Fitch raises Portland General Electric watch

Fitch Ratings raised its Rating Watch on Portland General Electric to positive from negative including its senior secured debt at BB+, senior unsecured at BB- and preferreds at B.

Fitch said the revision is in response to Portland General Electric's progress in successfully addressing a number of the challenges to the company's stand-alone credit profile following the bankruptcy of parent Enron Corp.

Specifically Fitch said there is greater clarity with regard to potential Enron exposures.

The watch change also considers Portland General Electric's much improved liquidity position, bolstered most recently by the May 1, 2003 remarketing of $142 million of secured pollution control revenue refunding bonds.

Further rating action beyond that point, either up or down, will be contingent upon Enron's ability to divest Portland General Electric in a timely fashion without negatively impacting Portland General Electric's financial position, and additional developments with regard to the FERC investigation of Portland General Electric into manipulation of western energy markets.

S&P rates Sealy notes B-

Standard & Poor's assigned a B- rating to Sealy Mattress Co.'s new $50 million subordinated notes due 2007 and confirmed its existing ratings including its subordinated debt at B- and bank loan at B+. The outlook is stable.

The ratings are based on Sealy's highly leveraged financial profile, partially mitigated by the company's leading position in the stable, though highly competitive, bedding market and its steady cash flow, S&P said.

The company's credit statistics are somewhat weak for the rating category and Sealy's historical performance. However, with higher profitability and manufacturing efficiencies from its new product introduction, and with debt reduction, S&P said it expects credit statistics to improve in the near term.

For the most 12 months to March 2, 2003, discretionary cash flow was $48.0 million, compared with an average of $58 million for the past three years, S&P said. Somewhat lower profitability and lower cash from working capital was mitigated by less capital spending. EBITDA coverage of interest expense, adjusted for operating leases, was 1.7x, versus a three-year average of 1.9x, as debt repayment did not offset lower profitability. Total debt to EBITDA is high at 6.5x.

Moody's rates Muzak notes B3, loan B2

Moody's Investors Service assigned a B3 rating to Muzak LLC's proposed $200 million senior notes and a B2 rating to its proposed $60 million senior secured credit facility. The outlook was changed to stable from negative.

Moody's said the ratings reflect the company's high leverage, negative free cash flow after capital expenditures and challenges related to growing the business.

The ratings also reflect Muzak's elimination of pending debt amortization, improved customer churn rate, and consistent revenue growth.

The new $60 million senior secured revolving credit facility will be used for working capital and general purposes. Proceeds from the proposed $200 million senior note transaction will be used to refinance the existing indebtedness under the credit facility and to repay the $10 million in sponsor notes, contributed in March of 2002.

The ratings reflect Muzak's significant leverage and lack of free cash flow, Moody's said. Free cash flow (after capital expenditures) has consistently been negative in recent years.

Moody's believes there will be minimum reduction in debt levels over the short term as the company will likely prioritize cash flow from operations to reinvest in the business.

Debt to capital remains high at around 77% and the company remains weak in its rating category, Moody's said.

Muzak's business requires significant reimbursement to offset its 10% annual churn rate. Additionally, the company's growth is constrained by the high upfront investment necessary to install its product at customer locations. Furthermore, although seemingly unlikely, competition could begin to pose a bigger threat with new satellite radio technology that has already begun to roll out.

Projected total Debt to EBITDA is expected to remain high at about 5.3x at the holding company, Moody's said. EBITDA coverage of interest was 2.0x and EBITDA less capital expenditures coverage of interest is under 1.0x. Debt to free cash flow (less capital expenditures) remains weak at over 15x.

Moody's rates Cinemark notes B3

Moody's Investors Service assigned a B3 rating to the new $210 million 9% senior subordinated notes issued by Cinemark USA, Inc. and confirmed its existing ratings including its $75 million senior secured revolver due 2007 and $125 million senior secured term loan due 2008 at Ba3 and $360 million 9% senior subordinated notes due 2013, $200 million 9 5/8% senior subordinated notes due 2008 and $75 million 9 5/8% senior subordinated notes due 2008 at B3. The outlook is stable.

Moody's said it views the follow-on offering as essentially credit neutral, noting that proceeds will be used entirely to finance the tender offer for a portion of the company's higher coupon 9 5/8% senior subordinated notes, thereby reducing interest expense and slightly enhancing financial flexibility while effectively maintaining leverage.

Moody's noted the planned and likely use of some of Cinemark's revolver availability to fund a portion of the tender offer as a modest shift in the mix of capital, but here to also added that the transaction was not likely to be material enough to alter current ratings, particularly given the ongoing expectation of positive free cash flow generation and ample liquidity for the company over the forward period.

The ratings broadly reflect the company's still high financial leverage after adjusting to account for off-balance sheet financing of theater operating leases; fairly modest fixed charge coverage; a higher level of international exposure due to the company's more extensive foreign operations (which reside outside of the Restricted Group); and, more generally, continued concerns about persistent excess screen capacity, box office volatility, dependence on Hollywood studios for hit releases, and the proliferation of alternative forms of entertainment for the theatrical exhibition industry as a whole, Moody's said.

The ratings draw support, however, from Cinemark's large asset base and the relatively new or upgraded nature of most of its theaters, the majority of which offer stadium seating; the advantages which the company gains from operating primarily in less competitive suburban markets; the added security resulting from owning a larger proportion of its theatres and maintaining lower fixed costs and overhead; and the comparatively conservative approach to running the business by management relative to industry peers.

The stable rating outlook reflects Moody's expectation that the company will continue to benefit from strong operating performance, albeit tempered somewhat by the anticipated slowdown in the box office relative to 2002. The rating outlook also reflects Moody's expectation that the company will take a rational approach to the future use of excess liquidity and free cash flow, with modest capital expenditures for new build properties, resulting in growing amounts of free cash flow which should result in a delevering process beginning in 2004.

Additionally, Moody's expects that the company will re-visit former plans to take the company public, which were originally postponed during 2002 as a result of unfavorable market conditions.

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