S&P cuts Charter

Standard & Poor's downgraded Charter Communications Inc. and kept it on CreditWatch with negative implications. S&P cut Charter Communications' $500 million 4.75% convertible senior notes due 2006 and $750 million 5.75% convertible senior notes due 2005 to CCC+ from B-, Charter Communications Holdings' $1.018 billion 11.75% senior discount notes due 2011, $1.5 billion 8.625% senior unsecured notes due 2009, $200 million senior discount notes due 2012, $200 million senior notes due 2010, $200 million senior notes due 2012, $300 million 11.75% senior discount notes due 2010, $325 million 10.25% senior notes due 2010, $350 million 9.625% senior notes due 2009, $500 million 11.125% senior notes due 2011, $575 million 10% senior notes due 2011, $600 million 8.25% senior unsecured notes due 2007, $675 million 10% senior notes due 2009, $675 million 13.5% senior discount notes due 2011, $750 million 9.92% senior discount notes due 2011, $850 million senior unsecured notes due 2008 and 2011 notes and $900 million 10.75% senior notes due 2009 to CCC+ from B-, Avalon Cable's $150 million 9.375% senior subordinated notes due 2008 and $100 million 11.875% senior discount notes due 2008 to CCC+ from B-, CC VI Operating Co. LLC's $1.2 billion senior secured credit facility to B from B+, CC VIII Operating LLC's $450 million revolving credit facility due 2007, $500 million tranche A term loan due 2007 and $500 million tranche B loan due 2008 to B+ from BB-, Charter Communications Operating, LLC's $5.2 billion senior secured bank loan to BB- from BB and Renaissance Media's $75 million 10% senior discount notes due 2008 to CCC+ from B-.

S&P said the downgrade follows Charter's release of lower revenue and cash flow guidance for the 2002 fourth quarter.

S&P said it is concerned that the competitive pressure that has eroded the company's basic subscriber base could continue. Charter may be challenged to achieve operating improvement needed to stabilize deteriorating credit measures and generate break-even free cash flow in 2003.

The rating remains on CreditWatch primarily due to uncertainty surrounding the ongoing federal grand jury subpoena into Charter's subscriber accounting practices, S&P added. In an action related to the grand jury investigation, the company announced yesterday that it has terminated its chief financial officer. Charter also terminated its chief operating officer, who had earlier been placed on leave.

Although management changes may likely benefit the company in the longer term, they could be disruptive in the near term, S&P said.

S&P said it is also concerned about the possibility of public debt restructuring transactions, given depressed debt trading levels. Completion of a sub-par exchange offer could be considered coercive to bondholders and tantamount to a default on initial debt issue terms.

Charter lost about 86,000 basic subscribers in the 2002 third quarter, which slowed revenue and operating cash flow growth to 12.6% and 8.7%, respectively, S&P noted. This performance was short of that delivered by other cable operators. Competition from satellite TV services and customer resistance to higher prices in the company's rebuilt markets contributed to the subscriber count reduction. The company expects to lose between 30,000 and 40,000 basic subscribers in the fourth quarter.

To stem customer defections, Charter said that it is testing lower priced programming tiers. However, S&P said it is concerned that less expensive offerings could erode overall pricing power and profitability. Digital cable so far has not helped offset basic service declines. While digital revenues grew by about 39% on a year-over-year basis in the third quarter, digital expenses rose at a faster rate. Digital churn in some of Charter's markets is as high as 5%.

S&P cuts Goodyear

Standard & Poor's downgraded The Goodyear Tire & Rubber Co. and removed it from CreditWatch with negative implications. Ratings lowered include Goodyear's $100 million 6.375% senior notes due 2008, $150 million 7% notes due 2028, $250 million 6.625% notes due 2006, $300 million 8.125% notes due 2003, $300 million 8.5% notes due 2007, $650 million 7.857% notes due 2011, $800 million term loan due 2004, €400 million 6.375% bonds due 2005 and SFR158 million 5.375% bonds due 2006, cut to BB- from BB+. The outlook is negative.

