Fitch rates Beverly notes B+, loan BB

Fitch Ratings assigned a BB rating to Beverly Enterprises, Inc.'s new $225 million senior secured bank facility and a B+ rating to its planned $100 million subordinated notes issue and confirmed the company's existing BB- senior unsecured debt rating. The outlook is stable.

Fitch said it believes that Beverly's 2003 profitability will likely be negatively impacted by the loss of Medicare givebacks (the Medicare Cliff) and increased insurance costs/reserves.

The divestiture plan announced in the third quarter of 2002 is intended to improve profitability by unwinding those facilities that account for a disproportionately high share of the company's patient care liability exposure, Fitch noted. Beverly's strategy is to divest those facilities that are currently expected to account for more than 50% of the company's 2003 patient care liability costs.

Profitability should improve beginning in October 2003 as facilities that represent significant portions of the company's liability cost are divested and with increased Medicare reimbursement beginning at the start of the federal fiscal year 2004 (October 1, 2003).

On June 30, 2003, Beverly successfully completed the sale of the first tranche of facilities it intends to sell. During the first six months of 2003, Beverly primarily used disposition proceeds to reduce debt by $107 million on top of a $154 million reduction in 2002, Fitch said. Debt reductions included paying off of $112 million of off-balance sheet, synthetic lease arrangements.

Beverly's success in selling this first tranche, which included a large portion of homes with high patient liability costs, is a positive indicator regarding the company's ability to consummate future asset sales and demonstrates the existence of a viable market for Beverly facilities. Fitch said it anticipates leverage will continue to moderate as additional divestiture proceeds are used to reduce debt levels.

S&P rates Beverly notes B, loan BB

Standard & Poor's assigned a B rating to Beverly Enterprises Inc.'s planned $100 million subordinated notes and a BB rating to its proposed $225 million secured credit facility comprised of a $75 million revolving credit facility due 2007 and a $150 million term loan B due 2008. S&P also confirmed the company's existing ratings including its senior unsecured debt at B+ and corporate credit at BB-. The outlook is negative.

S&P said the secured bank loan is rated one notch higher than the corporate credit rating because it believes that in a distressed default scenario the estimated asset value offers a strong likelihood of full bank debt recovery in the event of default.

Beverly's ratings reflect the difficulties it faces in an industry that has been hampered by reimbursement cuts and rapidly escalating insurance costs. The rating also reflects S&P's expectation that the company's turnaround efforts, including significant asset sales to reduce its substantial patient liability costs, will achieve a measure of success.

The company's efforts to improve its financial performance and reduce vulnerability to key industry risks have included the divestiture of about 100 nursing homes since December 2001, including 49 in patient liability-plagued Florida, S&P noted. The company expects to complete additional asset divestitures in the next 6-12 months, concentrating primarily on facilities that pose disproportionately high patient liability risk. The company has used the proceeds of these sales for debt reduction and will continue to do so.

Recent reimbursement developments for both Medicare and Medicaid have alleviated some near-term rating concerns about the company, S&P added. Cash flow protection, with funds from operations to lease-adjusted debt anticipated in the mid- to high teens in 2004, will continue to improve to levels more consistent with the rating as debt is reduced and cash needs for liability claims are reduced.

Nevertheless, changes in reimbursement and insurance remain a longer term risk to future financial performance. For example, the Sept. 30, 2002, expiration of temporary rate increases in Medicare payments resulted in an estimated $56 million reduction in the company's annual revenues. Moreover, rate relief under the Balanced Budget Refinement Act of 1999, accounting for nearly $40 million in revenues, is subject to annual renewal, S&P said.

S&P confirms Argo-Tech, off watch

Standard & Poor's confirmed Argo-Tech Corp.'s ratings including its $140 million 8.625% senior notes due 2007 and $55 million 8.625% senior subordinated notes series C due 2007 at B- and its $130 million bank facility due 2004 at BB-, removed them from CreditWatch negative and assigned a negative outlook.

S&P said the confirmation reflects a stabilized, albeit weak, financial profile and a growing military business mitigating the impact of the weak commercial aerospace market.

Argo-Tech's ratings reflect its participation in the cyclical commercial aerospace industry and high financial risk due to a sizable debt load, S&P added. Those factors overshadow the company's established positions in niche markets and solid profit margins.

Although revenue and earnings have been adversely affected by difficult conditions in the airline and commercial aircraft sectors, cost-reduction initiatives have enabled Argo-Tech to maintain operating margins in the mid-20% range, S&P said. In addition, despite the pressure on earnings, the company has been able to repay over $30 million in debt since October 2001.

In the near term, S&P expects debt to EBITDA to be around 6x, with EBITDA and EBIT interest coverages around 2.0x and 1.5x, respectively. Improvement in credit protection measures is dependant on the recovery in the commercial aviation market, especially demand for aftermarket parts and services.

