S&P puts Dillard's on watch

Standard & Poor's put Dillard's Inc. on CreditWatch negative including its senior unsecured debt at BB+, preferred stock at B+ and Dillard Investment Co. Inc.'s senior unsecured debt at BB+.

S&P said the action reflects a weakening of operating performance and S&P's expectation that the company's credit measures may deteriorate during 2003. The rating incorporated the expectation of a further recovery in operating performance and in credit ratios.

Dillard's operations are being affected by intense competition, lagging consumer confidence, a poor economy, a rising unemployment rate that has pared disposable personal income and the continuing impact world events are having on consumers' appetites for spending, S&P said. This environment is affecting sales growth for all department store operators, as all major players have seen same-store sales declines for a protracted period of time.

After several years of poor performance, Dillard's managed a relatively good year in 2002, with improved operating margins, EBITDA, cash flow protection, and leverage. Maintenance of the rating was predicated on a continuation of progress in 2003, but many of the same adverse macroeconomic factors that Dillard's and the rest of the retail sector faced on 2002 are unchanged, S&P said.

First quarter results were disappointing, and the recent 7% drop in same-store sales for May 2003, suggests that the economy and low consumer confidence are taking a heavier-than-average toll on Dillard's business. Dillard's same-store sales have been negative since 2000, and are off 7% for the first four months of 2003. Moreover, they have been in positive in only six of the last 28 months.

S&P added that it anticipates that EBITDA coverage of interest may decline from last year's 3.9x, a level that had been about adequate for the rating. Moreover, the company's resumption of share repurchases during the first quarter of 2003 may be a harbinger of greater activity in the future.

Moody's rates Psychiatric Solutions B3

Moody's Investors Service assigned a B3 rating to Psychiatric Solutions, Inc.'s planned $150 million senior subordinated notes due 2013. The outlook is stable.

Moody's said the ratings are limited by the company's aggressive acquisition strategy relative to its short operating history and small size and the risks associated with such a strategy. Offsetting these concerns are the company's leading position in a consolidating industry with potentially favorable growth trends, an experienced management team and Moody's expectation that the company will realize favorable operating trends going forward.

The stable outlook anticipates that operating trends will remain positive as the company integrates both The Brown School and Ramsay facilities and continues to improve existing operations.

Moody's said that although it expects acquisition activity will be the main growth driver going forward it also expects organic inpatient facility revenues to grow in the mid-single digit range. Once the integration of the recently acquired facilities is under control, Moody's expects the company to continue to supplement modest organic growth with a robust acquisition strategy of four to six facilities per year.

Moody's sees acquisitions consuming all the company's modest cash flow generation, hampering efforts to reduce debt going forward.

Following the proposed Ramsay acquisition, Moody's anticipates pro forma leverage (including The Brown School facilities) as measured by debt/EBITDA for Dec. 31, 2003 to be approximately 4.2 times (adjusted debt/EBITDAR will be high at approximately 4.8 times). Pro-forma interest coverage will be modest at roughly 2.5 times for the same period.

S&P rates Psychiatric Solutions notes B-

Standard & Poor's assigned a B- rating to Psychiatric Solutions Inc.'s planned $150 million subordinated ratings due 2013. The outlook is negative.

S&P said Psychiatric Solutions' rating reflects concern related to its ability to successfully integrate the operations of recently acquired businesses that increase the company's size dramatically in a short period of time, and the challenges to extend its limited record of success as a specialty health service provider given ongoing reimbursement risk from large third-party payors.

After the completion of two significant acquisitions, Psychiatric Solutions will have established itself as one of the three largest operators of behavioral health facilities in the U.S., S&P noted. Inclusive of the 11 facilities in the pending acquisition of Ramsay Youth Services and the completion of the acquisition of six facilities from the Brown Schools in April 2003, the company will have increased its total number of inpatient facilities to 22 from only five. Additionally, the company will have a total of 58 facilities that it manages for third parties, including units in hospitals.

With an experienced management team, the company will be well-positioned for further consolidation opportunities in this highly fragmented industry, S&P said. Psychiatric Solutions anticipates adding four to six facilities per year through acquisitions, but not until these latest two significant acquisitions are integrated into the company's operations.

With the debt incurred in connection with the acquisition of Ramsay, the company will have a highly leveraged capital structure with expected lease-adjusted debt to capitalization of about 75%. Operating performance, with margins in the low teens may improve as the company gains efficiencies with a larger base of facilities. S&P expects lease-adjusted EBITDA interest coverage to approximate 2.5x in 2003. Cash flow protection is weak with funds from operations to lease-adjusted debt of about 10% in 2003. Modest improvements anticipated as the benefits of these acquisitions are realized are incorporated in the ratings.

S&P rates Offshore Logistics notes BB+

Standard & Poor's assigned a BB+ rating to Offshore Logistics Inc.'s proposed $200 million senior unsecured notes due 2013 and confirmed its existing ratings including its senior unsecured debt at BB+ and subordinated debt at BB-. The outlook is stable.

Offshore Logistics' ratings reflect the company's position as a large, geographically diversified helicopter operator that services the cyclical and volatile offshore oil and gas exploration and production industry and somewhat aggressive debt leverage, S&P said.

