S&P rates MSW Energy notes BB-

Standard & Poor's assigned its preliminary BB- rating to the proposed $225 million senior secured notes due 2010 issued by MSW Energy Holdings II LLC and co-issued by MSW Energy Finance Co. II LLC. The outlook is stable.

The proceeds of the notes, together with capital contributions and loans from the issuers' indirect parents, will be used to finance the acquisition of United American Energy Holdings Corp.'s 50% interest in Ref-Fuel Holdings LLC. The rating on the notes reflect several risks.

The noteholders will depend solely on distributions from Ref-Fuel Holdings to pay interest expense on the notes, which in turn depends on distributions from American Ref-Fuel Co. LLC (ARC; BBB/Stable). The notes are interest only and the full principal amount is subject to refinancing risk at maturity. And certain structural features that protect lenders at ARC and ARC's operating companies may encumber cash flows to MSW II. For example, there is a 1.75x recourse debt service coverage ratio test at ARC for any distributions upstream.

Also, ARC's high leverage ($1.2 billion as of June 30, 2003, about 80% total debt-to-total capital, incorporating nonrecourse and recourse debt) reduces the quality of the cash flow available to MSW II because of ARC's limited financial flexibility. And there is no debt service reserve for the benefit of the MSW II noteholders. Also, security consists of assignment of shares only. Fixed assets related to ARC and ARC operating companies are pledged to lenders of ARC and ARC operating companies.

Consolidated debt service coverage ratios, including ARC operating companies' recourse and nonrecourse debt service, ARC debt service, and the proportionate interest expense on the notes, are weak with an average of 1.4x and minimum of 1.3x through the term of the notes.

The rating reflects some strengths as well. ARC has a relatively stable and predictable cash flow from ARC projects that derive the majority of revenues from long-term contracted electricity sales, tipping fees, and steam sales. The special purpose entity structure of the issuer, as well as organizational constitution of its ultimate parent, CSFB Private Equity, reduces parental bankruptcy risk. Furthermore, lack of unilateral control over Ref-Fuel Holdings by any one member limits the incentive for the ultimate parent, CSFB Private Equity, to debilitate MSW II in a parental bankruptcy scenario.

Also, distribution test of proportionate consolidated interest coverage ratio of 2.0x provides limited credit protection during stressed cash flow periods.

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