S&P upgrades AmeriSource-Bergen

Standard & Poor's upgraded AmeriSource-Bergen Corp. including raising $1 billion revolving credit facility due 2006 and $300 million term loan due 2006 to BBB from BBB-, $100 million 7.25% senior unsecured notes due 2005, $300 million 7.25% senior notes due 2012 and $500 million 8.125% senior unsecured notes due 2008 to BB from BB-, $300 million convertible subordinated notes due 2007 and $8 million 6.875% exchangeable subordinated debentures due 2011 to BB- from B+ and $300 million 7.8% trust originated preferred securities to B+ from B. The outlook remains positive.

S&P said AmeriSource-Bergen's ratings reflect its participation in the growing but fiercely competitive drug wholesaling industry, its short track record of performance at current levels, and the challenges of optimizing the synergies of the merger of two large companies. AmeriSource Health Corp. and Bergen Brunswig Corp. merged in August 2001.

These factors are mitigated by the improved scale and diversity of the new company, AmeriSource's progress in deleveraging its balance sheet and satisfactory cash flow protection, S&P said. Favorable demographics, new product introductions, and the greater acceptance of pharmaceutical use for disease-prevention programs will continue to drive industry growth. Yet drug distribution is being affected by intense pricing pressure from large drug retail and healthcare customers. Moreover, changes in government reimbursement rates for pharmaceuticals could pressure sales and margins.

The merger improved both AmeriSource's and Bergen's already solid business positions in pharmaceutical distribution, S&P noted. The companies match up well geographically, given AmeriSource's strong presence in the eastern U.S. and Bergen's presence in the West. There is little customer overlap, as AmeriSource's strength in hospital distribution added to Bergen's presence in alternate-site distribution. The combined company is gaining purchasing power and boosting operating efficiency through a rationalization of its distribution network.

AmeriSource-Bergen's EBITDA coverage of interest was a solid 6.2x for the last 12 months ended March 31, 2003, tracking well ahead of pro forma coverage of about 3.3x at the time of the merger, S&P said.

The company has made significant operational progress, and results to date indicate that the merger risk has been reduced substantially, S&P said. AmeriSource-Bergen could achieve an investment-grade rating in the next year or two if the company continues to grow operating income, extends its performance record, and if current credit protection measures are maintained or modestly improved.

Moody's rates Rent-A-Center loan Ba2

Moody's Investors Service assigned a prospective Ba2 rating to Rent-A-Center Inc.'s planned $120 million 5-year secured revolving credit facility, $80 million synthetic term loan and $450 million 6-year term loan. The action follows the recent assignment of a B1 rating to Rent-A-Center's planned senior subordinated notes. Moody's also confirmed the company's existing rating including its $250 million 7-year senior subordinated notes at B1 and Rent-A-Center East, Inc.'s $550 million of senior secured bank debt at Ba2 and $275 million senior subordinated notes due 2008 at B1. The outlook remains stable.

Moody's said it expects Rent-A-Center's credit profile will remain in line with its current ratings after the completion of these transactions, which follow an acquisition of 295 stores from Rent-Way earlier this year. The acquisition was financed by cash on hand.

The ratings continue to reflect Rent-A-Center's moderate leverage; the likelihood of neutral to negative cash flow available for debt reduction during the near term due to the announced stock buyback, as well as a continuation of organic and acquisitive growth; low tangible asset coverage relative to secured debt and total debt; historical volatility in operating profitability due in part to shifting strategies in a highly competitive retail segment as well as the opening and integration of new and acquired stores; and continued risk due to the low credit profile of Rent-A-Center's customer base and Moody's perception that a negative media image for the rent-to-own industry persists.

The ratings are supported by the improved performance measures demonstrated by Rent-A-Center's current management team over nearly two years; favorable legal decisions and legislation benefiting the rent-to-own industry and the resolution of all substantial lawsuits filed against Rent-A-Center to date; Rent-A-Center's national presence and dominant market share, which provides customer recognition, benefits of nationwide advertising and benefits of scale with regards to purchasing and systems; and adequate liquidity from cash balances and undrawn availability under the revolving credit facility, Moody's said.

The stable outlook reflects that Rent-A-Center's operating performance has shown sustainable improvements over the last two years and credit protection measures have returned to levels which are appropriate for the rating category, Moody's continued, adding that it expects these measures to remain within a stable range despite the $145.2 million equity tender contemplated in this refinancing.

Rent-A-Center's EBITDAR to fixed costs (adjusted to account for merchandise purchases as a current sales cost) rose to 2.7 times in 2002, a level which Moody's said it expects the company will be able to maintain after this financing and after integrating recently acquired stores.

S&P rates Medex notes B-, loan B+

Standard & Poor's assigned a B- rating to Medex Inc.'s planned of $150 million senior subordinated notes due 2013 and a B+ to its proposed $200 million credit facility. The outlook is stable.

The issues are part of a leveraged buyout by the company's equity sponsor, One Equity Partners, in tandem with the acquisition of a catheter product line from Ethicon Endo-Surgery, known as the Jelco Peripheral Intravenous Catheter (PIVC).

S&P said Medex's ratings reflect its niche position in the critical care market, which is subject to competition from much larger, better-financed companies. The ratings also reflect the company's heavy debt burden.

The planned $340 million acquisition of Jelco would add PIVCs to Medex's offerings, S&P noted. Single-use disposable PIVCs are commonly used to provide an entry-point to introduce fluids and drugs into the body intravenously. Jelco's business fits well with Medex's infusion systems business because it allows Medex to offer a complete drug delivery system and possibly create a competitive advantage.

However, the critical care products market is highly competitive and customers have numerous rival suppliers from which to choose. Many of Medex's competitors are larger and offer a broader range of products, which could make competing products more attractive to hospitals, group purchasing organizations, and others. Furthermore, Jelco PIVCs will no longer be associated with the Johnson & Johnson brand name, and this could place Medex at a disadvantage when competing against companies with more brand recognition.

Though Medex is acquiring a product line rather than a complete company, management will be challenged to integrate the Jelco business, which significantly increases the size and geographic scope of operations, S&P said.

The purchase of Jelco and the simultaneous leveraged buyout by One Equity Partners will leave Medex highly leveraged, with total lease-adjusted debt to EBITDA of about 4.4x and total debt to capital of about 78%, S&P added. Medex will have to successfully integrate Jelco's operations while maintaining its operating performance to be able to meet increased interest expense. Nevertheless, free operating cash flow is expected to be slightly positive in 2003.

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