Although the helicopter industry (like other oilfield services providers) is affected by the offshore rig count, which is heavily influenced by the capital spending patterns of upstream operators, an oligopolistic industry structure and demand generated throughout the exploration/construction/production cycle tends to ease Offshore Logistics' cash flow volatility, S&P said. The firm also owns a production management company (Grasso Production Management Inc.), but this division is a relatively small contributor to cash flow.

Offshore Logistics' financial condition should strengthen in fiscal 2004 because of rate increases implemented in the Gulf of Mexico over the past two years and a potential recovery in the company's Gulf of Mexico activity levels, S&P said.

Offshore Logistics' leverage is somewhat aggressive with total debt-to-total book capital of about 40%, as of March 31, 2003, and may be reduced modestly over the medium term from retained earnings, S&P said. Over the course of an industry cycle, EBITDA interest coverage is expected to average about 6.0x, with trough coverage of about 4.0x and peak coverage of about 8.0x. Through an industry cycle, funds from operations to total debt should average about 35%, with a cyclical trough in the mid-20% range.

Moody's rates AES China notes B2

Moody's Investors Service assigned a B2 rating to AES China Generating Co. Ltd.'s proposed $200 million bond issue. The outlook is stable.

Moody's said it understands that the main purpose of the new bond issue is to refinance the existing 2006 notes (B1, outlook negative), to pay special dividends to AES Corp. and for general corporate usage.

Moody's said the B2 rating reflects the likely reduction of future cashflows and balance sheet liquidity at the AES China level compared to the existing corporate profile. The rating also reflects the ongoing risks of contractual disputes arising in respect of power offtake for AES China's portfolio of power plants which is an endemic problem in respect of power projects in China. It also reflects the diminution in covenant protection for bondholders as the proposed covenants for the new debt issue will allow for more flexibility for AES China to provide cash distributions to its parent compared to the existing covenant structure for the 2006 notes.

Moody's added that while the fundamentals of the projects in which AES China has an interest have not materially changed, the projected Debt Service Coverage Ratio for future years after the refinance are weaker than under the current debt profile. The main reason for that is the proposed bond covenants now allow for proceeds from refinancing of the Jiaozuo power plant shareholder loan to be paid as special dividends to AES Corp.

Supporting the B2 rating and the stable outlook is that all power plants in which AES China has an interest are now fully operational including the six units of Yangcheng which has been in operation since July last year, Moody's said. In addition, the amount of power taken by the power purchasers for some of the plants has also shown improvement from previous years.

S&P cuts Mizuho, Sumitomo Mitsui, UFJ preferreds

Standard & Poor's downgraded the preferreds of Japanese bank groups Sumitomo Mitsui Financial Group, the UFJ group, and Mizuho Financial Group including SB Treasury Co. LLC's $1.8 billion non-cumulative preferred securities to B+ from BB-, TB Finance (Cayman) Ltd.'s 50,000 non-cumulative mandatory exchangeable preferred shares to B from B+, Tokai Preferred Capital Co. LLC's $1 billion perpetual preferred securities to B+ from BB-, Mizuho JGB Investment LLC's $1.5 billion non-cumulative preferred securities series A to B+ from BB- and Mizuho Preferred Capital Co. LLC's $1 billion non-cumulative preferred securities series A to B+ from BB-.

S&P confirmed the other ratings on the banks in the three groups.

S&P said the downgrades reflect the increased risk of payment default on the preferred instruments, given the impairment of the bank groups' financial profiles and exhaustion of distributable profits.

With uncertainties over the bank groups' future profitability, their capital remains at risk of erosion by the possible introduction of more rigorous evaluation of the groups' substantial deferred tax assets and still high risks of massive losses caused by credit costs and plunging stock prices.

S&P said it has examined the risks on Japanese banks' preferred instruments and has widened the gap between the rating on the issuer and its preferred debt to a larger extent than in regular cases.

As the bank groups' deferred tax assets are likely to be assessed more stringently, and the groups are still exposed to risks of an increase in credit costs and stock devaluations, the probability that distributable profits will be exhausted and a bank will suspend dividend payment on its preferred instruments has increased, S&P added,

Fitch rates UralSib notes B-

Fitch Ratings assigned an expected B- rating to the loan participation notes expected to be issued by Commerzbank AG to finance a loan to Ural-Siberian Bank (Uralsib).

S&P rates Sabesp notes B+

Standard & Poor's assigned a B+ rating to Companhia de Saneamento Basico do Estado de São Paulo's (Sabesp) $200 million senior unsecured notes due 2008 and confirmed its foreign currency debt at B+.

S&P said Sabesp's ratings reflect the risks of operating in the volatile economic environment in Brazil, the lack of a defined regulatory framework for the water utility sector and significant refinancing needs in 2003.

An additional risk to Sabesp includes the ongoing challenge to reduce overdue customer receivables, specifically from water wholesale to municipalities, S&P said. The risks are partially mitigated by Sabesp's strategic importance as a regional provider of water and wastewater service in the state of Sao Paulo, covering a large and broad territory with virtual monopoly for service and its capacity to progress in the capital program that allows comprehensive coverage of water service as well as expanded wastewater collection and treatment capability throughout the system.

Sabesp registered an improved financial performance in the first quarter of 2003 compared to the same period last year, S&P noted. The company recorded a growth of 10.8% in net operating revenues and 15.5% in cash generation (EBITDA) in the first three months of the year 2003 compared to the same period of 2002. This growth is due to a tariff increase of 8.22% in August 2002 and an increase in sales volume of about 3.5% compared to the first quarter of 2002.

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