S&P puts American Seafoods on positive watch

Standard & Poor's put American Seafoods Group LLC on CreditWatch positive including its $175 million 10.125% senior subordinated notes due 2010 at B and $280 million term B loan due 2009, $75 million revolving credit facility due 2007 and $90 million term A loan due 2007 at BB.

S&P said the CreditWatch placement follows the announcement by American Seafoods Corp., an affiliate of American Seafoods Group, that it plans an initial public offering of $450 million income deposit securities in the U.S. and Canada. In connection with this offering, American Seafoods Group expects to redeem 35% of the $175 million 10.125% senior subordinated notes due 2010 and commence a tender offer for the remainder.

Despite the firm's below-average business risk profile, S&P said it expects that if this transaction is completed there would be improvement in American Seafoods' financial profile, which could result in a one-notch upgrade.

S&P lowers Premcor outlook, rates notes BB-

Standard & Poor's assigned a BB- rating to Premcor Refining Group Inc.'s proposed $250 million senior unsecured notes due 2015 and lowered its outlook on Premcor and parent Premcor USA Inc. to negative from stable and confirmed the ratings including the corporate credit at BB-.

S&P said the negative outlook reflects its concern that Premcor is increasing its debt leverage during a time when it is facing significant capital outlays through 2005 that could further increase its debt leverage. The proposed offering increases Premcor's debt leverage to about 56%, compared with 53% as of March 31.

Premcor is increasing its debt leverage to invest between $200 million and $220 million to expand its Port Arthur refinery. S&P said it believes that this expansion has attractive economics and ultimately could benefit Premcor's credit quality but remains concerned that debt leverage could increase further if the industry experiences a cyclical downturn before it can complete its required spending for clean-fuels expenditures.

Over the next three years, Premcor's capital expenditure budget contemplates about $1.4 billion in capital spending, which includes $528 million for clean-fuels spending and $220 million for the Port Arthur expansion. In contrast, Premcor's trough operating cash flow is estimated to be less than $150 million.

Based on midcycle refining margins, S&P said it expects weak cash flow protection measures, with EBITDA interest coverage and funds from operations to total debt to average about 3.5x and 25%, respectively. Capital expenditures in 2003 (about $270 million) are expected to be funded from internal cash flow. However, Premcor faces material clean-fuels capital expenditures through 2005 which (along with already-high finance expenses) could strain the company's available capital resources if margins fall below midcycle levels during those years. Given the refining industry's history of boom and bust cycles, a period of below-average margins is likely.

Fitch rates Premcor notes BB-

Fitch Ratings assigned a BB- rating to Premcor Refining Group's proposed $250 million offering of senior notes. The company's outlook remains positive.

Fitch said that although the proposed debt offering will increase leverage it expects Premcor to continue to reduce leverage going forward as the company's credit profile continues to evolve.

Management has publicly committed to conservatively financing its ongoing growth strategy in an effort to improve its credit ratings.

Fitch expects that the company's next sizable acquisition will be financed with a significant component of equity. Fitch will continue to follow developments with the company over the next several months and take appropriate rating actions as necessary.

Moody's cuts Grohe outlook

Moody's Investors Service lowered its outlook on Grohe Holding GmbH to stable from positive and confirmed its ratings including its €200 million 11.5% senior notes due 2010 at B2, Grohe Beteiligungs GmbH's €370 million senior secured credit facilities at Ba3 and Friedrich Grohe AG & Co. KG's €50 million revolver and €180 million term loan at Ba2.

Moody's said the action follows Grohe's announcement that it has received the necessary number of consents from holders of its 11.5% senior notes to repay €200 million to shareholders and that its new senior secured credit facility has been signed.

The outlook change reflects the increased indebtedness of the company following the repayment which was funded through the incurrence of new senior secured indebtedness.

Moody's noted that in April Grohe drew down on its new credit facilities in order to repay €200 million of principal and accrued interest on outstanding shareholder loans.

Under current expectations, financial covenants should provide adequate flexibility to the business going forward. In addition, the mandatory amortization schedule under the new credit facilities should allow comfortable headroom in the company's cash flows. Grohe's net cash-pay debt/EBITDA ratio is expected to remain above 3.0x for at least the next 12-18 months, Moody's said.

