S&P cuts Enron to B-, Chapter 11 "distinct possibility" without merger

Standard & Poor's downgraded Enron Corp. and put its ratings on CreditWatch with developing implications. S&P cut the senior unsecured debt six notches to B- from BBB-, the subordinated debt to B- from BBB- and the preferred stock to CCC- from BB. Among other actions, it also cut Northern Natural Gas Co.'s senior unsecured debt to B- from BBB-, Marlin Water Trust II's senior secured debt to CCC+ from BB+, Enron units' preferred stock to CCC- from BB, Osprey Inc.'s senior secured debt to CCC+ from BB+, Osprey Trust's senior secured debt to CCC+ from BB+. It affirmed Enron Funding Corp.'s senior unsecured debt at AA-.

S&P, which released its comments before Dynegy Inc. said it was pulling out of its proposed merger with Enron, said it cut the company's ratings because of concerns about the viability of the merger agreement and the liquidity implications if the merger did not go through.

S&P said: "A collapse of the Dynegy deal would create enormous pressure on Enron's credit profile because of Enron's limited access to capital at a time when extensive debt restructuring is necessary. Furthermore, Enron faces rising liquidity needs in connection with its trading activities as counterparties demand greater assurances to transact business with Enron. A move by Enron to seek protection from its creditors through a voluntary filing under Chapter 11 of the U.S. Bankruptcy Code is a distinct possibility if the merger falls through."

Moody's downgrades Enron senior unsecured to B2

Moody's Investors Service downgraded Enron Corp.'s long-term debt ratings five notches and kept them on review for further downgrade. The action lowers the company's senior unsecured debt to B2 from Baa3 and affects a total of $12.4 billion of debt. Enron's commercial paper was confirmed at not prime. Also lowered were Enron's senior unsecured notes to Caa1 from Ba1, its cumulative trust preferreds to Caa2 from Ba2, Marlin Water Trust's senior unsecured notes to Caa2 from Ba2, Marlin Water Trust II's backed senior secured to Caa1 from Ba1, Osprey Trust backed senior secured to Caa1 from Ba1 and European Power Ltd. Co. to Caa1 from B1.

The action, released before Dynegy Inc. announced it was terminating the merger of the two companies, cited "the continued decline in Enron's financial performance including significant consumption of cash in its operations, in part due to counter-party demands for cash margin, has diminished prospects for the completion of Enron's proposed merger with Dynegy Inc."

Moody's said its previous Baa3 rating assumed "good prospects" for completing the merger and "reasonable prospects for marginally investment grade characteristics of the merged entity."

Moody's said Enron's consumption of cash over the past several weeks together with disclosures in its recent 10-Q and restatement of earnings "are of concern."

It added that the company's core trading operations appear to be adversely affected by lack of confidence in Enron. To remain a viable acquisition candidate, Enron's core energy trading operation must be able to sustain profitable trading volumes, Moody's said.

The rating agency said it "views positively" efforts by Enron's bank lenders to help stabilize the company's liquidity. But Moody's said that as assets are pledged to support additional borrowings the senior unsecured notes become effectively subordinated.

"It is likely that Enron will need to pledge more of its assets to secure additional liquidity," Moody's commented.

Fitch downgrades Enron to CC, default "probable"

Fitch downgraded Enron's senior unsecured ratings to CC from BBB- and revised the rating watch to negative from evolving. The rating agency noted that a CC rating indicates a default of some kinds "appears probable."

Fitch, which released its action before Dynegy Inc. announced it was pulling out of its planned merger with Enron, noted that on Nov. 21 it warned that without a merger Enron would be moved into the B rating category. Since then, "severe deterioration in Enron's financial profile and erosion of its global wholesale energy franchise has occurred following an inability to renegotiate a definitive agreement between its merger partner Dynegy and its lending bank consortium," Fitch said.

Without a definitive agreement, a continuing "crisis of confidence" has impaired liquidity and resulted in customer defections from its trading operations.

As a result, Fitch "believes the longer-term intrinsic values of Enron's energy assets and its trading businesses have themselves been diminished, reducing the prospects for a successful conclusion of the merger argument and debt restructuring. Potential liquidity demands from off-balance sheet vehicles and collateral calls will further compromise Enron's financial profile."

In addition to cutting the senior unsecured debt, Fitch downgraded Enron's subordinated debt to CC from BB, its preferred stock to C from B+ and its commercial paper to C from F3. It also cut Northern Natural Gas Co. and Transwestern Pipeline Co.'s senior unsecured debt to CC from BBB- and the senior secured notes of Marlin Water Trust II and Osprey Trust to CC from BB.

S&P cites disappointing results, weak credit measures in Kmart downgrade

Standard & Poor's cited "disappointing results" and "weak credit measures" in its downgrade of Kmart Corp. announced Tuesday. Among the actions, S&P cut Kmart's senior secured debt and senior unsecured debt to BB from BB+ and Kmart Financing I's preferred stock to B from B+..

The rating agency said improvements had been expected as a result of a turnaround strategy.

