Moody's rates Appleton Papers liquidity SGL-2

Moody's Investors Service assigned a speculative-grade liquidity rating of SGL-2 to Appleton Papers Inc.

Moody's said the rating reflects Appleton's good liquidity position as operating cash flow has remained relatively strong despite a steady deterioration in demand for company's core product, carbonless paper.

The rating also reflects Moody's view that over the next 12 months Appleton will likely meet its obligations through internal sources and access to their revolving credit bank facility will be reasonable.

However, the rating incorporates Moody's view that the cushion under the company's financial covenants is somewhat modest and alternate sources of liquidity will be limited.

S&P says Westar unchanged

Standard & Poor's said Westar Energy Inc.'s ratings including its corporate credit at BB+ with a developing outlook are unchanged in response to the stipulation and agreement entered into with the Kansas Corporation Commission staff and various other parties regarding its restructuring plan.

However, upon commission approval, the company's business profile will strengthen reflecting the improved regulatory relations, S&P said.

Less stringent financial parameters will then be required for investment-grade ratings.

As expected, Westar has committed to implement the plan by the end of 2004. The plan includes various asset and stock sales, proceeds of which will be applied toward debt reduction, S&P noted. Westar has also agreed to make rebates to customers of $10.5 million and $10 million in May 2005 and January 2006, respectively.

The significance of the settlement, which the KCC is expected to approve shortly, would outweigh one-time rebates and set the stage for Westar to return to being a pure electric utility with a reduced, though still onerous, debt burden, S&P said.

But it added that downside rating action is still possible in light of Westar's weak financial condition, as well as the execution risk associated with the plan.

Moody's cuts National Wine

Moody's Investors Service downgraded National Wine & Spirits, Inc. including cutting its $98 million 10.125% guaranteed senior unsecured notes due 2009 to B3 from B2. The outlook is negative.

Moody's said the downgrades reflect the uncertainties surrounding the company due to increased business risk resulting from the supplier-led changes in brand distribution rights.

The ratings are predicated on no material additional account losses akin to those National Wine & Spirits experienced throughout late 2002 and early 2003 when Diageo, Future Brands and Canandaigua Wine Co., among others, moved their business to the competition and did not renew their accounts in Illinois with National Wine & Spirits.

The aggregate loss of those accounts is approximately $193 million of revenue representing approximately 27% of fiscal year ending 2003 total revenue.

The ratings are based upon Moody's expectation that National Wine & Spirits' run-rate financials impaired by the lost Illinois business should still be sufficient to service its debt and to continue to reduce financial leverage possibly through future bond repurchases.

The ratings outlook remains negative given the absence of cushion under existing credit statistics to absorb further disruptions in its business.

S&P cuts Millennium Chemicals

Standard & Poor's downgraded Millennium Chemicals Inc. including cutting Millennium America Inc.'s $125 million senior secured term loan due 2006, $175 million senior secured revolving credit facility due 2006, $250 million 7.625% senior debentures due 2026, $450 million 9.25% notes due 2008 and $500 million 7% senior notes due 2006 to BB from BB+. The outlook is negative.

S&P said the action is in response to Millennium's sub-par financial profile and the announcement that Millennium expects to report a steeper than expected loss for the second quarter due to weak sales volumes and competitive price pressures in the titanium dioxide (TiO2) business.

The announced operating shortfall, which comes during the important coatings season for TiO2, as well as lingering economic uncertainties and the potential for additional raw material pressures in the petrochemical industry, are likely to further delay Millennium's efforts to restore the financial profile, S&p said.

S&P added that it recognizes that adverse business conditions in the petrochemical industry, including recent escalation in natural gas costs and weak demand for plastics, are likely to limit cash distributions from 29.5%-owned Equistar Chemicals LP this year.

At the current ratings, credit protection measures are expected to improve over the next two years, with funds from operations to total debt approaching 20%, from approximately 10%, S&P said. Total debt to total capitalization (adjusted to capitalize leases) is above 70%, compared with the appropriate 55%.