The confirmation of the ratings reflects the company's continued strong operating progress to date, in line with Moody's expectations, and the successful de-leveraging track record established by Grohe since the initial ratings assignment in October 2000. In the context of difficult domestic market conditions, Grohe has been so far successful in expanding its market share and geographical footprint (notably into the U.S.), while significantly improving its internal cash flow generation ability.

Moody's rates SPX notes Ba3

Moody's Investors Service assigned a Ba3 rating to SPX Corp.'s planned $200 million senior unsecured notes due 2011, confirmed its existing ratings including its $500 million senior unsecured notes due 2013 and $627 million Liquid Yield Option Notes due 2021 at Ba3, $500 million senior secured revolving credit facility due 2008, $225 million senior secured term loan A due 2008, $410 million senior secured term loan B due 2009 and $684 million senior secured term loan C due 2010 at Ba2 and maintained a positive outlook.

Moody's said the rating assignment and confirmation reflect SPX's strong market position and increasing diversification, solid operating and financial performance through the economic downturn, substantial cash flow generation, good liquidity condition, and strong management team.

However, the ratings are constrained by the company's still substantial debt load, significant goodwill and negative tangible net worth, continued weakness in some of its key end-markets, active stock repurchase program, and acquisitive growth strategy.

The positive outlook reflects Moody's expectation of continuing operational improvements at SPX, particularly if its major end-markets experience a meaningful rebound.

S&P upgrades Grey Wolf

Standard & Poor's upgraded Grey Wolf Inc. including raising its $250 million 8.875% senior notes due 2007 and $150 million 3.75% contingent convertible senior notes due 2023 to BB- from B+. The outlook is stable.

S&P said it raised Grey Wolf following a review of current and expected credit quality in light of the recent refinancing of its unsecured debt and present industry conditions for onshore drilling.

The recent redemption of $165 million of Grey Wolf's outstanding 8.875% notes due 2007 should save Grey Wolf about $9 million per year of interest expense. If, as anticipated, the remaining $85 million 8.875% notes are redeemed, total annual interest savings could be close to $14 million before accounting for transaction expenses, which would strengthen Grey Wolf's ability to weather cyclical downturns in drilling activity, S&P said.

Although the significant cash position Grey Wolf has recently maintained will likely be reduced as a result of the refinancing of the notes, availability under its credit facility should provide adequate liquidity for a multiyear downturn, S&P noted. Net debt reduction over the medium-term is expected as the drilling market recovers and free cash flow increases.

The ratings upgrade also anticipates the benefits of a nascent upturn in the onshore drilling industry, S&P said. During the past year, the land rig count has increased by more than 200 rigs and bidding activity indicates that more rigs are likely to find work in the near future. Fundamentals for the onshore drilling industry appear positive with natural gas inventories at very low levels, production increases occurring at a very slow rate, and North American natural gas prices sufficiently high to stimulate additional drilling.

Grey Wolf's debt leverage is aggressive, S&P said. Although the company's debt leverage is in the low-50% range, total debt to EBITDA is a very high 6x. Financial results in 2003 will be helped by the lower interest rate of the new $150 million notes. S&P said it believes that Grey Wolf could achieve EBITDA interest coverage of about 2.0x as opposed to below 1.5x without the refinancing.

S&P rates Waterford Gaming notes B+

Standard & Poor's assigned a B+ rating to the $150 million senior notes due September 2012 to be issued by Waterford Gaming LLC and its wholly owned subsidiary Waterford Gaming Finance Corp. and confirmed its existing ratings including its corporate credit at B+. The outlook is stable.

S&P said Waterford Gaming's ratings reflect the stable revenue stream stemming from the operations of the successful Mohegan Sun Casino, operated by the Connecticut-based Mohegan Tribal Gaming Authority. Offsetting this factor is the entity's high debt level and reliance on a single property for its debt service payments.

As the expansion efforts at the Mohegan Sun progressed to completion, Mohegan Tribal Gaming experienced significant growth in top line revenues and generated gross revenues for the fiscal year ended Sept. 30, 2002, of $1.1 billion, approximately a 30% increase over the fiscal period ended Sept. 30, 2001, and close to a 16% compound annual growth rate over Sept. 30, 1999, S&P noted. Gross gaming revenues continued to experience positive results during the first six months of the fiscal 2003 period ended March 31, 2003, with a year-over-year increase of about 20%.