S&P said the downgrade reflects its concerns about Goodyear's timely execution of its plan to improve profitability in its North American tire operation.

Poor recent operating performance has diminished financial flexibility and made the timing of long-term profit potential uncertain. As a result, S&P said it believes that liquidity issues could arise over the next two years, if measurable improvements do not occur in 2003, given Goodyear's expected operating cash flow relative to substantial debt maturities ($1.6 billion between 2003-2005), cash pension funding of up to $550 million through 2004 (with the potential for further significant pension contributions beyond 2004 depending on market conditions), and the uncertain outcome of upcoming labor contract negotiations.

Longer term, profit potential is challenged by difficult industry fundamentals and the constraints posed by the company's capital intensive character, which has inhibited Goodyear from responding effectively to industry pressures and changes, S&P said. Although S&P added that it believes that the actions taken by Goodyear to improve working capital management, reduce operating and capital costs, and better position the company from a marketing perspective will lead eventually to improved financial performance, the improvement is taking far longer than originally anticipated.

S&P cuts Qwest ratings

Standard & Poor's downgraded Qwest Communications International Inc.'s corporate credit rating to SD from CC and downgraded the senior unsecured debt of Qwest Capital Funding to D from CC icluding its $1 billion 7.75% notes due 2031, $1.25 billion 5.875% notes due 2004, $1.25 billion 7.75% notes due 2006, $1.5 billion 6.875% debentures due 2028, $1.75 billion 7.9% notes due 2010, $2 billion 7% notes due 2009, $2.25 billion 7.25% notes due 2011, $3 billion notes due 2021, $400 million 6.5% debentures due 2018, $500 million 6.25% notes due 2005 and $600 million 6.375% notes due 2008.

S&P said the action is in response to Qwest's completion of its recent debt exchange.

S&P said it views the transaction as a distressed exchange under its corporate criteria, and, therefore, the transaction is treated as a selective default under these criteria.

On completion of its review of the new capital structure, S&P said it will reassign the corporate credit rating of Qwest Communications International and the senior unsecured debt rating for the untendered debt at Qwest Capital Funding.

While the corporate credit rating of the parent is likely to be B- in line with the rating prior to this exchange, Qwest Capital Funding's debt may be either CCC or CCC+, depending on S&P's assessment of the degree of priority obligations relative to total assets under the new capital structure.

S&P said it will also assess the impact on the ratings for debt at Qwest Communications International and Qwest Communications Corp. The three new debt issues at Qwest Services Corp. are likely to be rated CCC+, given the fact that there is significantly less debt structurally superior to these notes versus the untendered debt at Qwest Capital Funding.

S&P cuts Centennial

Standard & Poor's downgraded Centennial Communications Corp. and kept it on CreditWatch with negative implications. Ratings lowered include Centennial Communications' $370 million 10.75% senior subordinated notes due 2008, cut to CCC+ from B-, Centennial Puerto Rico Operations Corp.'s $250 million senior subordinated notes due 2008, cut to CCC+ from B- and Centennial Cellular Operating Co. LLC's $1.25 billion senior secured credit facility, cut to B from B+.

S&P said the downgrade reflects its assessment that a weaker business profile will persist through the remainder of the fiscal year ended May 31, 2003 and beyond.

Centennial's domestic markets have been subject to heightened competition from the larger, more national players, such as AT&T Wireless and Cingular, S&P said. As a result, the cost per gross customer add in its U.S. markets has remained fairly high at $365 for the three months ended Nov. 30, 2002. The company also lost about 10,000 subscribers in its U.S. wireless market since May 31, 2002, against a backdrop of overall growth for the industry.

The company's Caribbean wireless operations in Puerto Rico, which represent about 30% of total company revenue, have been subject to increased competition as well, although customer growth in this market has been stronger than in the U.S., S&P added. This is due largely to a lower wireline penetration on the island, which has contributed to a more aggressive use of wireless phones as a substitute for wireline service.

