Fitch raises Tesoro outlook

Fitch Ratings raised its outlook on Tesoro Petroleum Corp. to stable from negative and confirmed its BB- on rating Tesoro's senior secured debt, which includes the company's $500 million revolving credit facility, $200 million of senior secured term loans and $375 million of senior secured notes. Fitch rates Tesoro's $940 million senior subordinated notes B.

Fitch said the improved outlook reflects the continued improvement in Tesoro's capital structure over the past several months.

On Sept. 10, Tesoro announced the repayment of the $125 million secured term loan under the company's credit facility. With the repayment, Tesoro has completed its target to reduce balance sheet debt by $500 million to approximately $1.6 billion. Management also remains publicly committed to further reducing debt and improving the company's capital structure.

The company's ratings, however, reflect the constrained financial flexibility of the company due to the substantial debt that was added to finance the acquisitions of the Golden Eagle refinery in May 2002 and the Mandan and Salt Lake City refineries in September 2001, Fitch said. Although continued debt reduction is the primary factor influencing Tesoro's ratings, Fitch continues to look for further generation of meaningful cash flow from operations and continued improvement in the company's credit protection metrics.

Credit protection metrics remained weak for the 12 months ended June 30, 2003 with EBITDA-to-interest of only 1.9 times, but are expected to improve given the recent strong margins and Fitch's expectation of a more mid-cycle margin environment in coming months.

Moody's lowers Beverly outlook, rates notes B2, loan Ba3

Moody's Investors Service assigned a B2 rating to Beverly Enterprises, Inc.'s planned $100 million subordinated notes and a Ba3 to its proposed credit facilities, confirmed its existing ratings including its $200 million 9.625% senior unsecured notes due 2009 at B1 and changed the outlook to negative from stable.

Moody's said the outlook change reflects the company's credit profile's reduced ability to absorb the impact of negative developments without a resulting ratings downgrade, given the deterioration following the Medicare cliff.

Moody's also noted that the uncertainty surrounding the execution of Beverly's asset disposition program is a concern, since the company's ability to retain current ratings may be contingent upon its ability to delever through the program. While problems are not anticipated, they may nonetheless arise.

If Beverly successfully completes its asset sales, however, its credit statistics would likely improve to levels consistent with the period prior to October 2002. Just as important, Moody's expects the company's exposure to patient care liability will be significantly reduced.

While the ratings are being confirmed, there are significant concerns which limit the ratings on the company, Moody's added. These include the company's high leverage, its high reliance on, and the unpredictability of, government reimbursements, the continued surge in costs for patient care liability insurance and the continued pressure expected on wages and benefit expenses, particularly for nursing care due to the nationwide shortages. Two of the issues, cuts in Medicare rates and the jump in insurance expenses, recently combined to erode Beverly's operating earnings significantly.

Positive factors supporting the ratings include the anticipated improvement in leverage, management's relatively conservative approach to financial management and the company's focus on improving operations and reducing costs. Recently, operating trends within management's control have been stabilizing or improving. Examples include the increase in Medicare census, flat to slightly stronger occupancy rates, improving DSO metrics and stability in wages and related expenses as a percent of revenues.

S&P puts Polska Telefonia on positive watch

Standard & Poor's put Polska Telefonia Cyfrowa Sp. zoo on CreditWatch positive including its €150 million bank loan due 2007 and €550 million bank loan due 2006 at BB+ and PTC International Finance II SA's $150 million 11.25% subordinated notes due 2009, €182.5 million 10.875% notes due 2008 and €282.75 million 11.25% subordinated notes due 2009 at BB-.

S&P said the watch placement follows the announcement by the owners of Polska Telefonia of an agreement in principle to accept the offer from Deutsche Telekom AG (BBB+/stable/A-2) for the remaining 51% of Polska Telefonia that the German telecoms group does not own for €1.1 billion ($1.2 billion) in cash.

S&P has already said Deutsche Telekom's ratings would not be affected by the cash-financed transaction as the offer was not seen as inconsistent with the group's debt reduction strategy.