The negative outlook is because of the difficult operating environment, coupled with a heavy debt burden and somewhat constrained liquidity, which S&P said will challenge management to strengthen credit protection measures to a level consistent with current expectations.

S&P puts Intermet on watch

Standard & Poor's put Intermet Corp. on CreditWatch negative including its $300 million revolving credit facility due 2004 at BB- and $175 million 9.75% notes due 2009 at B+.

S&P said the CreditWatch listing is the result of weaker-than-anticipated cash flow generation resulting from very challenging end-markets, which are not expected to improve materially in the near term.

In addition, operating results are not anticipated to improve significantly in the near term and could potentially lead to financial covenant violations, S&P added. The company expects to be in compliance with its financial covenants in the third quarter and has initiated conversations with its lending institutions about potential waivers or amendments if needed.

Intermet's liquidity position continues to weaken, as a result of limited room under its financial covenants. As of June 30, 2003, the company had about $20 million in bank credit facility availability.

However, Intermet's financial covenants tighten at the end of September 2003, which would further erode the company's liquidity and may result in a covenant violation.

Intermet continues to experience very challenging market conditions in both North America and Europe, S&P said. The automotive casting market is cyclical, highly fragmented, and subject to intense pricing pressure. In addition, Intermet has significant exposures to the Big Three automakers which have been losing market share.

As of June 30, 2003, total debt to EBITDA was around 3.5x, at the upper end of S&P's expectations of total debt to EBITDA in the 3x-3.5x range.

Moody's confirms DRS, rates notes B2, loan Ba3

Moody's Investors Service confirmed DRS Technologies, Inc. including its senior implied rating of Ba3, ending a review for downgrade begun on Aug. 19. The outlook is negative. Moody's also assigned a B2 rating to DRS' proposed $200 million senior subordinated notes due 2013 and a Ba3 rating to its proposed $512 million senior secured credit facility, consisting of a $150 million revolving credit facility due 2008 and a $362 million term loan due 2010.

Moody's said the confirmation reflects DRS' large and stable revenue base, increased significantly with the acquisition of Integrated Defense Technologies, Inc. in a strongly favorable defense contracting environment, the strategic benefits expected from the acquisition of IDT, strong interest coverage and liquidity post-transaction, as well as the company's substantial funded backlog across a number of important military platforms.

The ratings also consider the substantial increase in leverage consequential to the IDT acquisition and thin free cash flows relative to the elevated debt levels.

The negative ratings outlook reflects Moody's concern over the company's ability to reduce debt from cash flows in the near term given the dramatic increase in debt associated with the IDT acquisition.

Post-transaction, debt is estimated to increase 167%, from $225 million (as of September 2003) to $600 million, Moody's said. Relative to operating levels, this represents leverage increase from approximately 2.5x EBITDA for the 12 months to June 2003 (approximately 3.7x adjusted debt/EBITDAR) to about 3.7x pro forma EBITDA (4.3x pro forma adjusted debt/EBITDAR).

Although interest coverage is expected to remain robust, with pro forma EBIT for the 12 months to September 2003 covering interest by approximately 3.9x, free cash flow for 2003 is expected to be only modest in the near term. Moody's expects free cash flow (approximately operating cash flow less capital expenditures) to remain below 10% of total debt through 2004, but improving thereafter assuming a full and successful integration of IDT and other recent acquisitions by DRS.

Fitch confirms Harrah's

Fitch Ratings confirmed Harrah's Entertainment's BBB- senior unsecured rating and BB+ senior subordinated rating. The outlook is stable.

Fitch said the confirmation follows the company's recent announcement that it will acquire Horseshoe Gaming for $1.45 billion, including the assumption of $533 million in debt. This represents a 7.2x multiple of Horseshoe's trailing 12 months EBITDA of $213 million.

The acquisition enhances Harrah's business profile by adding three market-leading properties to a well-diversified asset base, Fitch said.

However, the increased debt associated with the transaction reduces the company's financial flexibility within the rating category. Confirmation of current ratings incorporates the company's capacity to reduce debt over the next 12-18 months.

From a credit perspective, the transaction can be adequately absorbed within the existing rating category. Fitch estimated that on a pro forma last 12 months basis (excluding the sale of Harrah's Shreveport), leverage would increase to 3.8 times from 3.3x at June 30, 2003. Assuming a full year contribution from the acquisition in 2004, Fitch estimates that Harrah's could finish the year with leverage in the 3.5x range.

While the run-up in leverage is considerable, Fitch noted it is consistent with Harrah's strategy of financing acquisitions with debt, and thereafter deleveraging in a timely manner.

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