S&P rates Keystone notes B-, loan B+

Standard & Poor's assigned a B- rating to Keystone Automotive Operations Inc.'s planned $175 million senior subordinated note issue due 2013 and a B+ rating to its planned $165 million bank facility. The outlook is stable.

S&P said the ratings reflect Keystone's participation in the competitive and highly fragmented specialty equipment segment of the automotive aftermarket industry, small sales and EBITDA base, and high leverage. These risks are mitigated somewhat by the company's leading position in its market segment.

While Keystone maintains the leading position, with significantly greater sales than its next largest competitor, the company's sales and EBITDA are relatively small at about $370 million and $45 million, respectively, in 2002, S&P noted. This provides less cushion for a decline in operating performance given the company's highly leveraged pro forma capital structure.

Pro forma lease adjusted EBITDA coverage of interest is 2.1x, and total debt to EBITDA is 5.4x, S&P said. Keystone has historically generated positive free cash flow. A continuation of this is expected to help reduce debt levels and leverage. Lease-adjusted operating margins improved to 13.7% in 2002 from 11.7% in 2001, as a new management team reduced costs and improved inventory management and deliveries.

Keystone's bank loan is rated the same as the corporate credit rating because it expects there would be a strong likelihood of substantial recovery of principal in the event of default or bankruptcy, with minimal loss expected.

S&P keeps Pinnacle on watch

Standard & Poor's said Pinnacle Foods Corp. remains on CreditWatch negative including its senior secured notes at BB-.

S&P said the continuing watch follows Aurora Foods Inc.'s announcement of a financial restructuring in which it will eventually be purchased by Pinnacle.

S&P said it expects that upon completion of the proposed Pinnacle and Aurora transactions, which are not expected to happen concurrently, Pinnacle Foods' existing senior secured debt will be repaid and subsequently withdrawn.

The CreditWatch listing reflects S&P's expectation that the company will likely be highly leveraged and that the proposed transaction could result in a weaker financial profile.

Aurora's corporate credit rating was lowered to D on July 2 when it missed its interest payment. Its CC bank loan rating will be lowered to D when the firm files for bankruptcy as part of its financial restructuring.

Fitch cuts Omnova

Fitch Ratings downgraded Omnova Solutions Inc.'s senior secured credit facility to BB- from BB+ and senior secured notes to B+ from BB. The outlook remains negative.

Fitch said the downgrade reflects Omnova's weak operating results during the fiscal third quarter, higher-than-expected leverage and its exposure to crude oil price volatility.

This level of performance was expected to a certain degree, considering the cyclical weakness in refurbishment activity for commercial real estate, specifically for office and hospitality segments and the higher average crude oil costs (a raw material).

Operating margins improved for the Building Products segment, however Decorative Products and Performance Chemicals' segment margins declined for the trailing nine months ending Aug. 31, 2003 compared to the same period last year.

The company's leverage and interest coverage were worse than expected due to higher debt and lower operating earnings for the 12 months ending Aug. 31, 2003.

Fitch said it does not expect any substantial debt repayment in the next several quarters and without an improvement in operating earnings, Omnova may need to seek covenant relief under the credit agreement early next year.

On a trailing 12 month basis for the period ended Aug. 31, 2003, Omnova's EBITDA-to-interest incurred was 2.1 times and its total debt (including the A/R program balance)-to-EBITDA was 7.2x.

S&P cuts Jack in the Box

Standard & Poor's downgraded Jack in the Box Inc. including cutting its $125 million 8.375% senior subordinated notes due 2008 to B+ from BB- and $150 million senior secured term B loan due 2007 and $200 million senior secured revolving credit facility due 2006 to BB from BB+. The outlook is stable.

S&P said the downgrade is based on the deterioration of credit protection measures over the past two years as a result of declining operating performance.

The company has suffered from the soft economy, higher unemployment rates, low consumer confidence, increased price competition and a shift in consumer preferences away from quick service meals. S&P said it expects that Jack in the Box's results will progress over time due to its focus on food and service; however, the business environment and the company's plans to "reinvent" itself over the next three to five years will make it very challenging for the company to significantly improve credit quality in the near term.

Jack in the Box's ratings reflect the company's participation in the intensely competitive quick-service segment of the restaurant industry and highly leveraged capital structure. These weaknesses are partially offset by the company's solid regional presence, generally good operating performance despite recent problems and its ability to develop and market new products.

Jack in the Box's comparable-store sales were soft in the first nine months of fiscal 2003 and in fiscal 2002 due to aggressive price discounting by competitors and the weak U.S. economy, S&P noted. Comparable-store sales fell more than 3.0% in the first nine months of fiscal 2003 and 0.8% in fiscal 2002.

Some cash flow protection measures have weakened: EBITDA coverage of interest fell to 2.6x in the first nine months of fiscal 2003 from 3.1x in the prior-year period, and funds from operations to total debt declined to 16.3% from 23.0%, S&P said. The company is highly leveraged, with total debt to EBITDA at 4.2x for the trailing 12 months ended July 6, 2003.

S&P says Triad unchanged

Standard & Poor's said Triad Hospitals Inc. ratings including its corporate credit at BB- with a positive outlook are not affected by the company's announcement that it had increased its estimated allowance for doubtful accounts by $50 million.

This announcement highlights a recent industry trend of companies increasing bad debt as a percentage of revenues, S&P noted.

Triad's action is considered to be a one-time occurrence and is not expected to materially change the company's credit profile, S&P said. The positive outlook indicates that the rating could be raised within the next few years if the company is able to continue improving its financial profile, even with modest acquisition activity.

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