S&P puts AmeriCredit on watch

Standard & Poor's put AmeriCredit Corp. on CreditWatch negative including its $175 million 9.25% senior notes due 2009 and $200 million 9.875% senior notes due 2006 at B+.

S&P said the action follows AmeriCredit's announcement that it will delay the release of operating results for the quarter and fiscal year ended June 30, 2003.

The delay was prompted by a review by the company and its independent auditors of the accounting treatment of certain interest rate swap agreements.

The company has indicated no anticipated changes in cash flow or total equity as a result of the review; however, income statements and the components of equity may require restatement, S&P said. The impact is estimated to be $50 million on a pretax basis.

S&P said it acknowledged that any restatement as a result of this review will have no impact on cash flow or total equity and that certain of its operating metrics indicate improvement. Nevertheless, S&P said it has consistently maintained that AmeriCredit's business model incorporates a relative high degree of risk. AmeriCredit has been under pressure in large part as a result of asset quality issues.

Fitch keeps AmeriCredit on negative outlook

Fitch Ratings said AmeriCredit Corp.'s senior unsecured debt remains at B with a negative outlook following the company's announcement of a delay in releasing operating results for quarter and fiscal year ended June 30, 2003.

AmeriCredit and its independent accountants are reviewing the accounting treatment of certain interest rate swaps that were entered into prior to 2001 and used to hedge variable cash flows on credit enhancement assets. This review will determine whether unrealized losses originally classified in other accumulated other comprehensive income should be reclassified to net income for fiscal-year 2002 and the first nine months of fiscal-year 2003, which may ultimately result in a restatement.

The amount of unrealized losses being reviewed totals approximately $50 million pre-tax.

Based on AmeriCredit's representation, Fitch said it does not believe that any restatement will have a material effect on previously reported cash flows or shareholders' equity because any such unrealized losses that may be reclassified to net income have already reduced shareholders' equity through other accumulated comprehensive income.

Fitch said its concerns continue to emphasize asset quality performance relative to chargeoffs and delinquencies, coupled with continued pressures in used car prices. Annualized net charge-offs declined to 7.4% of average managed auto receivables for the fourth quarter of fiscal 2003, compared with net charge-offs of 7.6% for the March 2003 quarter. Although, net chargeoffs have shown modest improvement, the level continues to remain high.

Moody's rates by Crum & Forster notes B1

Moody's Investors Service assigned a B1 rating to the $300 million of senior notes assumed by Crum & Forster Holdings Corp, which were initially issued by Crum & Forster Funding Corp.

Fairfax Financial has renegotiated its current credit facility, which enabled Crum & Forster Holdings Corp. to assume the notes and the related indenture issued by Crum &Forster Funding Corp.

The Crum & Forster rating reflects the group's current inability to access dividends from its insurance operating companies, Moody's said. However, Moody's recognizes that some progress has been made in this area, largely as a result of significant realized gains, and as of the end of the second quarter 2003, the earned surplus position of North River has improved to a point that should enable the company to pay modest dividends in 2004.

Moody's also noted that both United States Fire and North River have historically been troubled by weak and volatile earnings and significant adverse development on reserves. Moody's believes that the current management team has significantly changed the Crum & Forster's business mix having re-priced and re-underwritten the majority of the group's business including shifting its distribution platform. The turnaround had been slow to materialize but 2002 statutory results significantly improved.

Moody's said it believes that 2003 results will also continue to improve, helped by the current favorable market conditions. Crum & Forster also benefits from a high-quality investment portfolio, more conservative underwriting standards, an improving expense structure, and significantly reduced catastrophe exposure.

Nevertheless, Moody's believes that adverse reserve development written on business in prior years remains a risk, as does the company's exposure to asbestos and environmental claims. Moody's continues to be concerned with the general trends in asbestos settlements and the current legal environment.

Fitch puts Elektrownia Turow on watch

Fitch Ratings put Elektrownia Turow SA's senior secured debt secured by Power Purchase Agreement backed revenues on Rating Watch Negative including its Elektrownia Turow BV's €R270 million guaranteed secured bonds due 2011. The bonds are rated BB.

