S&P puts ArvinMeritor, Dana on watch

Standard & Poor's put ArvinMeritor Inc. and Dana Corp. on CreditWatch negative.

Ratings affected include ArvinMeritor's $100 million 6.75% notes due 2008, $150 million 7.125% notes due 2009, $200 million 6.625% senior notes due 2007, $400 million 8.75% notes due 2012, $750 million credit facility due 2005 and Meritor Automotive, Inc.'s $500 million 6.8% notes due 2009, all at BB+. Also affected are Dana's $150 million 6.5% senior notes due 2008, $200 million 7% senior notes due 2028, $250 million 10.125% notes due 2010, $250 million 6.25% bonds due 2004, $350 million 6.5% bonds due 2009, $400 million bank loan due 2005, $400 million 7% bonds due 2029, $575 million 9% senior unsecured debt due 2011, €200 million 9% notes due 2011 and Dana Credit Corp.'s $20 million floating-rate medium-term notes due 2003 and $25 million floating-rate medium-term notes due 2003, all at BB.

S&P said the CreditWatch listing follows the announcement that ArvinMeritor has commenced an unsolicited cash offer, having a $4.4 billion enterprise value, to acquire all outstanding common shares of Dana.

The CreditWatch listing reflects the potential for lower ratings, given the significantly increased pro forma leverage to complete the acquisition of Dana and ArvinMeritor's ability to generate financial measures appropriate for the current ratings.

The acquisition could produce a somewhat stronger business position for the larger ArvinMeritor in the highly competitive auto supplier industry, given the complementary nature of the products manufactured by the two companies, S&P noted.

However, the acquisition, if completed at the offered price, would add about $2.4 billion of new debt to the capital structure of the combined company. This incremental debt would reduce credit quality unless the higher leverage was mitigated by sufficient near-term cash flow from operations, asset sales, or the issuance of some equity.

Furthermore, it is possible that a higher price may be required to consummate the transaction. In addition, an acquisition of this magnitude would entail significant execution risk during an already challenging period for the auto supplier industry, S&P said.

Moody's puts ArvinMeritor on downgrade review, Dana on uncertain review

Moody's Investors Service put ArvinMeritor, Inc. on review for possible downgrade including its senior unsecured debentures, notes, medium-term notes and bank revolving credit facilities at Baa3, subordinated debt at Ba2 and Arvin Capital I's preferred stock at Ba1 and Dana Corp. on review with direction uncertain including its senior unsecured revolving credit facility and senior unsecured notes at Ba3 and Dana Credit Corp.'s medium-term notes at Ba3.

Moody's said the action follows ArvinMeritor's hostile cash tender offer for Dana.

Moody's said its review of ArvinMeritor will focus on the financial and integration risks associated with this potential merger.

ArvinMeritor, with just under $7 billion in 2002 revenues, is acquiring the larger Dana which generated $9.5 billion in revenues in 2002.

ArvinMeritor's ability to finance the transaction and future steps it will take to restore its strained balance sheet and financial flexibility will also be explored.

More specifically, Moody's will consider the ability of ArvinMeritor to maintain adequate liquidity through the initial stages of the transaction process, given the volatility in the company's primary end markets.

Moody's said its review of Dana will focus on the likelihood that a transaction will occur and the ultimate form of any such transaction.

There is a broad range of potential resolutions to the review action, including: a confirmation of existing ratings should no transaction result; withdrawal of Dana's ratings in the event that all existing obligations are refinanced or the legal structure of these obligations is revised; a potential downgrade in the event Dana decides to take defensive actions in order to stay independent; or other revisions to the ratings based upon pro forma details of a new capital and organizational structure should there be a change of control to ArvinMeritor.

Fitch cuts ArvinMeritor to junk, on watch

Fitch Ratings downgraded ArvinMeritor Inc. including cutting its senior unsecured debt to BB+ from BBB- and capital securities to BB- from BB+ and put it on Watch Negative.

Fitch said the action follows the announcement by ArvinMeritor of a hostile tender offer for Dana Corp. in a proposed debt-financed acquisition.

The downgrade reflects ArvinMeritor's intent to acquire growth through debt-financed acquisitions and a willingness to substantially raise the leverage in its capital structure.

If the transaction is completed on the proposed terms, further rating action is expected, Fitch said.

New financing for the transaction is likely to be on a secured basis, further impairing unsecured debt holders.

