Moody's downgrades Kmart three notches, still on review

Moody's Investors Service downgraded Kmart Corp., affecting $4.7 billion of debt securities, and kept the company on review for further downgrade. Ratings covered by the action include: Kmart's senior unsecured debt and medium-term notes, cut to B2 from Ba2 and its lease certificates, cut to B3 from Ba3;

Moody's said its downgrade reflects Kmart's "continuing weak operating performance and a widening competitive gap against its peers, as well as uncertainty about the prospects of Kmart's franchise longer term and the traction of its turnaround strategy.

"Additionally, Kmart's discussions with its bank lenders, critical to financing its 2002 inventory build, are likely to result in the effective subordination of the senior unsecured debt."

Flat sales through December compared to last year and a 1% decline in December itself indicate that Kmart is continuing to lose share to its competitors, Moody's said. It also faces aggressive real estate expansion by Wal-Mart, Target and others with better operations and financial flexibility.

"It is not clear when management's turnaround strategy will gain traction, and it may require Kmart to downsize its store base and/or to increase debt in order to finance necessary improvements in its still weak supply chain systems and store operations," Moody's commented.

The rating agency believes Kmart's bank lenders are likely to seek a security interest in Kmart's assets in order to renew or extend the bank facilities that mature in the latter part of 2002. "The granting of a security interest would cause effective subordination of the senior unsecured debt," Moody's said.

Argentinean devaluation to hurt corporations, Fitch says

Recent and expected announcements by the Argentine government will hurt the financial health of the country's corporations, Fitch said.

Plans to devalue the currency should reopen access to foreign exchange but at a higher cost, Fitch said.

"Although expected to be beneficial to the country, this devaluation effectively expropriates significant value from the corporates in this once near-dollarized economy," the rating agency commented.

Fitch anticipates Argentine corporations will see a deterioration of financial flexibility and credit protection measures.

Even for the best credits, acute lack of liquidity in the Argentine market will limit companies' ability to offset the adverse effect on cash flow and to meet near term debt service with bank lines, Fitch added.

Although most operating costs are in pesos, financial expenses will be dramatically increased as most debt obligations of Argentina's blue-chip corporations are in U.S. dollars, the rating agency said. As a result, devaluation will immediately increase the debt burden.

Moody's rates new Rural Cellular notes B3, upgrades bank debt

Moody's Investors Service assigned a B3 rating to Rural Cellular Corp.'s new offering of senior subordinated notes and upgraded the company's senior secured credit facilities to Ba3 from B1. It confirmed the company's other ratings including its $125 million 9.625% senior subordinated notes due 2008 at B3, its $209.4 million 11.375% senior exchangeable preferred stock due 2010 at Caa1 and its $167.8 million 12.25% junior exchangeable preferred stock due 2011at Caa2. The outlook is stable.

Moody's said its assessment reflects Rural Cellular's high leverage, the competitive nature of the wireless industry, and the maturing market for wireless services in rural markets.

On the positive side, Moody's said Rural Cellular has stable cash flows and needs a relatively low level of capital to maintain and grow its rural franchise, allowing it to achieve positive free cash flow.

The outlook is stable because Moody's believes the company may have difficulty expanding free cash flow should growth slow in its markets, if additional investments in its majority controlled Wireless Alliance joint venture are required, and as the exchangeable preferred stock issues begin to require cash dividends in 2003.

Moody's upgraded the credit facilities as they will represent a smaller proportion of the company's capital structure after the note issue, proceeds of which will be used to permanently prepay $150 million of term loans and reduce borrowings on the company's revolver.

Fitch rates Owens-Brockway notes BB

Fitch assigned a BB rating to the new senior secured notes to be issued by Owens-Illinois' Owens-Brockway Glass Container Inc. unit. It also confirmed Owens-Illinois' $4 billion of secured credit agreement at BB, its $1.7 billion of senior notes at B+ and its $453 million of convertible preferred stock at B-. The outlook remains negative.

Fitch noted that the new notes will be secured by all the domestic assets but not foreign subsidiaries whereas the bank loans are secured by substantially all the domestic assets and 65% of stock of first-tier foreign subsidiaries. This results in access to 60% of cash flow versus 100% for the credit agreement and collateral of 50% of Owens-Illinois' assets versus 50% of Owens-Illinois' assets 65% of stock of foreign subsidiaries.

As $650 million of senior unsecured notes come due over the next 18 months, Fitch expects Owens-Illinois to refinance it using senior secured notes. At the moment there is enough collateral that Fitch does not believe a rating differential is needed between the notes and the bank loan but that could change if enough senior secured notes are issued.

Fitch said the negative outlook reflects uncertainties about Owens-Illinois' asbestos exposure.

The rating agency noted Owens-Illinois has been "proactively seeking out claims at more favorable settlements, and expects total expenses to start declining over the next few years."

S&P lowers Buckeye Technologies

Standard & Poor's downgraded Buckeye Technologies Inc. Ratings affected include Buckeye's $150 million 8.5% senior subordinated notes due 2005, its $100 million 9.25% senior subordinated notes due 2008 and its $150 million 8% senior subordinated notes due 2010, all lowered to B+ from BB-. The outlook is negative.

