S&P cuts Land O'Lakes

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

S&P said it cut Land O'Lakes because of the decline in its recent 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, industry overcapacity in the Upper Midwest dairy region, and supply and demand imbalance in mozzarella cheese manufacturing, S&P continued. While Land O'Lakes is taking steps to rationalize production and increase productivity at its own facilities, a long-term industry solution is needed to address the structural changes in milk supply in the Upper Midwest dairy region.

Furthermore, the imbalance in mozzarella cheese will take several years to equalize if demand remains at the current level, S&P said. Even with Land O'Lakes' low-cost joint venture mozzarella cheese manufacturing facility in California coming on-line, mozzarella cheese prices will remain low and will continue to pressure margins.

Land O'Lakes is highly leveraged, S&P said. Total debt (including capitalized operating leases, the synthetic lease, accounts receivable securitization, and treating the preferred stock as debt) to EBITDA will be over 5.5 times, EBITDA to interest (including preferred stock dividends) of about 2.5x, and EBITDA margin in the 4.0% area at Dec. 31, 2002, S&P said.

Moody's upgrades Messer Griesheim

Moody's Investors Service upgraded Messer Griesheim GmbH including raising Messer Griesheim Holding AG's €550 million 10.375% senior notes due 2011 to B1 from B2 and the €1.070 billion secured facilities of Messer Griesheim GmbH and various subsidiaries to Ba2 from Ba3. The outlook is stable.

Moody's said the action reflects the solid de-leveraging of the group over the past 12 months, driven by timely asset disposals, a strict control of capital spending as well as cost-cutting measures.

The ratings also reflect the relative stability of Messer's cash flows, which, as with all industrial gas companies, are supported by high capital and technology barriers and long-term customer contracts, especially in the pipeline business, that are also expected to largely mitigate any negative impact from the current weak economic environment, Moody's said.

However, Messer still has fairly high leverage, particularly compared to its larger and financially stronger industry peers, is dependent on the economic outlook of its two largest markets, Germany and North America (about 50% of first half 2002 sales), faces continued margin pressure in its cylinder activities, and will be challenged to fully achieve the envisaged cost savings and margin improvements within the timeframe contemplated, Moody's said.

Net debt/EBITDA has improved to around 3.5x from about 4.7x at the time of the initial rating assignment, Moody's said. Messer has repaid its $198 million senior term disposal facility about one year ahead of schedule.

Moody's noted that of the €400 million disposal proceeds targeted by the end of 2003 about €320 million were achieved at the end of June 2002, roughly at expected prices, thereby significantly reducing execution risk, with the remaining non-core assets to be sold over the next year.

S&P cuts TXU Europe Funding

Standard & Poor's downgraded TXU Europe Funding Ltd.'s €500 million 7% secured notes to CC from BBB+ and put them on CreditWatch with negative implications.

S&P said the action follows its downgrade of the senior unsecured debt issued by TXU Eastern Funding Co.

TXU Europe Ltd. guarantees TXU Eastern Funding Co.'s senior unsecured debt.

There is a high risk that TXU Eastern Funding Co. will default on its next interest payment, at which time the ratings on its debt would be lowered to D, S&P said.

S&P cuts WCI outlook

Standard & Poor's lowered its outlook on WCI Communities Inc. to stable from positive confirmed its existing ratings including its corporate credit at BB- and assigned a BB- rating to its new $350 million senior unsecured credit facility due 2005.

S&P said WCI has started to experience softness within its higher-end luxury product niche (traditional and high-rise homebuilding), much of which is devoted to the discretionary second home purchaser. Order activity in this segment has dropped roughly 28% for the nine months ended Sept. 30, 2002 compared to the same period one year ago.

In addition, recent events at two projects (Trieste, a luxury high-rise building with an average sales price of $2.26 million; and Ventanas, a mid-rise project with an average sales price of $535,000 in Naples, Fla.) indicate that sales prices may be weakening materially within the luxury home segment.

Specifically, WCI indicated that it reversed roughly $35.4 million of revenue relating to its Trieste ($10.1 million) and Ventanas projects ($25.3 million), S&P noted. The company recently disclosed that purchasers of five units within the Trieste project ($10.1 million contract value) intend to default on their contracts. Consequently, WCI will retain the contract deposits totaling $2.9 million. Additionally, a management/administrative failure at Ventanas has led to the potential for purchasers of 48 units to rescind their contracts ($30.9 million aggregate contract values).

While the situation at Ventanas appears to be an isolated event, and management appropriately addressed the situation via revenue reversal and public disclosure, S&P said it is somewhat concerned that the defaults at Trieste, coupled with the contract rescissions at Ventanas, speak to pricing softness within the luxury home segment and could ultimately impact WCI's profit margins and credit statistics.

S&P cuts Sola

Standard & Poor's downgraded SOLA International Inc. including cutting its senior secured debt to BB from BB+ and its senior unsecured debt to BB- from BB.

S&P said the action reflects challenges Sola faces in strengthening its competitive position in the North American market, which depends to a great extent on its establishing in the near term a network of wholly owned U.S. prescription processing laboratories, likely through several small acquisitions.

At the same time, competitive pressures and a weakened economy could test the company's ability to execute its strategy and realize expected financial results, S&P added.

Recent completion of a wide-scale restructuring program should reverse certain historical operating inefficiencies and provide Sola with a leaner cost structure, improved manufacturing productivity, a higher-value-added product mix, and improved supply-chain management, S&P said.

This, together with its lab expansion and the launch of new products, could yield medium-term financial measures in line with the rating category (pretax interest coverage in the mid-2 times area, return on permanent capital in the low teens percentage area, and funds from operations to total debt in the high teens percentage area), S&P continued.

Success is predicated, however, on strengthening its North American market position, S&P cautioned, adding that foreign exchange exposure also could affect performance. Sola's capital structure is expected to remain aggressive, with lease-adjusted debt leverage averaging in the mid-50% area and total debt to EBITDA around 3.5x, given possible use of bank debt to fund capital investment.

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