S&P keeps TransDigm on watch

Standard & Poor's said TransDigm Inc. remains on CreditWatch negative including its secured debt at B+ and subordinated debt at B-.

S&P said the continuing watch follows the announcement that TransDigm will be acquired by Warburg Pincus LLC.

The ratings were originally placed on CreditWatch on March 18 due to the then pending war on Iraq and the possible effect on commercial aerospace suppliers.

The ratings on TransDigm will depend on the balance of equity and debt used in the transaction and the resulting financial profile of the company, S&P said.

The existing ratings for TransDigm Inc. reflect a relatively modest scale of operations (2002 revenues about $250 million), cyclical and competitive pressures in the aerospace industry, and a highly leveraged balance sheet, but incorporate the firm's leading positions in niche markets and very strong profit margins, S&P said. TransDigm is a well-established supplier of highly engineered aircraft components for use on nearly all commercial and military airplanes. The company has expanded its product offering through several acquisitions, including the mid-2001 major purchase of Champion Aviation, the world's largest manufacturer of igniters for turbine engines, and spark plugs and oil filters for piston engines.

Moody's puts TransDigm on review

Moody's Investors Service put TransDigm, Inc. on review for possible downgrade including its $200 million 10.375% senior subordinated notes due 2008 at B3 and $30 million senior secured revolving credit facilities due 2004, $83 million senior secured term loan B due 2006 and $117 million senior secured term loan C due 2007 at B1.

Moody's said the review is in response to the proposed levered acquisition of the company by private equity firm Warburg Pincus LLC.

To the extent that the acquisition will be funded by increased debt, the ratings will be subject to downward revision if increased leverage were to put additional stress on the company's cash flow generation, particularly in light of the current difficult market environment in the commercial aerospace sector, Moody's said.

S&P expects Quintiles to be rated BB-

Standard & Poor's said it expects Quintiles Transnational Corp.'s corporate credit rating will fall to BB- from the current BBB- if the management-led leveraged buyout is completed as proposed.

S&P said it will assign ratings to the specific debt and loan instruments as their terms become more definite.

The revised rating would reflect the large financial burden assumed to fund this transaction, but also continue to reflect the company's leading position as a service provider to stable customers, S&P said.

A group formed by the company's founder and chairman is acquiring Quintiles for about $1.7 billion.

Recognizing a preferred stock held by equity investors as a potentially significant call on financial resources, this largely debt-financed transaction weakens lease-adjusted credit measures dramatically, S&P said. Including this preferred stock as debt, total debt to EBITDA will rise to more than 7.0x from 1.0x, and funds from operations to total debt will fall to about 10% from 85%.

Moody's raises Cott outlook

Moody's Investors Service raised its outlook on Cott Corp. to positive from stable and confirmed its existing ratings including its $125 million secured bank credit facility at Ba3 and $275 million senior subordinated notes due 2011 at B2.

Moody's said the higher outlook reflects Cott's continuing improvements in EBITDA, operating margin and return on assets since the last ratings action in December 2001. The change also reflects improved stability to Cott's free cash flow generation, notably since restructuring efforts implemented during 2000 and 2001 have gained traction. Reduction in financial leverage driven by improvement in profitability further supports the positive outlook.

The ratings continue to reflect Cott's leading position in its core markets, its established retailer brands and products, as well as good geographic diversification. In Moody's opinion, liquidity is good with working capital requirements and capital expenditures amply covered by internally generated funds. Liquidity is further supported by cushion under existing covenants and by approximately $50 million of availability under the US $75 million revolver.

The ratings also incorporate the business risk associated with the company's historically acquisitive growth strategy, Moody's said. General economic downturn throughout its markets, and to a lesser extent, adverse weather conditions continue to pressure volumes. Additionally, the ratings reflect significant customer concentrations, increased competition and some threats from increased share penetration of non-carbonated soft drinks.

For the 12 months to March 31, 2003, free cash flow to total debt is good at approximately 24%, Moody's said. Total debt of approximately $363 million to EBITA of approximately $140 million is 2.6 times (slightly over 2 times EBITDA of approximately $175 million). Debt equates to 30% of total revenue.

Moody's rates Le-Nature's notes B3

Moody's Investors Service assigned a B3 rating to Le-Nature's, Inc.'s planned $150 million senior subordinated notes due 2010. The outlook is stable.

Moody's said the rating reflects the continued marketability of its relatively new assets and sustained enterprise value which are key drivers of the ratings. These help to mitigate the absence of free cash flow throughout the historical period, the company's thin equity base, and moderate coverage of pro forma interest expense after capital expenditures.