S&P noted that Kmart's EBITDA before nonrecurring charges fell 20% for the third quarter ended Oct. 31, 2001, compared with the same period the previous year. The decline was primarily related to weak sales stemming, in part, from lower pricing on many items and reduced advertising. Same-store sales for the third quarter fell 1.5% and are flat year-to-date. Higher costs in the form of added store labor also contributed to the profit decline.

"Although Kmart appears to be making progress in some measures of customer satisfaction, such as in-stocks, and inventory flow and working capital metrics are improving, these have yet to result in stronger profitability and cash flow," S&P added.

It concluded: "The ratings could be under pressure if management is unable to demonstrate solid progress over the next year or two."

S&P cuts Classic Cable to D

Standard & Poor's downgraded Classic Cable Inc., cutting its $225 million 10.5% senior subordinated notes due 2010 to D from C.

S&P rates Sinclair Broadcast new notes B

Standard & Poor's rated Sinclair Broadcast Group Inc.'s upcoming issue of senior subordinated notes due 2011 at B and affirmed the company's existing ratings, including its BB- senior secured debt, B subordinated debt and B- preferred stock. The outlook is negative.

S&P said the ratings reflect Sinclair's "large television audience reach, cash flow diversity, and strong margin and discretionary cash flow potential."

These positives are offset by the company's "high financial risk from aggressive, debt-financed acquisition activity, mature long-term TV advertising growth prospects, and near-term advertising contraction that is pressuring key credit measures."

Over the past year, S&P said, reduced advertising has challenged Sinclair. National advertising revenue has declined by a double-digit percentage, while local ad sales have been more stable, with a single-digit decline.

The weakness was made worse by the Sept. 11 attacks and subsequent economic uncertainty and falling consumer confidence could delay a advertising rebound "well into 2002 when political advertising may provide some lift, though to a lesser extent than in 2000," S&P said.

Moody's rates new Sinclair notes B2

Moody's Investors Service assigned a B2 rating to Sinclair Broadcasting's proposed senior subordinated notes due 2011 and confirmed its existing ratings, affecting $2.2 billion of debt. Among the confirmed ratings are $1.1 billion of bank credit facilities rated Ba2, $450 million of senior subordinated notes rated B2, $172.5 million of convertible preferred stock rated B3 and Sinclair Capital's $200 million of HYTOPS rated B2. The outlook is stable.

Moody's said the ratings reflect Sinclair's "high leverage through its HYTOPS and modest cash flow coverage of interest and dividends."

It noted: "The weak advertising environment, exacerbated by the events of September 11, has placed a strain on the company's cash flow. The current advertising environment is not expected to improve dramatically for the foreseeable future. Due to the prolonged nature of this advertising slump, broadcasters risk facing additional downward pricing pressure, especially as it relates to national advertising, as competitors may dump inventory at lower rates."

Moody's also pointed out that Sinclair's stations tend not to be among the top two rated stations in their markets. "Moody's expects lower rated stations to suffer disproportionately more in weaker economies," the rating agency said.

On the plus side, Sinclair's ratings are supported by the company's interest in rationalizing its television station portfolio and strong asset coverage of debt, Moody's said.

S&P rates Appleton Papers new notes B+

Standard & Poor's assigned a B+ rating to Appleton Papers Inc.'s planned $250 million senior subordinated notes due 2008. S&P also affirmed its existing ratings, including its senior secured bank loan at BB. The outlook is stable.

S&P said the ratings reflect Appleton's "leading positions in niche specialty paper markets, a fairly stable cost base, limited product diversity, and an aggressive financial profile."

The rating agency noted Appleton's industries is "modestly cyclical and very concentrated," with the larger diversified Mead Corp. being the company's primary competitor.

Volumes in the U.S. have been declining about 9% a year because of the development of substitute technologies, and these declines are expected to continue, S&P added, noting that Appleton plans to offset the decreases with sales in the growing thermal paper market and new product applications.

S&P downgrades Hexcel, still on negative watch

Standard & Poor's downgraded Hexcel Corp. and kept the ratings on CreditWatch with negative implications, where they were placed on Sept. 21, 2001. Among the ratings lowered are Hexcel's senior secured debt, cut to B from BB- and its subordinated debt, cut to CCC+ from B.

S&P said the action reflects "prospects for continued weak operating performance and heightened liquidity concerns. A sharp downturn in commercial aerospace demand following the Sept. 11 terrorist attacks and a softer economy could lead to net losses in the intermediate term, following net losses for the nine months ended Sept. 30, 2001."

S&P expects the initial impact on Hexcel to be evident later this quarter and in the early part of 2002, as airplane manufacturers start to adjust inventories ahead of reduced production rates. Mitigating the impact is a recently announced restructuring program aimed at further cutting costs.

The rating agency added: "As a result of subpar financial performance and high debt levels, credit protection measures are very thin. Moreover, liquidity is tight, with limited cash balances and availability under the senior secured credit facility, and sizable interest payments due in early 2002 on rated subordinated notes."

S&P said Hexcel will have to negotiate covenant modifications on its credit facility in the fourth quarter. If these negotiations are successful, S&P said it will likely affirm the ratings and remove them from CreditWatch.

