S&P cuts Land O'Lakes

Standard & Poor's downgraded Land O'Lakes Inc. including cutting its $350 million 8.75% notes due 2011 to B- from B+ and $250 million revolving credit facility due 2004, $250 million tranche B term loan due 2008 and $325 million tranche A term loan due 2006 to B+ from BB and Land O'Lakes Capital Trust I's $200 million 7.45% TOPrS to CCC from B-. The outlook is negative.

S&P said the downgrade reflects the decline in Land O'Lakes' operating performance and S&P's expectation that performance will not improve to prior levels in the near term.

The company has been negatively affected by the cyclical downturn in many areas of the cooperative's agricultural-based businesses, weakness in certain segments of its dairy operations because of heightened competition and soft feed volumes due to the weak agricultural markets. While Land O'Lakes is taking steps to rationalize production and increase productivity at its own facilities, industry conditions remain challenging and there will be continued pressure on margins, S&P said.

Land O'Lakes' ratings reflect an aggressive financial profile, the inherent cyclical nature and seasonality of many of the cooperative's agricultural-based businesses, moderate discretionary cash flow and a sizable debt amortization schedule. These factors are somewhat mitigated by the firm's diverse product line, geographic coverage, and strong consumer brand franchise.

Land O'Lakes is highly leveraged. S&P expects that total debt (including capitalized operating leases, the synthetic lease, accounts receivable securitization, and preferred stock treated as debt) to EBITDA will be more than 6.0x, EBITDA to interest (including preferred stock dividends) about 1.5x, and EBITDA margin in the 2.0% to 3.5% range.

Moody's rates National Nephrology notes B3

Moody's Investors Service assigned a B3 rating to National Nephrology Associates, Inc.'s proposed $150 million senior subordinated notes due 2011 and confirmed its existing ratings including its senior implied rating of B1. The outlook is stable.

Moody's said the ratings consider the company's high leverage as well as favorable operating trends and stable credit metrics.

In addition to National Nephrology's leverage, the ratings further reflect the company's acquisitive growth strategy, the significant concentration of revenues generated from the administration of EPO, the significant reliance upon and unpredictability of government reimbursements, Moody's concerns regarding the increasing costs for labor and supplies and the high level of competition in the industry.

Mitigating factors include the company's good performance track record since its inception in 1998, National Nephrology's demonstrated success in acquisition and de novo activities, expected stability in revenues supported by the predictable, recurring and long term needs of dialysis patients, positive industry growth trends and the continued support of equity sponsor J.W. Childs Associates, LP.

The stable outlook reflects Moody's anticipation of continued growth for National Nephrology, though at more moderate levels compared to the past. Revenues will be driven by modest organic growth, de novo developments and modest acquisitions.

Margins may come under pressure due to potential pricing and reimbursement pressures, as well as increasing expenses. However, this may be mitigated through improving efficiency at the company and greater scale as the company continues to grow, Moody' said.

Following the refinancing, leverage will increase slightly, though it will remain at a level consistent with the company's past. Leverage, as measured by adjusted debt (for 8x rent)/EBITDAR, will approach 5.0 times.

S&P rates Nebraska Book loan B+

Standard & Poor's assigned a B+ rating to Nebraska Book Co. Inc.'s planned $160 million senior secured bank loan and confirmed its existing ratings including its bank debt at B+ and subordinated debt at B- and NBC Acquisition Corp.'s subordinated debt at B-. The outlook is stable.

Although the transaction increases Nebraska Book's leverage, S&P expects that it will be gradually offset by the company's growing profitability and that EBITDA coverage of interest will remain adequate for the rating. Moreover, the company has built sufficient flexibility in its balance sheet to accommodate additional debt.

Nebraska Book's ratings reflect its relatively small size, lack of business diversification, high leverage and weak credit protection measures, S&P said. These factors are somewhat offset by Nebraska Book's established market position in the used textbook business and favorable industry growth prospects.

Revenues and EBITDA have increased by a compound annual growth rate of 14% and 17%, respectively, over the past five years. Nebraska Book has expanded wholesale operations, acquired college bookstores, improved same-store sales, and increased sales of complementary services, S&P noted.

Pro forma for the refinancing transaction, the company is highly leveraged, with lease-adjusted total debt to EBITDA of 5.8%, including parent NBC Acquisition's senior discount debentures. However, S&P expects that leverage will decline as EBITDA grows. Pro forma cash flow protection measures are weak but adequate for the rating category, with EBITDA coverage of interest expense at 2.2x for the 12 months ended June 30, 2003.

Moody's lowers Nebraska Book outlook, rates loan B1

Moody's Investors Service lowered its outlook on Nebraska Book Co., Inc. to negative from positive, confirmed its existing ratings including its $110 million senior subordinated notes due 2008 at B3 and NBC Acquisition Corp.'s $76 million senior unsecured debentures due 2009 at Caa1 and assigned a B1 rating to Nebraska Book's planned $110 million term loan and $50 million revolving credit facility.

The lower outlook reflects that the additional amount of secured debt would weaken all of Nebraska Book's ratings, and would leave no cushion at current rating levels for a change in strategy or operating performance. Moody's said it is concerned that competitive pressure or technology shift could change the dynamics of Nebraska Book's wholesale book business, or that the company may resume more aggressive growth or diversification strategies which could reduce cash balances and delay de-leveraging.

Moody's said the ratings reflect Nebraska Book's very high leverage relative to both income and assets following the proposed transaction and a modest amount of cash flow available to reduce debt.

Following the transaction, funded debt will be higher than total assets, including the book value of intangibles. Debt to EBITDA will rise above 5.0 times at closing, with lease-adjusted debt to EBITDAR well in excess of 5 times, Moody's noted.

Nebraska Book has not significantly reduced debt since its leveraged transaction in 1998, although it has improved debt protection measures as a result of sales growth and higher profit margins. Paydowns of secured debt from operating cash flow were largely offset by accrual of the parent company's discount notes, which have now gone cash pay. Moody's expects debt repayment to be modest over the medium term.

The ratings are supported by low volatility in used textbook segment of Nebraska's business, satisfactory fixed charge coverage ratios and by the substantial amount of cash which Nebraska Book has retained on its balance sheet which is being used to meet seasonal needs. The company has been able to retain cash as a result of following a more conservative acquisition strategy over the past two years.

S&P puts U.S. Oncology on watch

Standard & Poor's put U.S. Oncology Inc. on CreditWatch negative including its $175 million 9.625% subordinated notes due 2012 at B+ and $100 million senior secured revolving credit facility due 2007 at BB+.

S&P said the action reflects U.S. Oncology's vulnerability to Medicare prescription drug legislation currently being considered by Congress.

Pharmaceutical sales currently represent about half of U.S. Oncology's revenues and Medicare and Medicaid payments account for approximately 40% of the company's net patient revenues.

Both the House of Representatives and the Senate have passed separate bills aimed at reducing the amount paid by the government for cancer drugs. The House version would base Medicare reimbursement on a percentage of average sales price, while the Senate version proposes drug reimbursement based on 85% of the average wholesale price.

In a separate development, the Centers for Medicare & Medicaid Services is also expected to propose new rules aimed at reducing drug costs under Medicare.

S&P said the reduction in pharmaceutical reimbursement could be partially offset by increased reimbursement rates for administrative costs. In both the House and Senate bills, practice expense payments would be increased appropriately based on market surveys.

However, given U.S. Oncology's dependence on pharmaceutical sales and government reimbursement, the current and anticipated proposals represent a significant risk to the company, S&P said.

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