Moody's rates Select Medical notes B2

Moody's Investors Service assigned a B2 rating to Select Medical Corp.'s $175 million proposed senior subordinated notes due 2013 and confirmed the company's existing ratings including its $175 million 9.5% senior subordinated notes due 2009 at B2. The outlook is stable.

Despite an increase in leverage, a weakening of the company's credit metrics and potential integration issues in connection with the proposed $230 million acquisition of Kessler Rehabilitation Corp, Moody's said it confirmed the ratings in consideration of Select Medical's positive operating trends, including good cash flow generation, and Moody's expectation that the company's credit profile will return to current pre-acquisition levels over the near-to-intermediate term.

The ratings also reflect the company's leading position in both its business segments. Moody's notes that the acquisition of Kessler will further enhance Select's strong position in the outpatient rehabilitation market. It will also enable the company to expand into the inpatient rehabilitation market and further diversify its sources of revenues.

Limiting the ratings, Moody's noted that the company's adjusted leverage (for rent), post acquisition, will be moderately high and that adjusted coverage metrics are modest. Furthermore, Moody's expects the company's appetite for acquisition activity to persist, especially given the company's expansion into a new business line (inpatient rehabilitation) following the Kessler acquisition.

Leverage (debt/EBITDA) declined to 2.0 times at Dec. 31, 2002 from 3.2 times pro forma for the 12 months ending March 31, 2001. Interest coverage, as measured by EBITDA-capex/interest, strengthened to 4.8 times from 2.7 times. Pro forma for the acquisition, however, the company's metrics will weaken considerably: leverage and coverage will be 2.5 times and 2.8 times, respectively, for the 12 months ended March 31, 2003. When adjusted for rent, the metrics will be even weaker.

S&P rates Advanstar notes B-

Standard & Poor's assigned a B- rating to Advanstar Communications Inc.'s proposed $400 million second priority senior secured notes maturing 2008 and 2010 and put the B rating on the company's revolving bank credit facility on CreditWatch positive. Other ratings were confirmed including the subordinated debt at CCC+. The outlook remains negative.

S&P said the revolver was put on positive watch because of the improved collateral coverage that would result from the pending reduction in the size of the facility.

Advanstar's ratings reflect its high financial risk and the still difficult, but stabilizing, industry operating environment, S&P said. These risks are tempered by the good competitive positions of Advanstar's niche trade show and publishing businesses and the company's good sector diversity outside of its fashion industry concentration.

Refinancing bank debt with higher rate notes will modestly increase interest expense, although this will be more than offset by the substantial elimination of debt maturities until at least 2007 when the revolving credit facility matures, S&P said. Financial risk is high with consolidated debt to EBITDA of about 8.0x and EBITDA coverage of total interest of 1.1x on a pro forma basis. EBITDA coverage of interest expense improves slightly to 1.3x on a cash basis excluding the accretion on the parent company notes.

S&P says Avista unchanged

Standard & Poor's said Avista Corp's ratings are unchanged including its corporate credit at BB+ with a stable outlook following the company's announcement that it is divesting a majority stake in its fuel-cell business, retaining only 19.9%.

S&P said the move is positive for credit quality but does not affect ratings at present.

Avista Labs is an unprofitable business and a cash drain on Avista, though a small one.

By its actions, Avista not only eliminates a need for additional cash investments in the business, except for $1.5 million under certain conditions, but it also brings in investors whose risk appetite is more in line with that of the fuel cell business.

Finally, the divestiture also demonstrates Avista's commitment to focus on its core utility business.

Avista's credit profile has stabilized since the establishment of the Energy Cost Recovery Mechanism by the Washington Utilities & Transportation Commission in 2002 and its order allowing the recovery of deferred costs incurred during the western U.S. power crisis.

While financial ratios are still weak for the current rating, S&P said it expects that Avista will continue to aggressively pay down debt and minimize further capital investments in unregulated businesses.

S&P confirms OM Group, off watch

Standard & Poor's confirmed OM Group Inc. and removed it from CreditWatch positive including its $325 million senior secured revolving facility and $600 million term C loan due 2007 at B+ and $400 million 9.25% senior subordinated notes due 2011 at B-.