Wireless operations in the Dominican Republic remain a fairly new venture, with attendant operating cash losses, and the company is focused on improving churn and profitability of this business through an increased focus on postpaid subscribers, which carry initially higher cost per gross additions.

S&P said the company is on CreditWatch because of its continued concerns about Centennial's liquidity through the fiscal year ended May 31, 2003. S&P said it is also concerned about the company's ability to meet financial maintenance covenants under its secured bank loan agreement, especially if operating cash flow from the Caribbean wireless and broadband businesses do not grow materially in the remainder of fiscal 2003 from fiscal 2002 levels.

Moody's cuts Buhrmann

Moody's Investors Service downgraded Buhrmann NV including cutting its $1.75 billion senior secured credit facilities to B1 from Ba3 and $350 million 12.25% senior subordinated notes due 2009 to B3 from B2. The outlook is stable.

Moody's said it downgraded Buhrmann because of continued weak market conditions for its core activities, which Moody's anticipates will continue to pressure the company's profitability and cash flow generation ability over the next 12-18 months at least.

Following its profit warning in October, Buhrmann has announced an additional cost re-structuring plan and has successfully amended its bank facility covenants in order to yield additional financial flexibility in 2003, Moody's said. These new initiatives consist principally of further headcount reductions, approximately 50-60% of which will take place in the company's North American Office Products division.

While Buhrmann has established a significant track record of successfully executing re-structuring plans in the past (notably with the recent integration of the USOP and Samas acquisitions), Moody's noted that these planned headcount reductions come after significant cuts over recent years, including a 3,000 strong headcount reduction in the 12 months ending Sept. 30, 2002.

As a result, new cost re-structuring initiatives are likely to erode certain levels of middle management for the company, but will also need to ensure that the growth prospects of the company are not adversely impacted.

In addition, Moody's noted that, while measures put in place at the time of the last rating action in December 2001 have been successfully implemented from an operational standpoint, continued weak market conditions and margin pressure have hindered the immediate financial benefits of such cost reductions to the company.

S&P cuts Unicco, on watch

Standard & Poor's downgraded Unicco Service Co. including Unicco Finance Corp.'s $105 million 9.875% senior subordinated notes due 2007, cut to CCC+ from B-, and Unicco Service's $60 million senior secured credit facility due 2005, cut to B+ from BB-, and kept it on CreditWatch with negative implications.

S&P said the action reflects its heightened concerns about continued challenging industry conditions and the uncertainty surrounding Unicco's insurance accrual and its potential impact on covenant compliance under its senior secured credit facility.

The company has filed for extensions for the filing of its Form 10-K for the year ended June 30, 2002, and its Form 10-Q for the quarter ended Sept. 29, 2002, reflecting the ongoing actuarial review of Unicco's Workers' Compensation and general liability self-insurance risks.

S&P takes Town Sports off watch

Standard & Poor's confirmed Town Sports International Inc.'s ratings and removed it from CreditWatch with negative implications including its $155 million 9.75% senior notes due 2004 at B and $25 million revolving credit facility due 2004 at B+. The outlook is stable.

S&P said the confirmation is in response to Town Sports' announcement that it is not currently pursuing a recapitalization.

The rating action reflects the company's decision to not pursue in the immediate future a previously announced recapitalization, S&P said. Nevertheless, Town Sports plans to explore opportunities if favorable market conditions develop.

Town Sports' financial risk is high, elevated by its relatively small cash flow base, capital spending-related discretionary cash flow deficits, and ongoing expansion plans, S&P said. There is limited cushion in the ratings for a potential recapitalization that would increase debt leverage.

Liquidity and access to capital markets have also been of some concern, S&P said. These are balanced by good comparable-club revenue growth, driven by increasing membership dues, and ancillary services.

Moody's raises ChipPac outlook

Moody's Investors Service raised its outlook on ChipPac, Inc. to stable from negative and confirmed its ratings including its $165 million 12¾% senior subordinated notes due 2009 at B3 and $37 million guaranteed senior secured term loan B due 2006 and $50 million guaranteed senior secured revolving credit facility due 2005 at B1.