Faced with intensifying pressures from OEM customers, over-capacity in many of the vehicle component areas, and a desire to grow the business and its content per vehicle penetration in an uncertain volume demand environment, ArvinMeritor intends to grow through acquisition and consolidation with concomitant rationalizations, Fitch said.

While Fitch recognizes ArvinMeritor's historical track record of integration success, a transaction in the magnitude of the proposed Dana acquisition carries execution risk to fully realize the potential synergies.

ArvinMeritor willingness to incur substantial leverage, when combined with the cyclical nature f its businesses, indicates higher financial risk going forward, even in the event that the transaction does not close, Fitch said.

S&P rates Westlake notes B+, loan BB

Standard & Poor's assigned a B+ rating to Westlake Chemical Corp.'s planned $400 million senior unsecured notes due 2011 and a BB rating to its new $100 million term B loan due 2010 and $200 million revolving credit facility due 2007. The outlook is stable.

S&P said the ratings reflect Westlake Chemical's below-average business position as a commodity chemical producer and its aggressive financial profile.

Competition in the company's business segments is very intense, and based primarily on price, S&P noted. Exposure to commodity chemical cycles is a negative credit attribute, as is the company's concentration in North America.

Some diversity of the product line and the divergence of cycles among these businesses can lessen the sometimes volatile swings in profitability and cash flows. Also, the fabricated products business reduces exposure to the PVC market and further diversifies cash flow streams.

Westlake's reliance on natural gas liquids and its inability to process naphtha, as many of its competitors do, are negative ratings factors that can affect financial performance, S&P added. In addition, the company's general exposure to volatile feedstock and energy costs is a risk factor.

The firm is aggressively capitalized, with total debt to EBITDA (adjusted for operating leases) of more than 4.0x, S&P said. The company's leverage stems from its aggressive growth strategy and the lack of cash flow generation during the past two fiscal years.

Funds from operations as a percentage of total debt is satisfactory, near the 15% to 20% range expected for the rating. However, this ratio will likely be volatile over the industry cycle (the ratio was negative in 2001). Cash flow generation has been hurt by poor earnings in 2001 and working capital usage in 2002. Still, improving business conditions should allow the firm to meet capital spending needs from internal cash generation. Moderate strategic acquisition activity is expected in the company's existing product lines.

Moody's rates Westlake Chemical notes Ba3, loan Ba2

Moody's Investors Service assigned a Ba3 rating to Westlake Chemical Corp.'s planned $400 million guaranteed senior unsecured notes due 2011 and a Ba2 to its planned $200 million guaranteed senior secured revolver due 2007 and $100 million guaranteed senior secured term loan B due 2010. The outlook is stable.

The ratings reflect Westlake's position as a second-tier producer of commodity petrochemicals and plastics, on-going exposure to volatile feedstocks and the need to convert to a heavier feedstock slate over the next 12-18 months, continued weak end-market conditions, the company's thin, albeit trough level, operating margins, moderate vertical integration in the chlor-alkali business, uncertainty over the exact timing of a recovery in the olefins business, and expiration of an energy supply contract in 2005, Moody's said.

The ratings, however, are supported by the company's relatively good financial performance for a cyclical chemical company in the trough of the cycle. The ratings are also supported by the company's position as an integrated producer of commodity plastics and polyvinyl chloride (PVC) based fabricated products, its competitive cost position in chlor-alkali, and the favorable supply/demand fundamentals for the chlor-alkali business.

The stable outlook reflects Moody's expectation that Westlake will manage the transition to a heavier feedstock slate at its Lake Charles ethylene crackers over the next 12-18 months, but that similar conversions by other competitors cause margins to remain relatively depressed over the next 18 months.

Furthermore, it reflects that the company's sales volumes will remain stable or slightly improve, that chlor alkali margins will improve in 2003, and that vinyls margins could experience a modest upside in 2004. The outlook also reflects Moody's expectation that credit metrics could slightly worsen in the near-term due to weaker profitability stemming from FIFO accounting and weak demand levels in second quarter of 2003.

The notching of Westlake's senior secured credit facilities reflects their senior position in the capital structure and the substantial tangible asset support provided by the collateral package.

Fitch cuts Levi Strauss

Fitch Ratings downgraded Levi Strauss & Co.'s secured bank facility rating to BB- from BB and senior unsecured debt to B from B+. The outlook is negative, reflecting the continued challenges Levi faces in stimulating top-line sales growth and maintaining operating margins.