Although there remains uncertainty regarding potential competitive changes in neighboring markets, no new significant competition is expected in the intermediate term and S&P expects that gross revenues at the Mohegan Sun will continue to improve given its solid position in the demographically favorable Connecticut market and quality of its facility.

Modoy's rates Premcor notes Ba3

Moody's Investors Service assigned a Ba3 rating to Premcor Refining Group's new $250 million senior unsecured notes due 2015 and confirmed its existing ratings including Premcor Refining's $750 million senior working capital secured bank facilities at Ba2, senior unsecured notes at Ba3 and senior subordinated notes at B2 and Port Arthur Finance's senior secured notes at Ba3. The outlook is stable but could turn negative or the ratings could be hurt if Premcor, Inc. experiences sustained margins below mid-cycle and/or conducts acquisitions without ample equity funding.

Premcor continues to pursue high impact acquisitions, Moody's noted. With heavy capital spending needs at least through 2005, Premcor would be materially cash flow negative in 2004 and 2005 even at mid-cycle margins.

The outlook would be helped if Premcor announced a material acquisition, of clearly high quality, and funded such an acquisition with substantial common equity. Preferred or convertible preferred stock funding would not be a significant substitute for common stock.

The ratings are supported by a diversified refining base of significant scale, suitable net leverage and liquidity relative to the ratings, a past pattern of sufficient equity funding of acquisitions, strong initial liquidity, and Moody's expectation of a generally supportive refining environment through 2003.

Theoretically, if Premcor experienced no worse than mid-cycle margins (10-year average) through 2005, the current note offering and large pro-forma cash balances, appears to effectively pre-fund heavy capital spending through 2005, becoming cash flow positive in 2006. In reality, however, margins will be widely volatile around the mean, Moody's said.

S&P upgrades Caremark Rx

Standard & Poor's upgraded Caremark Rx Inc. including raising its $250 million senior secured term B loan due 2005 and $300 million revolving credit facility due 2005 to BBB- from BB+ and $450 million 7.375% senior notes due 2006 to BB+ from BB. The outlook is stable.

S&P said the upgrade reflects Caremark's improving financial performance and increasing financial flexibility, due to its continued solid position in the growing pharmacy benefit management industry and leading positions in the mail-order prescription and specialty pharmaceutical distribution segments. These positive factors are somewhat offset by the continued intense pricing competition in the industry and the potential for adverse developments to affect the business model.

Though Caremark is the smallest of the five major pharmacy benefit managers, the company continues to successfully compete for new clients. More importantly, Caremark has one of the largest and most efficient mail-order pharmacy services in the industry.

Nevertheless, Caremark must continue to successfully compete against its much larger rivals, including Medco Health and AdvancePCS. While the company retains more than 97% of its clients, contract pricing remains competitive, S&P noted. The pharmacy benefit management industry also remains under high scrutiny by various government officials for companies' marketing practices and relationships with major pharmaceutical firms.

Caremark's financial performance and cash flow protection measures have markedly improved in the past several years, S&P said. Free operating cash flows have steadily grown to $360 million in 2002, from just $49 million in 1998. During the same period, funds from operations to total debt has grown to 47% from 5%, and total debt to EBITDA declined to 2x from more than 11x.

Moody's puts IMC Global on review

Moody's Investors Service put IMC Global Inc.'s on review for downgrade including its guaranteed senior unsecured notes at Ba2, senior unsecured notes at Ba3 and senior secured credit facilities at Ba1.

Moody's said the review was prompted by its concern that weaker domestic and international demand for diammonium phosphate (DAP) combined with higher production costs could translate into negative free cash flow and weaker credit metrics for 2003.

Moody's said it is concerned IMC's production costs may remain elevated due to higher input pricing. Additionally, Moody's is concerned that higher natural gas prices and their impact on nitrogen fertilizer prices will cause North American farmers to remain conservative with regards to fertilizer application rates despite improvements in crop prices.