S&P said it cut Buckeye's ratings because it expects debt will remain elevated over the intermediate term, "which will likely prevent Buckeye from restoring financial flexibility to a level appropriate for the previous rating."

While capital expenditures should decline substantially now construction of its new $100 million airlaid non-wovens machine is complete, "weak markets, machine ramp-up costs, and heightened competitive pressures, are likely to dampen near-term earnings and impede free cash flow generation," S&P said.

It added that Buckeye has a below-average business profile and an aggressive financial profile but also leading positions in niche pulp markets.

S&P upgrades Friendly Ice Cream

Standard & Poor's upgraded Friendly Ice Cream Corp., including raising its senior unsecured debt to B- from CCC+. The outlook is stable.

S&P said it lifted Friendly's ratings after successful completion of its refinancing plan, restoring financial flexibility.

S&P said the refinancing "significantly" extends the maturities of the company's debt; it had been facing $75 million of bank debt maturities in 2002.

Nonetheless, Friendly's ratings are held down by intense competition in the restaurant industry, weak credit protection measures and a highly leveraged capital structure, partially offset by its established brand name and regional market position, S&P said.

Moody's lowers Antenna TV outlook to stable

Moody's Investors Service lowered its outlook on Antenna TV SA to stable from positive and confirmed the Ba3 rating on its $220 million of senior unsecured notes.

Moody's said the lower outlook reflects Antenna's deteriorating operating performance, as reflected in its third quarter results, and considerable uncertainty regarding the longer term prospects for the European advertising market.

"Despite a meaningful increase in audience share resulting from the September 10th airing of 'Big Brother', Antenna's revenues for the third quarter of 2001 decreased slightly to $22.0 ($22.7 million for the prior year period) while operating cost increased materially," Moody's said.

Moody's upgrade HMV Media, positive outlook

Moody's Investors Service upgraded HMV Media Group plc and assigned a positive outlook. Ratings affected include HMV Media's £440.0 million senior secured credit facility (amortized to £410.2 million), raised to B1 from B2, its £135 million 10.875% senior subordinated notes due 2008 and $125 million 10.25% senior subordinated notes due 2008, both raised to B3 from Caa1, and its $81.3 million 12.875% senior cumulative redeemable preference shares due 2009, raised to Caa2 from Ca.

Moody's said it lifted the ratings because of HMV Media's continued progress in operating performance and internal cash flow generation over recent quarters, further solidified by strong trading results for the Christmas period.

Strength in core European markets have helped cash flow as have management initiatives, including tighter working capital management, Moody's said.

"Significant progress" in deleveraging is reflected in net debt/EBITDA of 3.7 times for the 12 months to Oct. 27, 2001, compared to 4.2 times for the year ended April 28, 2001 and 5.0 times for the 12 months to Oct. 28, 2000, Moody's said.

S&P removes Stillwater Mining from watch

Standard & Poor's removed Stillwater Mining Co. from CreditWatch with negative implications and assigned a stable outlook to the company.

Ratings affected include Stillwater's $135 million secured term loan due 2007, $65 million secured term loan due 2005 and $50 million secured revolver due 2005, all rated BB.

S&P puts General Binding on negative watch

Standard & Poor's put General Binding Corp. on CreditWatch with negative implications.

Affected ratings includes General Binding's $150 mil 9.375% senior subordinated notes due 2008, rated B- and its $475 revolving credit facility due 2002, rated B+.

Moody's puts Ispat Inland on review for downgrade

Moody's Investors Service put of Ispat Inland Inc. and its affiliate Ispat Inland LP on review for possible downgrade, affecting $1.1 billion of debt securities. Ratings involved in the action include Ispat Inland Inc.'s senior secured first mortgage bonds at B3 and industrial revenue bonds at Caa2 and Ispat Inland LP's $700 million senior secured term credit facilities and $160 million senior secured letter of credit facility ratings both at B3.

Moody's said its review will examine "the challenging conditions within the domestic integrated steel industry combined with the company's limited financial flexibility, and the potential implications of financial difficulties encountered at other entities within the Ispat International NV (Ispat) group of companies.

Weak cash flow performance has limited the financial flexibility of Ispat Inland Inc., Moody's said.

But it added: "Recent indications of improved pricing and volumes for Ispat Inland may benefit the company's prospective financial performance and will be considered by Moody's review, nevertheless it is possible that Ispat Inland Inc. may require an extension into 2002 of its waiver of the financial covenant in its credit agreement regarding minimum consolidated EBITDA."

Moody's cuts Covanta, still on review

Moody's Investors Service downgraded Covanta Energy Corp. to junk, including cutting its senior unsecured debt to Ba3 from Ba1 and its subordinated debt to B1 from Ba2. The ratings remain under review for downgrade.

Moody's said the review will continue while Covanta takes actions to improve its liquidity either through asset sales or by accessing the capital markets.

Moody's said it cut Covanta's ratings because of increasing concerns about the company's "diminished liquidity, its lack of access to the capital markets, the inability to sell its remaining entertainment and aviation services assets, continued delays in the collection of outstanding California utility receivables, and its inability to meet cash usage covenants under its bank revolving credit agreement. The banks have agreed to waive these covenants through January 2002 but have as yet not agreed to provide any additional liquidity to the company."

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