S&P said the action incorporates the expected completion of OM Group's definitive agreement to sell its precious metals business to Umicore SA for about $752 million in cash.

The pending sale, which is expected to close in the third quarter of 2003, was incorporated into the ratings and is a positive for credit quality, given that net proceeds of about $700 million have been earmarked for debt reduction.

Still, the financial profile will remain highly leveraged, the business profile will be less robust, and the outlook for higher cobalt and nickel prices remains uncertain, S&P said. If the sale of the precious metals business, which is still subject to regulatory review, does not occur, it would clearly have negative implications for OM's credit prospects.

The ratings on OM reflect the company's position as an established provider of metal-based specialty chemical and refined metal products and expected satisfactory liquidity, overshadowed by the vulnerability of its operating margins and profitability to the volatility of cobalt and nickel prices, political and civil instability risks in its principal cobalt supplier country, long-term nickel supply uncertainties and a heavy debt load, S&P said.

Nevertheless, despite the value-added characteristic of cobalt products, cobalt prices have a major impact on group earnings, primarily in the company's refining operation; swings in cobalt refining profitability are considerable, depending in part on the price of cobalt. In periods of low metal prices, refining profit per pound can be minimal, S&P said. During 2002 the market price of cobalt remained at extremely low levels of $6.00 per pound to $7.00 per pound, versus historically higher prices of $10.00 per pound to $30.00 per pound.

Pro forma for the sale of the precious metals business, OM will remain aggressively leveraged over the near term with debt to EBITDA in the 3.5x to4.0x range and funds from operations to total debt in the 10% to15% range, S&P said.

Moody's rates Kinetic Concepts notes B3, loan B1

Moody's Investors Service assigned a B3 rating to Kinetic Concepts, Inc.'s planned $205 million guaranteed unsecured senior subordinated notes due 2013 and a B1 rating to its planned $100 million guaranteed senior secured revolving credit and $480 million guaranteed senior secured term loan B. The outlook is stable.

Moody's said Kinetic Concepts' ratings reflect its strong revenue and profit growth, its position in an attractive market niche, improvements the company has made in its Medicare billings process and its successful settlement of its anti-trust lawsuit against a competitor.

The rating action also recognizes the company's relatively high leverage, flat therapeutic surface business and increasing concentration on a single product line.

The stable rating outlook reflects Moody's expectation that the company's V.A.C. product line will gain increasing market acceptance, generating rapid, low double-digit growth in revenues, profits and operating cash flow in the process.

Kinetic Concepts has experienced rapid growth for the last several years. Revenues have grown at a CAGR of about 28% since 1999 and gross profit margins have risen over the period as well. Moody's expects Kinetic Concepts' revenues to continue to grow at a rate in the low double digits for several reasons. First, hospitals, specialized nursing facilities and home health care service providers have embraced the V.A.C. product line. Although alternatives exist, many, such as artificial skin, are complements rather than substitutes to the Kinetic Concepts offering. Second, the populations of North

America and Europe, Kinetic Concepts' core markets, continue to age. Older individuals are more likely to have compromised circulatory systems and suffer from diabetes, both of which make it more difficult for wounds to heal. Finally, these same populations are suffering increasingly from obesity. Obesity gives rise to immobility, skin problems and diabetes, problems that both Kinetic Concepts' V.A.C. systems and therapeutic surfaces are designed to address.

Trends such as these should contribute cash flow growth in the low double-digit range, in Moody's view.

The transaction will cause the company's total debt levels to rise from $416.8 million as of March 31, 2003 to $889.4 million on a pro forma basis, including the new preferred stock issue, which Moody's considers relatively highly debt-like. Moody's expects total debt/EBITDA to rise from 3.31x at the end of 2002 to approximately 5.0x at the end of 2003, again taking into account the new preferred stock issue. Given the reduction in its blended interest rate; the use of preferred stock, which is PIK in the first three years; and the expected growth in profits and cash flow, however, EBITDA/interest is likely to improve materially nonetheless, rising from 3.63x for 2002 to approximately 5.0x for 2003.