S&P lowers Terex outlook to stable

Standard & Poor's lowered its outlook on Terex Corp. to stable from positive and affirmed its existing ratings, affecting about $1.03 billion in debt, including its senior secured debt at BB- and its subordinated debt at B.

S&P said the lower outlook reflects "the company's weaker than expected operating results, continued softening in its construction and mining end-markets, and its aggressive acquisition policy."

It added: "These factors have extended the time period during which Standard & Poor's expected the company's credit protection measures to improve and therefore has limited the potential for higher ratings in the intermediate term."

In addition to an 18% decline in sales and a 28% fall off in EBITDA during the first nine months of 2001 compared with the previous year, Terex has continued its aggressive acquisition growth strategy, S&P said. It completed the purchase of CMI Corp. on Oct. 1 and this week announced the acquisition of two German companies, Atlas Weyhausen and The Schaeff Group, which will further increase debt levels. The $315 million purchase price for the three companies consists of $215 million in debt and $100 million in equity.

S&P said the transactions represent a debt to EBITDA multiple around 4.0 times. As a result of the weaker operating performance and higher debt levels, the company's credit protection measures have weakened, with total debt to EBITDA, as of Sept. 30, 2001, on a pro forma basis, increasing to about 5.1x from 3.7x at the beginning of the year, while EBITDA to interest coverage has declined to about 2.4x from 2.6x, S&P added.

Moody's downgrades Malden Mills, sees restructuring

Moody's Investors Service downgraded Malden Mills Industries, Inc., including lowering its $125 million senior secured credit facility maturing 2006 to Caa3 from B1. The outlook is negative.

Moody's said it lowered the ratings because it believes Malden Mills will need to restructure its debt and possible incur costs to "right-size" its plant. "As reported by the company, it may need an additional cash infusion to accomplish a turnaround and the company may consider filing for protection under Chapter 11," the rating agency added.

Moody's said its previous rating reflected a view that Malden Mill's cost containment program along with the ability to garner premium prices for its technologically innovative products would lead to improved margins and generate sufficient cash flow to reduce debt.

Improvements were seen in fiscal 2000 but this year lower demand and price pressure reversed that trend Moody's said.

S&P cuts AmeriKing to selective default

Standard & Poor's downgraded AmeriKing Inc. and its unit National Restaurant Enterprises Holdings Inc. to SD (selective default) from CCC+ and lowered its rating on National Restaurant Enterprises Holdings' $50 million 10.75% senior unsecured notes due 2007 to D from CCC- after the company failed to pay interest due Nov. 15 on its senior notes.

S&P also cut National Restaurant Enterprises Holdings' $50 million 13% pay-in-kind notes due 2008 to C from CCC- and AmeriKing's preferred stock to C from CC. National Restaurant Enterprises Inc.'s senior secured bank loan was lowered to C from CCC+ "reflecting the uncertain prospects for the full recovery of these issues in the event of a bankruptcy."

The rating agency noted: "AmeriKing's operating performance has been poor for the past two years, in part due to the weakening competitive position of the Burger King chain."

Moody's downgrades Infonet Services

Moody's Investors Service downgraded Infonet Services Corp., including lowering its senior secured debt to Ba3 from Ba2. The outlook is negative.

Moody's said that Infonet's recent performance has fallen short of the rating agency's previous expectations, adding: "The negative outlook reflects our concern that the growth of Infonet's revenue and EBITDA will be slower than originally forecasted."

Moody's noted Infonet also has low margins because of "the highly competitive nature of the international data transport market and the risk of increased pricing pressures."

However, Infonet has low levels of debt, relatively strong debt protection measures, and an established customer base, Moody's commented.

S&P cuts Mrs. Fields Original Cookies outlook to negative

Standard & Poor's lowered its outlook on Mrs. Fields Original Cookies Inc. to negative from stable. It also affirmed its ratings, including the B+ senior unsecured debt.

S&P said the revision reflects "declining operating performance, which has led to weakened credit measures."

Operating performance has been affected by the general economic downturn, exacerbated by the events of Sept. 11, S&P said. Comparable-store sales decreased 5.1% in the third quarter of 2001 following a decline of 5.0% in the second quarter.

Twelve-month EBITDA coverage of interest is only 1.8 times for the period ended Sept. 30, 2001, S&P added.

Moody's downgrades Oxford Automotive, negative outlook

Moody's Investors Service downgraded Oxford Automotive, Inc., affecting $375 million of debt including its $175 million of guaranteed senior secured bank credit facilities, cut to Caa2 from B1 and its $199.65 million of 10.125% guaranteed senior subordinated series D notes due 2007 to C from Caa1. The rating outlook is negative.

Moody's said the action reflects its "heightened concern" that Oxford will be unable to continue making its $10 million semiannual senior subordinated note interest payments.

Even if the company has enough cash to make the next payment due Dec. 15, it will have to amend its bank facility first, Moody's said.

"Oxford is experiencing an acute liquidity crisis, and it is Moody's perception that the company has no obvious sources of quick availability with the exception of a $32 million cash balance (as at September 30, 2001) and improved working capital management opportunities," the rating agency added.

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