S&P lowers Huntsman outlook

Standard & Poor's revised its outlook on HMP Equity Holdings Corp. and its subsidiaries Huntsman International Holdings LLC and Huntsman LLC to negative from stable and confirmed its ratings on the companies including HMP Equity's senior secured discount notes due 2008 at B-, Huntsman International Holdings' senior unsecured debt at B-, Huntsman International's senior secured debt at B+, senior unsecured debt at B and subordinated debt at B- and Huntsman LLC's senior secured debt at B+. Huntsman Advanced Materials LLC including its senior secured notes at B, continues to have a stable outlook.

S&P said the outlook revision highlights the risk of a downgrade this year given the disappointing second quarter operating results, diminished expectations for a meaningful rebound in the second half of 2003 and the potential for additional raw material pressures in the petrochemical industry.

S&P added that it also recognizes that adverse business conditions facing the Huntsman companies will limit prospects for reducing the onerous debt burden over the near term and may result in bank loan covenant violations at both Huntsman LLC and Huntsman International Holdings LLC within the next several quarters.

From an operating perspective, Huntsman's businesses continue to face persistent challenges that include oversupply conditions and low operating rates in petrochemical product lines, reduced volumes due to weak economic conditions and unusually volatile raw material costs, S&P said. Industry conditions are likely to remain subdued at least for the next couple quarters, but expectations for economic improvement and the absence of large-scale capacity additions in most commodity chemicals suggest that operating results could begin to strengthen in late 2003 and beyond.

During recent years, operating results have reflected the company's exposure to cycles, with EBITDA margins in the high-single digit area; this exposure elevates credit risk for a company with a substantial debt burden, S&P said. Still, these businesses are capable of achieving operating margins in the mid-teens percentage area, on average over the course of the business cycle.

S&P cuts Doane Pet

Standard & Poor's downgraded Doane Pet Care Co. including lowering its $150 million 9.75% senior subordinated notes due 2007 and $213 million 10.75% notes due 2010 to CCC+ from B- and $100 million revolving credit facility due 2005, $123.9 million term loan due 2005, $123.9 million term loan due 2006, $62.5 million term loan due 2005 and €75 million term loan due 2005 to B from B+. The outlook is stable.

S&P said the downgrade reflects Doane's weaker-than-expected operating performance, which has resulted in credit measures that are below S&P's expectations.

In addition, S&P anticipates that Doane's 2003 financial results will remain weak given the company's limited pricing flexibility and the volatility of its raw material costs, which, together with packaging costs, represent about 75% of cost of goods sold.

The ratings continue to reflect Doane's heavy debt burden stemming from its LBO and aggressive acquisition strategy, its narrow business focus, and participation within a highly competitive industry. These factors are somewhat mitigated by the company's strong business position in the stable but mature pet food industry.

The company's credit protection measures have weakened, with EBITDA coverage of cash interest at about 1.8x and total debt (adjusted for leases) to EBITDA high at about 5.8x for the 12 months ended June 28, 2003, S&P said. In addition, the company has a large layer of preferred stock that accretes at 14.25%, creating a growing liability on Doane's balance sheet. Furthermore, S&P said it expects that Doane's ability to greatly improve its financial profile will be constrained in the near-to-intermediate term.

Fitch cuts Solutia, on watch

Fitch Ratings downgraded Solutia Inc.'s senior secured revolver to B- from BB- and its senior unsecured debt and senior secured notes to CCC from B. The ratings were also put on Rating Watch Negative.

Fitch said the downgrade is based on near-term liquidity issues, as well as continued weak operating performance. Weak earnings and cash flow generation has resulted in the deterioration of the company's overall credit quality.

The Rating Watch Negative status reflects near-term issues including the ability of the firm to successfully obtain additional bank covenant waivers, current renegotiation of credit facilities which expire in August 2004, as well as the result of Solutia's decisions after looking at all available alternatives regarding liquidity and legacy issues.

Additionally, the risk related to the polychlorinated biphenyls (PCBs) contamination litigation in Anniston, Alabama may continue to hinder Solutia's refinancing efforts, Fitch said.

S&P cuts Oglebay Norton, on watch

Standard & Poor's downgraded Oglebay Norton Co. including cutting its $100 million 10% senior subordinated notes due 2009 to C from CCC and $118 million term loan due 2003 and $232 million senior secured loan 2003 to CC from B-. All ratings were put on CreditWatch developing.

S&P said the action reflects Oglebay's decision to defer its Aug. 1 interest payment on its 10% senior subordinated notes until amendments with senior lenders are reached.

Oglebay is currently operating under covenant waivers from both its bank syndicate and senior secured note lenders. All covenant waivers expire on Aug. 15.

Ratings could be raised if Oglebay makes the $5 million subordinated note interest payment within a 30-day grace period, otherwise ratings would be lowered to D.

During the second quarter of 2003, Oglebay had been operating under a covenant waiver that expired on Jun. 15, 2003, and was subsequently extended until Aug. 15, 2003. The company is currently in negotiations with its senior lenders to amend these covenants.

As of Aug. 1, Oglebay had sufficient funds to make its $5 million interest payment with approximately $10 million of borrowing availability under its revolving credit facility, but neglected to do so under management's own volition. Oglebay intends to make its interest payment by the end of August, but will only do so after a new covenant package is secured.

Weak demand throughout most of Oglebay's end markets, together with rising healthcare, interest and energy costs have significantly weakened Oglebay's financial position and liquidity, S&P said. Moreover, Oglebay's debt levels are at an all time high of $462 million (adjusted for operating leases) while free cash flow generation remains negligible.

S&P cuts GEO Specialty

Standard & Poor's downgraded GEO Specialty Chemicals Inc. including cutting its $120 million 10.125% senior subordinated notes due 2008 to CCC- from CCC+ and $40 million revolving credit facility due 2005 and $95.5 million term B loan due 2007 to CCC+ from B. The outlook is negative.

S&P said the downgrade follows GEO's announcement that it did not make the Aug. 1 interest payment on its $125 million 10.125% subordinated notes.

GEO has received a loan commitment that will allow the company to make the $6.1 million payment within the 30-day grace period. However, this commitment is subject to negotiations between the company and its senior lenders regarding amendments to covenants in its bank credit facility.

Even if the company does make the pending interest payment, ongoing access to the credit facility is a key rating consideration in light of the company's low cash balance, persistent operating challenges and considerable debt service requirements.

GEO's ratings reflect significant deterioration in the company's operating performance and liquidity and heightened concerns regarding the ability of the company to meet near-term financial commitments, S&P said.

The company's operating difficulties stem primarily from substantially reduced volumes and profitability in the gallium market, which has not recovered since its falloff in early 2001, as well as a weak domestic economy and higher raw material costs, which have negatively pressured results for GEO's other business units, S&P said. The profitability in the company's peroxy business, acquired from Hercules in a mid-2001 debt-financed transaction, has also been lower than expectations. End markets for gallium products, primarily telecommunications and electronics, are not expected to rebound in the near term, thus maintaining pressure on the firms operating profits.

GEO remains highly leveraged following the peroxy transaction, with a debt to EBITDA ratio of almost 9x, S&P said. Cash flow protection, as measured by the ratio of EBITDA to interest, is expected to remain thin at almost 1.2x.

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