Fitch said the action follows a review of the initial draft act for the Polish power sector restructuring and the clarification of its timetable. This restructuring involves the cancellation of all PPAs between PSE SA, the national grid operator, and all power generators, including Elektrownia Turow, in return for financial compensation.

The draft act is still being discussed. The process will involve a new system under which consumers will pay a restructuring fee, and these future fees will be securitized to support a restructuring bond issue, Fitch noted. The bond proceeds will be used to compensate power generators for the cancellation of the PPAs.

The draft act provides for a unilateral cancellation of the PPAs, thereby putting pressure on the bondholders to accept the restructuring plan. On a positive note, the draft act specifies that certain events have to occur before such a cancellation can take place, including a successful restructuring fee securitization. This means the compensation funds will have to be readily available before the PPAs are effectively cancelled, Fitch said.

The level of compensation currently offered to Elektrownia Turow largely, but not fully, covers Elektrownia Turow's debt including the 2011 bonds secured by PPA-backed revenues. The compensation, however, is not set according to the company's debt position, Fitch noted. Importantly, the draft act provides for proportional prepayment of all secured debt, which, in Fitch's view, would lead to a deterioration of the PPA-secured creditor position, although secured creditors could instigate "execution" proceedings through Polish courts, under which compensation would be allocated in priority to PPA secured creditors.

Fitch added that any scenario other than full redemption that would effectively force bondholders to accept a risk higher than that provided by the current PPA security will likely be viewed as a default.

S&P lowers Danka outlook

Standard & Poor's lowered its outlook on Danka Business Systems plc to negative from stable and confirmed its ratings including its senior unsecured debt at B+.

S&P said the outlook revision is primarily due to margin pressure in the June quarter from a competitive pricing environment, as well as a turn to negative free operating cash flow in the period.

The ratings reflect Danka's still-declining revenue base and second-tier position in the highly competitive office equipment market, partly offset by the company's moderate financial profile for the rating and significant base of recurring service revenues, S&P said.

Revenue and EBITDA levels have declined since fiscal 1999, driven by a history of problematic acquisitions and an ongoing customer-base transition to digital copiers from analog, S&P added. Increasing competition and Danka's high cost structure pressured margins in the June quarter. EBITDA margins (operating-lease adjusted) declined to about 6% in the June 2003 quarter from more than 9% in the June 2002 quarter. Pressure on margins may be reduced in the second half of fiscal 2004 as the company benefits from the rollout of a new Oracle ERP system in the U.S.

Although revenues modestly declined in the June quarter, they are expected to stabilize over the near-to-intermediate term, as growth in digital product sales and installed base and related service revenues offsets the declining analog product base. EBITDA interest coverage dipped to 1.5x for the June quarter from more than 2x.

Although Danka had strong free operating cash flow for the past two years, higher levels of working capital contributed to a free operating cash flow deficit of about $14 million in June 2003, S&P said. Expected improvements in working capital and profitability should have a positive impact on near-to-intermediate-term free operating cash flows.

S&P confirms Star Gas

Standard & Poor's confirmed Star Gas Partners LP including its senior unsecured debt at B. The outlook is stable.

S&P said the confirmation follows Star Gas' announcement that the partnership acquired six heating oil and propane companies during the past four months.

The acquired companies consist of approximately 95,000 customers and are expected to add 81 million gallons of annual volume, representing an approximate 13% increase in Star Gas' total volume. The cumulative acquisition purchase price was $68.5 million, representing a 5.3x anticipated EBITDA multiple.

Although Star Gas has completed several all debt-financed acquisitions during the past four months, S&P said it confirmation is based on the expectation that management will refinance such transactions in a balanced manner with 50% of debt and 50% of equity over the near term. Failure to finance acquisitions in a balanced manner over time would likely warrant an adverse rating action.

The ratings on Star Gas reflect the company's high leverage and weak financial profile, coupled with the mature, highly fragmented, weak growth industry environment and the reliance on acquisitions to sustain growth, S&P said.

These risks are partially offset by the company's relatively stable and predictable cash flow, due to the nondiscretionary nature of heating oil and propane usage, and the company's margin-based business, which help mitigate against commodity risk and allow the company to pass through costs to its customers.

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