Moody's review will consider IMC's liquidity and the company's plan to address intermediate term debt maturities, and the global competitiveness of North American DAP producers given energy pricing over the intermediate term. Moody's will also assess the sustainability of higher phosphate fertilizer prices, and the positive impact of low phosphate fertilizer inventories and higher crop prices. Additionally, the review will focus on DAP capacity in developing countries, primarily India and China., as well as potential positive pressure from asset sales and cost reduction activities.

IMC faces substantial debt maturities in 2005, when approximately $450 million of unsecured notes become due, Moody's said. The company must also refinance its term loan and revolving credit facility, which could expire in 2004 if the 2005 debt maturities are not fully refinanced.

S&P puts Michaels Foods on positive watch

Standard & Poor's put Michael Foods Inc. on CreditWatch positive including its $200 million 11.75% senior notes due 2011 at B- and $100 million senior secured revolving credit facility due 2007, $125 million term A loan due 2007 and $245 million term B loan due 2008 at B+.

S&P said the CreditWatch placement follows Michael Foods' announcement that it has signed a letter of intent to sell Kohler Mix Specialties, Inc., its dairy products division, to Dean Foods Co. Proceeds are expected to be used to repaying a portion of the outstanding bank debt.

Despite the company's below-average business risk profile, S&P expects that if the transaction is completed and proceeds used to reduce debt the improvement in the company's financial profile might result in a one-notch upgrade.

Moody's rates Grey Wolf convertible B1

Moody's Investors Service confirmed Grey Wolf Inc.'s ratings including its $250 million of 8.875% senior unsecured guaranteed notes due 2007 at B1 and rated its new convertible at B1. The outlook remains positive.

The ratings reflect an expected first half 2003 cash flow cycle bottom, firming sector rig utilization and dayrates, expected late 2003 to 2004 cash flow acceleration, adequate net leverage and liquidity for the rating assuming cash flow recovery as expected, and good asset coverage.

The outlook is sensitive to avoiding leveraged acquisitions and to a strong second half-2003 recovery in EBITDA and cash flow, Moody's said.

Also, the convertible note indenture does not limit new senior secured indebtedness. If secured borrowings become substantially greater than expected, the notes could be notched one rating level below the then-existing senior implied rating.

March 31 cash balances totaled $103 million, debt totaled $250 million and book equity totaled $216 million. EBITDA for 2002 totaled $41 million, interest expense was $24 million, and capital spending was $23 million.

Grey Wolf can probably curtail 2003 capital spending by avoiding material orders of new drilling pipe inventory until activity and cash flow picks up in 2004, Moody's said.

Pro-forma for the new notes, roughly $50 million of borrowings under the pending new secured facility and the redemption of the original $250 million of bonds, cash balances would be $37 million, debt would total $200 million and equity would be $208 million.

Moody's rates Sequa liquidity SGL-2

Moody's Investors Service assigned a speculative-grade liquidity rating of SGL-2 to Sequa Corp.

Moody's said the SGL-2 rating reflects its estimation of a good liquidity profile over the forward 12-month period. The rating is supported by expectations that the company will maintain a large cash balance in the near term, despite negative free cash flow generation, bolstered by the recently-announced issuance of $100 million in senior unsecured notes.

Liquidity would be further strengthened by completion of the announced sale of its ARC Propulsion unit to GenCorp for $133 million in cash. Closing is expected in August 2003.

S&P cuts Sbarro

Standard & Poor's downgraded Sbarro Inc. including cutting its $255 million 11% senior unsecured notes due 2009 to B- from B+. The outlook is negative.

S&P said the downgrade is based on Sbarro's continued poor operating performance that has weakened cash flow protection measures. Same-store sales fell 7.1% in the first quarter of 2003, after declining 4.8% in all of 2002; EBITDA margins for the 12 months ended April 20, 2003, decreased to 14% from 17% the year before. As a result, EBITDA fell 64% to $5 million in the first quarter of 2003.

Operating performance over the past two years has been negatively affected by a reduction in shopping mall traffic related to the general economic downturn, S&P said. About 70% of the company's restaurants are located in shopping malls.

Cash flow protection measures are very weak, with lease-adjusted EBITDA coverage of interest of only 1.3x for the 12 months ended April 20, 2003, compared with 1.5x the year before. S&P said it is concerned that continued operating weakness could further pressure cash flow protection measures. In addition, covenants currently provide very limited cushion.

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