Moody's said the action reflects ChipPac's strengthening of its balance sheet with funds raised in 2002 from two equity placements. The outlook also is based on Moody's expectation that the company will continue to comply with the debt leverage and interest coverage covenants on its credit facilities.

During the first half of fiscal 2002 ChipPac raised $163 million in two equity offerings, Moody's noted. In addition it showed year-over-year improvements in revenue and operating margins for the two quarters ended June 30 and September 30, has exposure to the wireless segment, which has exhibited some strength in the demand for back-end services, the benefits of a firming in the worldwide demand for semiconductors.

The ratings, however, also take into consideration ChipPac's leveraged profile, with a pro forma debt to EBITDA, adjusted for the subsequent repayment of the $50 million previously drawn under the revolving credit facility, of 4.5 times for the 12 months ending in the third quarter of fiscal 2002, Moody's said. EBIT would not have provided coverage of interest expense over the same period.

The ratings also reflect uncertainty in the company's computing and consumer end-markets, Moody's said. There have been seven quarters of recorded net income loss, with loss expected in the fourth quarter of fiscal 2002.

Moody's rates Home Interiors loans B2

Moody's Investors Service assigned a B2 rating to Home Interiors & Gifts, Inc.'s $24 million term A loan due 2004, $172 million term B loan due 2006 and $30 million revolving credit commitment due 2004 and confirmed its existing rating including its $150 million senior subordinated notes due 2008 at Caa1. The outlook is positive. The bank facility was amended and restated in July 2002.

Moody's said the ratings reflect the company's enhanced financial flexibility following improved operating results and amendment of its bank credit facility; the ability to finance growth and required amortization out of internally generated cash flow; and a return to margins more in line with historical performance.

Also supporting the ratings are refinements made to the displayer base, which has helped increase retention and improve the productivity of displayers; the company's long operating history; and the large amount of variable costs in Home Interior's expense structure, Moody's added.

Negatives include Home Interiors' still-high leverage and its relatively thin asset coverage; the risk of sharp fluctuations in operating performance; and the expectation that the company will not reduce debt beyond required amortization levels. The ratings also consider the risk that the company will not continue to de-lever as rapidly as in the recent past, when leverage benefited from a series of special transactions; increased inventory risk from adding permanent inventory to the system to combat shrink; and the risks and benefits associated with new systems implementations, previous new product launches, acquisitions and international expansion.

Moody's also noted the amount of cash building on Home Interiors' balance sheet which may be used to make larger acquisitions than previously made by the company.

Fitch puts Panhandle Eastern on positive watch

Fitch Ratings changed the Rating Watch on CMS Panhandle Eastern Pipeline Co. to positive from evolving including its senior unsecured debt at BB. Fitch also put Southern Union Co.'s BBB senior unsecured notes, BBB- trust originated preferred securities and BBB+ first mortgage bonds on Rating Watch Negative.

The action follows the announcement that Southern Union in partnership with AIG Highstar Capital, LP will acquire the CMS Panhandle Companies from CMS Energy Corp. in a transaction valued at approximately $1.8 billion, including the assumption of $1.16 billion of outstanding debt.

The Rating Watch Negative status for Southern Union reflects the potential for higher initial leverage to complete the acquisition and the structural subordination of the cash flow Southern Union will derive from Panhandle Eastern upstream dividends.

The Rating Watch Positive status applied to Panhandle Eatern's rating reflects the higher rating of Southern Union as compared with that of current 100% owner CMS Energy, which is at B+ on Rating Watch Negative.

It also incorporates Fitch's understanding that Southern Union and AIG Highstar do not intend to leverage the joint venture company that will be formed for the acquisition. On a standalone basis, Panhandle Eastern has historically demonstrated a stable financial profile and a solid market position. In particular, PEPL continues to benefit from consistent cash flows derived from its gas transmission, favorable FERC regulation, significant storage capacity and access to diverse natural gas supplies.

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