Moody's rates Hanover Compressor subordinated notes B3

Moody's Investors Service assigned a B3 rating to Hanover Compressor's $263 million subordinated zero-coupon notes issued to Schlumberger, Inc., confirmed its other ratings including its $192 million 4.50% non-guaranteed senior convertible notes, HET 2001A's $300 million 8.50% partly secured senior notes due 2008 and HET 2001B's $250 million 8.75% partly secured senior notes due 2011 at B2 and Hanover Compressor's $86 million non-guaranteed convertible trust preferred stock at B3, and maintained a negative outlook.

Moody's said the zero-coupon notes are not guaranteed by subsidiaries and the covenants are very weak. Registration with the SEC is pending.

Moody's said Hanover Compressor's ratings reflect sizable, fairly durable cash flow tempered by high leverage, soft results in the mature over-supplied domestic gas compressor and processing equipment markets, high capital needs for international expansion and political risk in those markets, limited internal ability to materially reduce debt, and liquidity risks inherent to tight fourth quarter 2003 bank covenants and 2004 debt maturities.

The outlook may move to stable if second quarter and 2003 cash flow meet expectations, bank covenants are relaxed or replaced with a new revolver, and the June 2004 maturity of $200 million in bank synthetic leases and November 2004 maturity of the $350 million secured revolver are soon refinanced. Downgrades may result if second quarter or 2003 free cash flow materially disappoint, covenant breaches become imminent, or refinancings are unsuccessful, Moody's said.

Hanover Compressor's high leverage is incompatible with the current ratings and run-rate free cash flow unless material leverage reduction begins this year, Moody's said. Removal of the negative outlook requires: recovery in the domestic business and no material erosion elsewhere in the business; strong capital discipline; a long-term solution to very tight covenants in Hanover Compressor's $350 million secured bank revolver maturing November 2004; a sufficiently benign result from Hanover Compressor's ongoing SEC investigation; and debt reduction from sources other than asset sales. Weak secular domestic trends and excess capacity compound the challenges to strong recovery.

The ratings are supported by very early signs of domestic market firming; Hanover Compressor's position as the largest natural gas compression rental firm; wide fleet diversification by horsepower range and across domestic and international producing basins; Hanover Compressor's higher average horsepower per compressor unit which diversifies field level exposure to individual wellbores; and settlement of shareholder litigation on terms not materially damaging to bondholders, Moody's said.

S&P lowers Select Medical outlook

Standard & Poor's lowered its outlook on Select Medical Corp. to stable from positive and confirmed the company's ratings including its subordinated debt at B.

S&P said the new outlook reflects the impact on Select Medical's credit profile of its larger-than-expected $230 million acquisition of inpatient rehabilitation provider Kessler Rehabilitation Corp.

The revision also reflects S&P's revised view of Select Medical's future acquisition prospects.

S&P added the Select Medical's ratings reflect its relatively narrow service niche, risk of future adverse changes in reimbursement, and ongoing expansion efforts that may limit its ability to extend its recent successes.

The company remains vulnerable to changes in reimbursement. Although it appears that Medicare's prospective payment system for LTACs will be favorable for the company, future adverse changes could have a significant effect, as Medicare contributes 40% of Select Medical's total revenues, S&P said. The currently favorable managed-care environment is expected to moderate in the next year or two. Moreover, the company's acquisition plan could accelerate even further, hurting credit strength.

A new equity offering in 2001 contributed to a reduction in lease-adjusted debt to capitalization to 59%, as of Dec. 31, 2002, from about 69% in 2000. Also, the company's funds from operations to lease-adjusted debt of 30% and its 3.4x EBITDA interest coverage provide the cushion for Select to acquire Kessler without affecting its rating, S&P said.

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