured by EBITDA/Interest has increased to 3.3 times from 2.8 times over the same period. For fiscal year 2003, Moody's anticipates leverage in the mid-two range and coverage to approach 5.0 times.

Fitch views CMS actions positively

Fitch Ratings said recent actions by CMS Energy Corp., specifically the announced sale of the CMS Panhandle Companies for $1.828 billion, will have positive credit implications for the company.

Fitch currently rates CMS' senior unsecured debt at B+ on Rating Watch Negative.

Resolution of the Rating Watch is dependent on the timely release of re-audited financial restatements, the successful refinancing of bank facilities and the conclusion of pending regulatory investigations, Fitch said. CMS expects to release re-audited financial statements and repay or refinance outstanding bank facilities by March 31, 2003. If bank facilities at Consumers Energy are not successfully refinanced, Fitch foresees the need for $630 million of additional funding from asset sales or other financing sources in 2003, and approximately $800 million of maturities in 2004.

CMS' ratings were placed on Rating Watch Negative on July 17, 2002, following concerns regarding CMS' weak liquidity position, high parent debt levels and limited financial flexibility.

The sale of the Panhandle Companies will serve to bolster CMS' near-term liquidity levels and will help the company to meet approximately $1.3 billion of debt and bank facility maturities in 2003. Fitch said. Additionally, consolidated leverage and coverage ratios should improve over prior estimates as a result of associated debt reduction from the sale, although CMS will lose a relatively stable dividend source.

S&P cuts Cable Satisfaction, still on watch

Standard & Poor's downgraded Cable Satisfaction International Inc. including cutting its $150 million 12.75% senior notes due 2010 to CC from CCC+ and kept it on CreditWatch with negative implications.

S&P said the action reflects its continued concerns about Cable Satisfaction's ability to arrange funding by Jan. 31 to refinance its maturing €100 million secured term loan and obtain liquidity for ongoing operations and debt service.

As at Sept. 30, 2002, Cable Satisfaction was in violation of some of its covenants for its €100 million secured term loan, for which the company obtained waivers until Jan. 31, 2003, and simultaneously extended maturity to Jan. 31, 2003 from Dec. 31, 2002.

Cable Satisfaction currently has no access to additional funding and cash on hand is limited, implying a risk profile that is vulnerable to nonpayment and dependent on financial market conditions in the very near term, S&P said.

S&P cuts Rent-Way

Standard & Poor's downgraded Rent-Way Inc. including cutting its $435 million senior secured credit facility to CCC from CCC+ and removed it from CreditWatch with negative implications. The outlook is developing.

S&P said the action is in response to its ongoing concern about Rent-Way's ability to refinance its bank loan that matures in December 2003 amid the uncertain outcome of federal investigations and class action lawsuits against the company.

Improper accounting entries were made in fiscal 2000, 1999, and 1998 that overstated assets and income and understated liabilities and expense, S&P noted. The class action alleges that as a result of accounting irregularities, the company's previously issued financial statements were materially false and misleading. The lawsuits seek damages in unspecified amounts. In addition, there are pending federal governmental investigations by the SEC and the U.S. Attorney regarding the accounting irregularities.

In an effort to improve its liquidity, the company entered into an agreement to sell 295 of its stores to Rent-A-Center Inc. for $101.5 million in cash, S&P said. The transaction is expected to close in the second quarter of fiscal 2003. Proceeds from the sale will be used to pay down existing bank debt.

S&P rates Fisher Scientific notes B

Standard & Poor's assigned a B rating to Fisher Scientific International Inc.'s new $150 million nine-year senior subordinated notes. The company's existing ratings including its senior secured debt and senior unsecured debt at BB- and its subordinated debt at B remain on CreditWatch with positive implications.

S&P said the CreditWatch reflects Fisher's strong performance in a difficult market environment and the expected benefits of its planned refinancing. The rating agency added that it estimates that a proposed refinancing of high-cost debt issued to finance the company's 1998 LBO should save at least $10 million of interest expense annually.

If the balance of the refinancing is completed as anticipated in early 2003, S&P said it expects to raise the corporate credit and senior debt ratings to BB from BB- and subordinated debt ratings to B+ from B.

Although the company continues to operate with a heavy debt burden, with total debt to capital in excess of 95%, other credit measures are strengthening, reflecting ongoing operating improvements, S&P said. Funds from operations to lease-adjusted debt and EBITDA interest coverage have increased to more than 20% and 3.5x, respectively.

S&P cuts Vanguard Health, rates loan B+

Standard & Poor's downgraded Vanguard Health Systems Inc., removed it from CreditWatch with negative implications and assigned a B+ rating to its new $150 million senior secured term bank loan due 2009. Ratings lowered include Vanguard's corporate credit rating, cut to B from B+, and $300 million 9.75% subordinated notes due 2011, cut to CCC+ from B-. The existing $125 million senior secured revolving credit facility due 2006 was confirmed at B+. The outlook is stable.

S&P said the downgrade reflects its concern about Vanguard's ability to earn a return consistent with a higher level of credit quality, considering the added debt to finance its acquisition of Baptist Health System in San Antonio, Texas. The purchase of Baptist Health, a large five-hospital, not-for-profit system, cost Vanguard $295 million, and requires a capital expenditure commitment of $200 million over six years to upgrade the facilities.

The secured bank facility is rated one notch higher than the corporate credit rating. The facility is secured by first priority security interests in all tangible and intangible assets. S&P's review of the collateral package in a distressed default scenario suggests that estimated asset value will be sufficient to provide complete recovery of the full bank facility in the event of a default.

The speculative-grade ratings on Vanguard reflect a portfolio of hospitals that has not been well diversified and that was built during the past three years primarily through a risky strategy of buying turnaround situations, S&P noted. With the completion of the Baptist Health System transaction, Vanguard now owns and operates 15 acute-care hospitals in Illinois, Arizona, California, and Texas. The majority of these hospitals were acquired from not-for-profit entities during the past three years.

Vanguard is attempting to bolster the profitability of its newer operations by increasing the number of services offered, recruiting additional physicians, eliminating weak services, and rationalizing capital costs, S&P said. However, the pace of improvement, which has been below the rating agency's expectations, highlights the competitive nature of Vanguard's markets and the challenge it faces to bolster its weak operating margins of 9% in 2002. The company's liquidity cushion to meet $200 million in committed capital requirements and other capital needs could become quite thin in light of minimal free cash flow and possible future shortfalls in performance.

Moody's puts Aquila on review

Moody's Investors Service put Aquila, Inc. on review for possible downgrade, including its senior unsecured debt at Ba2.

Moody's said the review is in response to Aquila's weak financial results and Moody's belief that the current negotiations with bank lenders may result in a significant amount of secured debt in the company's capital structure.

The company received a waiver under its bank agreement until April for a defaulted interest coverage covenant, Moody's noted. Significant charges related to the shuttering of the company's trading business and other operations resulted in quarterly losses which will be carried-through in a rolling covenant calculation. The company has projected that the negative impact of the losses will affect the covenant calculation until December 2003.

In its third quarter earnings conference call, Aquila, Inc. announced its intent to reduce the size of its corporate revolver in line with its changed business profile, Moody's added. Its willingness and ability to dramatically reduce its revolver may be sufficient to keep its facility unsecured, however, some other newly negotiated bank facilities in its sector have required a security interest in the borrower's assets. As a condition of granting the waiver of the covenant default the bank group required Aquila to seek regulatory approval to grant security; an indication of the intent to request collateral.

Moody's said it believes that the chances are better than not that Aquila will have to grant some form of security in order to satisfy the lenders.

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