S&P confirms Dean Foods, off watch

Standard & Poor's confirmed Dean Foods Co. and removed it from CreditWatch positive including its $1 billion term loan B due 2008, $800 million revolving credit facility due 2007 and $900 million term loan A due 2007 at BB+ and Dean Holding Co.'s $100 million 6.75% senior notes due 2005, $150 million 6.9% senior notes due 2017, $200 million 6.625% senior notes due 2009 and $250 million senior notes due 2007 at BB-. The outlook is positive.

S&P said the outlook revision reflects the completion of the common equity conversion of the last tranche of preferred securities and S&P's expectation that Dean Foods' credit protection measures will, in the near term, improve to a level that would be commensurate with an investment-grade rating. Key to an upgrade will be Dean Foods' ability to sustain stronger credit protection measures and at the same time continue its acquisition strategy.

The ratings reflect Dean Foods' position as the largest national dairy company in the U.S., with about a 35% share of the U.S. dairy industry. This is offset by a moderately aggressive financial profile and the company's acquisitiveness, S&P said. The ratings further reflect Dean Foods' strong portfolio of national, regional, local, and private-label brands, solid regional market positions, geographic diversity, stable cash flow, moderate capital expenditures, cost-saving opportunities, and an experienced management team.

S&P said it expects that Dean Foods will be acquisitive and will take advantage of consolidating trends in the dairy and related food industries however the company is expected to temper this with a financial policy more geared to achieving and maintaining an investment-grade rating.

In addition, acquisitions are expected to be of a size that their integration into Dean Foods' operations should continue to be fairly seamless. The company has the financial flexibility to pursue acquisitions in related industries under its revolving credit facility and with its stable cash flow from operations.

Dean Foods' financial profile has moderated with the conversion of the preferred securities, which analytically S&P had viewed as debt. In the near term, S&P expects that Dean Foods will achieve pretax interest coverage of more than 3.0x, EBITDA to interest coverage of more than 5.0x, and total debt to EBITDA of less than 3.0x.

Moody's rates Southern Star notes B1

Moody's Investors Service assigned a B1 rating to Southern Star Central Corp.'s planned $180 million senior secured notes and rated Southern Star Central Gas Pipeline, Inc.'s $175 million senior secured notes and $60 million credit facilities at Ba1. The outlooks are stable.

Moody's said the ratings reflect the substantial leverage that South Star is incurring in AIG Highstar Capital LP's acquisition of Central.

Southern Star's risks include: relatively weak credit measures, including leverage that is well higher than its peers', thin coverages and returns that are lower than its allowed levels; mature market with limited internal growth opportunities, boding flat to declining revenues over time, which could necessitate a rate filing (and the risk of getting its allowed returns lowered) sometime in the future; the risk of concentration in a single asset; concentration in two customers; declining deliverability in the Hugoton Basin (about a third of Central's gas supply), which will over time necessitate investments to source new supplies from other regions; and an operating record yet to be established as a standalone entity under new ownership.

However, Moody's said those risks are mitigated by: the majority of revenues stabilized by fixed, non-volumetric reservation charges under long-term contracts with creditworthy utilities; competitive advantage versus other pipelines in the region due to the location of Central's system, the number of its delivery points and lower rates; longer than industry average life of its contracts (6 years); little near-term re-contracting risk, with its major contracts not due for a few years; storage capacity located near market areas that enables Central to provide premium services to its major customers at around maximum tariff rates and mitigating the overall impact of any rate discounting; and lack of a requirement to file for a rate case, which allows the company discretion in managing some of its regulatory risks.

Central was acquired by Highstar in November 2002, for $380 million of cash plus the assumption of $175 million of Central's existing senior notes (about 7 times 2002 EBITDA). The cash consideration was financed with a $200 million bridge loan; the rest with equity from Highstar. Southern Star will repay this bridge loan and supplement its liquidity with proceeds from $180 million of Holdco notes and a $50 million Opco term loan. In addition to the term loan, Opco will put in place a $10 million 364-day facility for working capital needs, Moody's said.

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