Despite explosive top line growth and good profitability since inception, the cash-absorbing nature of the business constrains the ratings, Moody's said. The stable outlook reflects some tolerance within existing ratings categories to absorb modest fluctuations in credit statistics.

The ratings reflect concerns about the company's ability to manage its growth and to consistently generate free cash flow, notably given the absence of a proven record of free cash flow generation, Moody's added. Given Le-Nature's thin equity base, the ratings incorporate modest cushion to absorb operating shortfalls and/or failure in business strategy.

The ratings are particularly sensitive to execution risk given that the company is at an inflection point as it transitions to self-manufacturing of PET bottles, greenfields a West coast plant, and aggressively seeks to penetrate new regional markets. Substantial capital expenditures are likely to follow if growth targets are met.

Pro forma for the proposed transactions for the 12 months to March 31, 2003, financial leverage is high with total debt of approximately $160 million to EBITA of approximately $27 million at 5.9 times (2.9 times EBITDA of approximately $55 million), Moody's said. Debt exceeds revenue of approximately $144 million. EBITDA less capital expenditures is insufficient to cover interest expense. Good EBITA return on assets of approximately 13% supports the minimal level of intangibles (less than 1% of total assets) and evidences Le Nature's solid enterprise value.

S&P keeps Pilgrim's Pride Remains on watch

Standard & Poor's said Pilgrim's Pride Corp. remains on CreditWatch negative including its senior secured debt at BB, senior unsecured debt at BB- and subordinated debt at B+.

S&P said the CreditWatch update follows the announcement by Pilgrim's Pride that its board of directors unanimously approved a definitive share purchase agreement with ConAgra Foods Inc. to acquire ConAgra's integrated fresh chicken division, the fourth-largest chicken producer in the U.S., for a combination of cash, stock, and debt valued at about $590 million.

Pilgrim's Pride is currently the third-largest player in the commodity-based U.S. poultry industry. With this acquisition, Pilgrim's Pride will become the second-largest player in the U.S., with revenues of about $5 billion, behind Tyson Foods Inc. (BBB/Watch Neg), S&P noted. In connection with this transaction, Pilgrim's Pride will also become a preferred supplier of chicken products to ConAgra.

Results of Pilgrim's Pride recently have been affected by the industry downturn because of oversupply of meat proteins in the U.S. and the October 2002 Center for Disease Control and Prevention's announcement that test samples at the company's Wampler Foods plant in Franconia, Pa., showed that one food product and 25 environmental samples tested positive for listeria, S&P said.

Fitch confirms M/I Schottenstein

Fitch Ratings confirmed M/I Schottenstein Homes, Inc. including its bank facility at BB and senior subordinated notes at B+. The outlook is stable.

Fitch said the ratings reflect M/I Schottenstein's healthy financial structure, solid coverages and strong operating performance consistent with the current point in the housing cycle.

The company's debt-to-EBITDA of 0.6 times and debt-to-capital ratio of approximately 19% are considered conservative for the rating and enhance financial flexibility in the event of an economic downturn, Fitch added. The rating incorporates the potential for leverage to rise from current levels.

Risk factors include the inherent (although somewhat tempered) cyclicality of the homebuilding industry. The ratings also manifest M/I Schottenstein's capitalization and size and heavy (although diminishing) exposure to the Midwest (Columbus, Ohio, Cincinnati and Indianapolis) which is currently the most sluggish housing region.

The company has demonstrated solid margin enhancement over the recent past with EBITDA margins increasing from 6.5% in 1997 to 11.6% currently, Fitch said. Although M/I Schottenstein has benefited from strong economic conditions, a degree of margin enhancement is also attributed to broadened new product offerings and the maturing of key divisions in Florida and Metropolitan Washington D.C. In addition, margins have benefited from purchasing, access to capital and other scale economies that have been captured by the large national homebuilders in relation to smaller builders. These economies, somewhat greater geographic diversification (than in the past), the company's presale operating strategy and a return-on-capital focus provide the framework to soften the margin impact of declining market conditions in comparison to previous cycles. Acquisitions have not played a part in the company's operating strategy, as management has preferred to focus on internal growth.

Debt-to-capital pretty consistently declined from 53.7% at the end of 1997 to 18.8% currently, which is well below the company's targeted range of 40-45%. This reported ratio is at a level considered quite strong for the rating, Fitch said.

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