S&P lowers Mediacom outlook

Standard & Poor's lowered its outlook on Mediacom Communications Corp. and subsidiaries to negative from stable and confirmed its ratings including its senior secured debt at BB+ and senior unsecured debt at B+.

S&P said the outlook revision is based on the concern about increased competition from direct-to-home (DTH) satellite TV providers, which are expanding the availability of local-into-local broadcast signals in the company's markets. Rising DTH competition is contributing to subscriber erosion at Mediacom that is higher than the level earlier anticipated by the company, marginally weakening the overall business risk profile.

During the 12 months ended June 30, 2003, basic subscribers declined by 1.4%. The company is now expecting up to a 2% basic subscriber decline for full-year 2003, compared with previous guidance of flat to 1% lower subscriber levels, S&P noted. Although Mediacom is steadily strengthening its financial profile and began generating free cash flow in the 2003 second quarter, the increased competitive environment makes it important for the company to maintain a higher level of financial cushion in order to retain the BB corporate credit rating.

Mediacom's ratings continue to reflect high financial risk from debt incurred for cable system acquisitions and rebuilding projects; rising satellite TV competition that is eroding basic subscriber levels; the less lucrative, smaller market characteristics of the company's systems; mature revenue growth prospects for video services; and rising programming costs, S&P said. Partly tempering these factors are the company's good business risk profile from its position as the dominant supplier of pay television in its markets, the potential for revenue growth from high-speed data and digital video services, and healthy margins.

EBITDA to interest is roughly 2.1x, and debt to EBITDA for the 12 months ended June 30, 2003, was high at about 7.7x, S&P said. Based on annualized EBITDA for the second quarter of 2003, debt to EBITDA was 7.3x, reflecting rising EBITDA and slowing cash consumption. Because of system rebuilding activities, Mediacom's capital expenditures have been high, and discretionary cash flow for the 12 months ended June 30, 2003, was negative. However, extensive system rebuilding projects are now largely finished, and the company generated positive discretionary cash flow in second quarter of 2003.

S&P rates Nextel notes B+

Standard & Poor's assigned a B+ rating to Nextel Communications Inc. $1 billion 7.375% senior serial redeemable notes due 2015 and confirmed its existing ratings including its senior unsecured debt at B+, preferred stock at B- and Nextel Finance Co.'s senior secured debt at BB. The outlook remains stable.

S&P said the new notes are rated one notch below the corporate credit rating because of the amount of material obligations that rank ahead of them.

Proceeds from the new notes will be used to completely retire the 9.75% senior serial redeemable discount notes due 2007 on Oct. 31 and the 12% senior serial redeemable notes due 2008 on Nov. 1. While this refinancing of higher coupon debt, along with the similar transaction completed in July 2003, will improve annual free cash flows by about $90 million, the impact is not material relative to the company's debt load, S&P said.

S&P said the ratings reflect its assessment that Nextel, with its differentiated service and experience in marketing to enterprise customers, has good prospects of maintaining its competitive edge in the near term. In addition, the company has shown progress in improving financial leverage.

Based on an assessment of Nextel's network and established niche in the business sector, S&P said it does not expect Nextel to be materially challenged by competitors in the near term. Nextel has a proven overbuild frame relay network that is optimized for push-to-talk (PTT) calls. Because competitors have networks that were not designed with PTT in mind, competing PTT offerings could find it challenging to consistently match Nextel's service quality in the areas of latency, reliability, and multiparty calling capability.

The company has demonstrated solid operating performance in the past seven quarters despite a challenging operating environment for the wireless services sector because of several factors, enabling Nextel to maintain industry-leading average revenue per user (second-quarter 2003 ARPU of $69, versus an estimated average of about $55 for other wireless carriers), maintain low monthly churn (second-quarter churn of 1.6%, versus an estimated average of about 2.5% for other carriers), and gain market share, S&P said.

Nextel has strengthened its balance sheet in the past year. The combination of solid EBITDA growth and privately negotiated debt-for-equity exchanges helped the company to lower debt to annualized EBITDA to about 2.9x in second quarter 2003 from about 4.1x in the same quarter a year ago, S&P said. Given that Nextel is projected to perform solidly in the next two years and that management remains committed to further deleveraging the balance sheet, the company's financial risk profile could moderately improve.

S&P puts Pep Boys on watch

Standard & Poor's placed the ratings of The Pep Boys - Manny, Moe & Jack on negative watch including its senior secured and senior unsecured debt at BB- based on the company's lower-than-expected projected earnings for the second half of 2003, and S&P's belief that credit measures for the year may be lower than previously anticipated.

In addition, the company incurred pretax charges of $85 million in second quarter to close underperforming stores, write-down inventory and reduce its workforce.

Pep Boys has also had negative same-store sales through the first half of 2003 and faces more than $100 million of annual debt maturities over the next four years.

These factors will require the company to continue to maintain sufficient cash flow and liquidity to satisfy these obligations.

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