S&P upgrades USI Holdings

Standard & Poor's upgraded USI Holdings Corp. including raising its $125 million bank loan and $75 million revolver loan to BB- from B+. The outlook is stable.

S&P said the upgrade is in response to USI Holdings' improving coverage ratios, prospective ability to satisfy debt covenants, much improved operating results and reduced debt leverage.

Offsetting the much improved company profile are USI's short tenure as a public company and lack of a consistent, sustained, profitable track record.

Many of the company's full-year 2002 performance measures place it squarely at the bottom tier of its peer group of insurance brokers, S&P noted. However, excluding charges related to discontinued operations in the first quarter of 2002, the company's trailing 12-months performance as of March 31, 2003 is more comparable to that of its peers.

S&P added that it considers the 12-month period beginning with second quarter of 2002 to be more indicative of USI's prospective operating results.

S&P said it expects that full-year 2003 cash flow from continuing operations (adjusted for interest and lease expenses) will provide a 50% cushion to fund expected interest, principal and lease obligations.

Though USI is currently in compliance with its debt covenants, it has had to renegotiate and amend debt covenants several times since 1999 to remain in compliance. USI is in the unique position of being partially owned by one of its note holders, J.P. Morgan Chase & Co. Consequently, banks have historically shown a willingness to renegotiate terms and debt covenants so that USI remains in compliance, S&P said.

Given the improved fundamentals of the company, S&P said it expects that USI will not only continue to remain in compliance with its existing credit facility but will be able to enter into a more stable, manageable long-term capital structure in the near future.

USI has continued to benefit from the hard market in the property/casualty industry, and revenues are up 6.8% over first-quarter 2002. However, given that the company derives only about 58% of its revenue base from property/casualty commissions, it has not experienced the same magnitude of top-line growth as have other pure insurance brokers, S&P said.

Moody's rates Weight Watchers loan Ba1

Moody's Investors Service assigned a Ba1 to Weight Watchers International Inc.'s proposed $463 million senior secured term loan B and confirmed its existing ratings including its $45 million senior secured revolving credit facility due 2005 and $32.8 million senior secured term loan A due 2005 at Ba1. The outlook is stable.

Moody's said the ratings reflect Weight Watchers' strong cash flows, impressive coverage ratios and strong market position but are restrained by its low level of tangible assets and a lack of significant product diversification.

The ratings reflect Weight Watchers' strong generation of free cash flow, positive industry trends, and a strong market position. Beneficial industry trends include the continued growth in the number of overweight people who can eventually become Weight Watchers' customers, Moody's said.

Furthermore, as the population ages and as more people become concerned about the health threats posed by obesity, the company's significant brand awareness should prove to be a competitive advantage.

The ratings also reflect Weight Watchers' low level of tangible assets and a lack of meaningful product diversification. At year end 2002, property, plant and equipment was only $13 million, whereas goodwill was $311 million. Furthermore, while the company's track record is impressive, it can be hurt by a number of factors that hurt attendance. For example, a decline in attendance at the weekly meeting that is lost due to the weather or the "CNN Effect" is not usually made up for.

Additionally, the company must successfully innovate to retain existing customers and attract new ones. There is always the risk that future innovation will not be sufficiently successful, that a new competitor's product will gain acceptance or even that the medical community will invent a new weight-loss pill.

S&P rates Weight Watchers' loan BB

Standard & Poor's rates Weight Watchers International Inc.'s proposed $504.7 million term loan B facility due Dec. 31, 2009 at BB. The outlook is stable.

Proceeds from the new term loan will be used to finance the announced tender of up to all $264 million of the company's 13% senior subordinated notes (plus related tender premiums and transaction fees) and to repay about $204.7 million of its existing term loan B, transferable loan certificate, and term loan D facilities.

Security is a first-priority perfected lien on the capital stock of the company's direct and indirect subsidiaries and all material property and assets of the company and each of its direct and indirect domestic subsidiaries

Ratings reflect the company's narrow business focus and high debt levels. These factors are partially offset by the company's leading market position, geographic diversity, predictable cash flows and favorable demographic trends, S&P said.

EBITDA for the 12 months ended March 29, was about $334 million, pro forma for the acquisition of The WW Group Inc., which closed on April 1. Pro forma full-year lease-adjusted EBITDA coverage of interest expense reflective of the new capital structure is about 9.9x compared to about 6.8x for the last 12 months ended March 29, 2003. Standard & Poor's expects the company to rapidly pay down debt with its free cash flows and does not anticipate sizable acquisitions in the intermediate term. As such, Standard & Poor's expects credit protection measures to improve modestly over the next few years, S&P said.

Moody's raises Masonite outlook

Moody's Investors Service raised its outlook on Masonite International Corp. to positive from stable and confirmed its ratings including its $100 million revolver due 2006, $100 million term loan A due 2006 and $450 million term loan B due 2008 at Ba2.

Moody's said the positive outlook reflects its expectations that Masonite will continue to reduce debt leverage and will successfully complete the integration process, as it has done effectively to date, of Masonite Corp.

The ratings acknowledge Masonite's strong cash flow generating ability, the smooth integration to date of the old Masonite Corp., the return to pre-acquisition debt leverage levels and the reduced counter party credit risk that the company faces as compared to other companies in the building products industry, Moody's added.

At the same time, the ratings incorporate the company's sales concentration to the two big box home center retailers, the narrow product line, the exposure to cyclical construction and remodeling markets, and any remaining issues arising from completing the integration of Masonite Corp.

As of the second quarter ended June 30, 2003, Masonite's total debt/capitalization ratio had been reduced to 44.4%, down from 55.5% at the time of the rating of the current bank credit facility in July 2002 and as compared to the 64.8% at the time of the company's initial rating in August 2001, Moody's said. Some of the initial debt decline came from asset sale proceeds and early prepayment of a seller note at a discount, but recent debt reduction has come out of utilization of the company's strong cash flow. Free cash flow as a percentage of total debt exceeded a healthy 20% in 2002 and should continue to show gradual increases in the coming years.

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