S&P cuts Lone Star

Standard & Poor's downgraded Lone Star Technologies Inc. including cutting its $150 million 9% senior subordinated notes due 2011 to B- from B. The outlook is stable.

S&P said the downgrade reflects Lone Star's weaker than expected performance, owing to an increase in imports that have captured market share in commodity tubular products, substantial rise in the company's steel scrap and slab and natural gas costs that have eroded margins and uncertainties about whether recent prices increases will be sustainable and enable the company to offset these higher costs.

While drilling end-markets have been more active and rig rates (an indicator of strong demand) have risen in North American markets, most of this activity is focused on shallow depths and has yet to result in strong sales of value-added, higher margin products, S&P said. A recovery is possible in 2004 in Lone Start's more lucrative end markets, but a prolonged period of strong pricing and free cash flow would be needed to restore financial measures to levels consistent with its former rating.

Lone Star's ratings reflect the significant volatility associated with its markets, its exposure to high import levels and challenges it faces in offsetting currently high raw material costs.

Lone Star's EBITDA for the quarter and first nine months ended Sept. 30, 2003, was a loss of $7.0 million and $7.3 million, respectively, S&P added. The poor results of the September quarter reflect the reduced volumes from one of its key customers. The company expects to generate modest positive EBITDA in the fourth quarter, on some improved volumes and a modest decrease in its steel slab costs.

S&P rates Jenoptik notes BB-

Standard & Poor's assigned a BB- rating to Jenoptik AG's proposed €150 million senior guaranteed bonds. The outlook is negative.

Although Jenoptik's ratio of priority liabilities to total assets exceeds the threshold of 30%, the rating on the bond is equalized with the corporate credit rating because of the existence of non-operating assets directly held by Jenoptik, worth more than €100 million; the assignment of €150 million of senior downstream loans to Jenoptik's Clean Systems division, its most important subsidiary, which has the advantage of placing bondholders in a similar position to the creditors of these subsidiaries; and the existence of senior upstream guarantees from Jenoptik Photonics AG and its most important subsidiary, Jenoptik Laser Optik, Systeme GmbH.

Fitch rates Jenoptik notes BB

Fitch Ratings assigned a BB rating to Jenoptik AG's proposed €150 million seven-year senior notes.

The refinancing plan announced by Jenoptik in September 2003, which includes the issuance of 8.14 million shares and the notes, will strengthen the company's capital structure and improve its debt maturity profile, Fitch said.

Management will also seek to strengthen market positions through organic and acquisitive growth, while continuing to establish partnerships in order to reduce the group's risk exposure. Within the clean-systems division, management continues to evaluate strategic alternatives, which may include a co-operation with strategic partners or investors or a total or partial divestment of the business. The direction of any rating change, triggered by the occurrence of such an event, will clearly be dependent on the nature of the transaction and its impact on the business and financial risk profiles of the group.

Moody's rates Bank Petrocommerce notes B1

Moody's Investors Service assigned a B1 rating to the loan participation notes issued by, but without recourse to, Standard Bank London Holdings plc for the purpose of financing a loan to OJSC Bank Petrocommerce. The financial performance of the notes relies solely on the credit and financial standing of Bank Petrocommerce. The outlook is stable.

Moody's said the rating reflects Petrocommerce's important role in Russia's banking system as one of the top 20 banks in the country with a significant market presence. The rating is additionally supported by the bank's improving financial performance in the past two years.

Nevertheless, the rating remains constrained by Petrocommerce's close relationship with its parent, Lukoil - the largest oil company in Russia and the bank's majority owner - since Petrocommerce still has a high level of business with related parties, Moody's said. Also the lack of a long financial history, a low level of provisions and asset quality that needs to be improved weigh on the rating.

Although rapidly growing, Petrocommerce is still relatively small in absolute terms and as such is strongly exposed to any swings in general business conditions in Russia.

S&P rates Telex notes B

Standard & Poor's assigned a B rating to Telex Communications Inc.'s proposed $125 million senior secured notes due 2008. The outlook is stable.

S&P said the ratings reflect Telex's high debt leverage, the very competitive consumer and professional markets the company serves and its need to continually refresh its product line with new items. These factors are partially mitigated by Telex's well-known brand names and its portfolio of patents.

Sales for the first half of fiscal 2003 ended June 30 declined 4.6% from the previous year, with the Professional Audio segment essentially flat and the Audio and Wireless Technology segment down 14%. Weakness at the Audio and Wireless Technology segment was due to discontinued hearing instrument products and lower sales in the telecommunications and educational markets. With the company's emphasis on lean manufacturing and expense control, EBITDA, adjusted for non-recurring costs such as the consolidation of manufacturing plants, rose to $32.4 million for the 12 months ended June 30, 2003, from $27.5 million in 2001.

After the company's issuance of senior secured notes, debt leverage will remain high, especially given the significant business risk of the industry, S&P said. Total debt to lease-adjusted EBITDA, including holding company debt and unfunded pension obligations, is expected to be about 6.0x, and EBITDA cash interest coverage is expected to be about 2.5x. When paid-in-kind (PIK) interest accrued from the subordinated debt is taken into account, EBITDA interest coverage is about 1.6x.

S&P expects that with free cash flow applied to debt reduction and higher profitability from cost containment, EBITDA cash interest coverage should improve to the 2.5x-3.0x range in the intermediate term.

Moody's cuts Atlantic Mutual

Moody's Investors Service downgraded Atlantic Mutual Cos. including cutting its $100 million surplus notes due 2028 to Ba3 from Ba1. The outlook is developing.

Moody's said the downgrade was based on its evaluation of the company's capital initiatives, as well as consideration of several other factors including Atlantic Mutual's future access to capital, competitive positioning, current operating leverage, core loss reserve adequacy and the rating agency's concerns about Atlantic Mutual's ability to retain or achieve scale in its commercial and personal lines businesses, which could have an impact on the company's ability to generate capital organically.

A key issue considered by the rating agency was the impact on capital of business written by Atlantic Mutual during the soft market pricing period of the late 1990s. With limited other capital sources, due to its mutual company form, and later exacerbated by losses from the terrorist attacks of Sept. 11, 2001 and deteriorating equity markets, Atlantic Mutual increased its reliance on reinsurance to support its capital base. Some of the reinsurance arrangements have proven to be de facto financings of underwriting losses incurred during the late 1990s, i.e. "soft" capital that Atlantic Mutual was in the process of repaying. The company's decision to now unwind some of these agreements has caused an acceleration of these losses into the current year's results.

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