The control by Deutsche Telekom of 100% of Polska Telefonia would represent a major credit event for Polska Telefonia and the ratings on the company would likely be raised to a level equal or close to the ratings on Deutsche Telekom upon closing of the transaction, S&P said.

S&P rates Scotts notes B+, loan BB

Standard & Poor's assigned a B+ rating to Scotts Co.'s proposed $200 million senior subordinated notes due 2013 and a BB rating to its proposed $1.2 billion secured bank facilities. Scotts' existing ratings were confirmed including its senior secured debt at BB and subordinated debt at B+. The outlook remains positive.

S&P said the bank loan is rated the same as the corporate credit rating, reflecting the likelihood of meaningful recovery of principal under a default scenario.

Scotts' ratings continue to reflect its high debt levels and the inherent seasonality in its business, S&P added. Somewhat mitigating these concerns is the firm's competitive position and leading brand names in the consumer lawn and garden market in the U.S. and Europe.

Despite cold wet weather in the U.S. and unusually hot, dry weather in Europe during Scotts' fiscal third quarter, sales for the nine months ended June 28, 2003, increased almost 5% (excluding changes in foreign currency), S&P said. However, Scotts' lease-adjusted operating margins were pressured and declined to about 14% for the trailing 12 months ended June 28, 2003, from about 15% in fiscal 2002, because of higher advertising, pension, and health care expenses; investments in business development initiatives; in-store sales support; and expensing of stock options.

Still, Scotts maintained its improved credit protection measures (adjusted for operating leases), S&P said. For the trailing 12 months ended June 28, 2003, EBITDA coverage of interest was about 3.5x, with debt to EBITDA of about 3.3x as compared with 3.5x and 3.1x, respectively, in fiscal 2002.

Nevertheless, the company will be challenged to continue to improve its operating performance, an effort that includes its multiyear international restructuring plans (announced in 2002).

S&P says ON Semiconductor unchanged

Standard & Poor's said ON Semiconductor Corp.'s sale of $147 million in common stock on Sept. 17 is positive but will not lead to a change in its ratings including its corporate credit at B or negative outlook.

S&P said total debt levels of $1.42 billion remain quite high at 7x last 12 months EBITDA, while sales levels continue to decline.

The company faces large debt maturities in 2006 and beyond, which could present challenges unless additional financing arrangements are made, S&P added.

ON's revenues have continued to decline modestly quarter-to-quarter, as price pressures outstrip unit sales expansion, while most other semiconductor companies have reported sequential revenue improvements in 2003.

ON's cost reduction efforts have contributed to profitability, but debt protection measures remain slim, with pro forma EBITDA coverage of interest expense around 1.5x, S&P said.

S&P rates Koppers notes B

Standard & Poor's assigned a B rating to Koppers Inc.'s proposed $300 million senior secured notes due 2013 and confirmed its existing ratings including its corporate credit at B+. The outlook is stable.

Proceeds from the proposed senior notes issue will be used to refinance the company's $175 million 9.875% subordinated notes due 2007 and to fund an $80 million dividend to shareholders.

While the debt-financed dividend payment is consistent with the aggressive financial policies of the company's owners and will increase debt leverage, liquidity remains satisfactory and business prospects are expected to support credit quality, S&P said.

S&P said Koppers' ratings reflect its below-average business position and its very aggressive financial profile.

The company's overall financial performance has improved due to the contributions by Koppers Australia and Koppers Europe, S&P noted. Recent profitability has been affected by weakness in demand resulting from the global economic slowdown. In addition, earnings have been affected by lower profit margins for PAA. Prices for PAA have remained relatively low due to difficult market conditions and excess supply, despite higher prices for orthoxylene.

In 2003, Kerr-McGee, the company's largest competitor in the railroad wood treating business, announced its intention to exit the industry by year end, thus creating meaningful new business opportunities for Koppers.

Following the senior secured notes offering, Koppers remains highly leveraged, with pro forma total debt (adjusted for the capitalization of operating leases) to EBITDA near 5x and negative net worth, S&P said. Due to higher interest expense and working capital requirements for new business opportunities, material cash generation in excess of scheduled amortization payments is not expected over the next few years.

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