Fitch said the downgrade reflects Levi's revised sales and earnings outlook for 2003, which anticipate softer, sales coupled with higher debt levels. As a result, credit measures will weaken from year-end 2002 levels.

Also considered is the weak retail environment, which shows no signs of easing. These factors are weighed against Levi's solid brands with leading market positions as well as the geographic diversity of its revenue base and sufficient cash flow generation to meet capital needs.

In connection with its second quarter earnings release, Levi announced that sales for fiscal 2003 are now expected to be flat, whereas sales had previously been expected to grow 2-5%, Fitch said. Softer sales are attributed to weak retail consumer spending. In particular, the department store channel, Levi's primary distribution channel, has been persistently weak in 2003 as consumers diversify their shopping patterns to include other channels.

While operating margins are expected to be maintained in the range of 8-10%, the sales decline will result in operating profit being down, Fitch said. In addition, though debt levels were anticipated to rise, in part due to Levi's entry into the mass channel with its Levi Strauss Signature brand, the earnings shortfall and higher inventory levels from the weak retail environment are leading to a greater than originally expected increase in debt at year-end.

As a result, credit protection measures at fiscal year-end 2003 are expected to weaken considerably from fiscal 2002 levels where leverage was reported at 3.6 times (x) and coverage at 2.7x. Due to these changes, Levi also amended its bank credit facility to provide easier covenant levels.

Fitch confirms Dean Foods

Fitch Ratings confirmed Dean Foods Co.'s secured credit facility at BB+ and senior unsecured notes at BB-. The outlook is stable.

Fitch noted Dean Foods called its $600 million convertible trusts preferred securities in three tranches, beginning April 17. Substantially all was converted to equity by June 24. As a result of the conversion, annual fixed charges will be reduced by approximately $33.6 million and Dean Foods' adjusted debt levels including the preferred securities will be lower.

While the conversion has resulted in the immediate improvement of credit statistics, Fitch expects the benefit to be partially off set by debt-financed acquisitions.

On June 30, Dean Foods entered into a definitive agreement to acquire the 87% equity interest in of Horizon Organic Holdings Inc. it does not currently own for $256 million, including the assumption of approximately $40 million in debt or for approximately 24 times EBITDA.

This acquisition, which is expected to be financed in cash, will expand Dean Foods' penetration in the food service channel and provide the company with additional needed capacity.

For the latest 12 months ended March, 31 2003, pro-forma for the acquisitions and redemption of the convertible preferred securities, total debt including preferred securities to-EBITDA was 3.7x as compared to 4.0x excluding these transactions and EBITDA-to-interest incurred was 3.9x and 3.7x, respectively, Fitch said. Continued improvement in credit metrics may lead to positive rating actions.

Moody's rates Medco notes, loan Ba1

Moody's Investors Service assigned a Ba1 rating to Medco Health Solutions, Inc.'s planned $250 million senior secured term loan A, $650 million senior secured term loan B, $250 million senior secured revolving credit facility and $500 million senior unsecured notes. The outlook is stable.

Moody's said the value of security pledged to the loans is relatively modest compared with the value of the company's unpledged assets. Moody's believes that the senior unsecured noteholders still benefit from assets not pledged as collateral, including inventory, non-rebate accounts receivable, rebate receivables not included in the A/R facility and certain fixed assets. As a result, it is rating the senior unsecured notes at the same level as the senior secured bank lenders.

Medco's ratings reflect its large scale and good competitive position in the PBM industry, particularly its significant size in the mail order segment, as well as its ability to generate solid operating cash flow and its prospects for deleveraging, Moody's said.

However, the rating also reflects Medco's recent declines in membership which are contributing to lack of growth in mail order volumes, as well as Moody's belief that Medco's relationship with Merck may represent a growing competitive disadvantage in the coming years, potentially leading to further enrollment declines.

In addition, the rating reflects the highly competitive nature of the PBM industry, the potential for margin erosion from customers demanding higher rebate levels, and uncertainty that the increasing shift from brand drugs to generics, or the adoption of a Medicare drug benefit, will be immediately beneficial to Medco.

Based on the proposed capital structure, Medco's initial credit statistics reflect pro forma debt/EBITDA of approximately 1.5 times. Based on 2002 reported operating cash flow of $471 million, Moody's anticipates pro forma operating cash flow to lease-adjusted total debt in the 30% range.

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