S&P rates Qwest notes CCC+

Standard & Poor's assigned a CCC+ rating to Qwest Services Corp.'s $3.3 billion of new senior subordinated secured notes issued in Qwest Communications International Inc.'s debt exchange offer and assigned a CCC+ rating to the $7.7 billion of untendered senior unsecured debt remaining at Qwest Capital Funding Inc. The outlook is developing.

S&P said Qwest's corporate credit rating of B- is the same as before the exchange offer.

As a result of the exchange, the company's consolidated debt has been reduced by a relatively modest $1.9 billion, versus the company's total pre-exchange debt balances of about $24.5 billion, S&P noted.

The B- rating reflects the high degree of risk that continues to surround Qwest due to the ongoing Department of Justice criminal and SEC investigations, as well as the existence of various shareholder lawsuits, S&P said.

The rating agency added that near-term liquidity remains a source of concern, particularly if completion of the $4.3 billion second phase of the company's directories sale is delayed beyond 2003.

Even with the debt exchange, which resulted in a reduction of about $287 million in maturities in 2004, Qwest has consolidated maturities from 2003 through 2005 of about $6.7 billion, of which about $4.5 billion is due through 2004.

S&P said the new Qwest Services debt is rated the same as Qwest Capital Funding's untendered debt because of its assessment of the priority obligations relative to the consolidated asset value of Qwest.

Using a conservative $3,000 per access line value for the company's 17 million access lines and according some value to the company's 1.1 million wireless subscriber base, recognizing cash expected from completion of the directories sale net of debt paydowns required through 2004, S&P said the priority obligations exceeded its 15% threshold for rating the debt one notch below the corporate credit rating, but were less than the 30% threshold for rating the debt two notches below the corporate credit rating.

S&P said that if Qwest is able to stabilize performance for its telecommunications businesses in 2003 the business risk for the company may support a higher rating.

Moody's assigns NR to Qwest Services notes, cuts Qwest Capital, on review

Moody's Investors Service assigned an NR (not rated) to Qwest Services Corp.'s $3.3 billion of senior subordinated notes due 2007, 2010 and 2014 and downgraded Qwest Capital Funding's senior unsecured debt to Caa2 from Caa1. All Qwest ratings, including Qwest Communications International's senior unsecured debt at Caa1, Qwest Corp.'s senor unsecured debt at Ba3 and Qwest Communications Corp.'s senior unsecured debt at Caa1 remain on review for possible further downgrade.

Moody's said it gave Qwest Services an NR rating because Qwest has yet to provide audited, stand-alone financials for the company.

Qwest Capital Funding's senior unsecured rating was lowered to Caa2 from Caa1 because of the structural subordination of the remaining $7.7 billion of notes to $4.4 billion of new debt - $3.3 billion of senior subordinated Qwest Services notes and $1.05 billion of existing senior unsecured Qwest Communications International bonds - and the continued risk of impairment resulting from future free cash flow generation and the ability of Qwest Corp. and Qwest Services to make distributions to Qwest Capital Funding when subsidiary debt service requirements are so significant.

Qwest remains on review for downgrade until audited financials are filed for all debt-issuing legal entities, both SEC and Department of Justice investigations are resolved, contingent liabilities resulting from shareholder and stakeholder lawsuits can be reasonably assessed and the company demonstrates that it can sustain sufficient free cash generation to service all its debt and generate a meaningful return on assets, Moody's said.

Moody's raises Rite Aid outlook

Moody's Investors Service raised its outlook on Rite Aid Corp. to stable from negative and confirmed its ratings including its $1.9 billion secured bank facility at B2, $2.0 billion of senior notes at Caa3 and $20 million of 7% redeemable preferred stock at C.

Moody's said increasing cash flow and more efficient asset management have improved the company's ability to cover fixed charges and necessary investment over the next year.

But the rating agency added that an upgrade is premature unless the company makes concrete arrangements for refinancing the bank loan and two note issues due in 2005.

The stable outlook reflects Moody's revised opinion that the company likely will have sufficient liquidity to meet minimal obligations over at least the next 12 months, including payment of cash interest expense, support of seasonal working capital needs, repayment of debt principal, and a small level of capital expenditures.

Given current trends of operating improvement, Moody's said it also believes that the company will remain in compliance with its bank agreement covenants.

Fitch puts Durango on watch

Fitch Ratings put Corporacion Durango SA on Rating Watch Negative including its B+ foreign and local currency ratings.

Fitch said the action follows Durango's announcement that it is evaluating debt-restructuring alternatives at the holding company.

S&P puts Chohung on positive watch

Standard & Poor's put Chohung Bank on CreditWatch with positive implications including its $200 million adjustable-rate lower and upper tier II subordinated notes due 2010 at B. S&P also put Shinhan Bank on CreditWatch with negative implications.

The action is in response to the emergence of Shinhan Financial Group as the likely buyer of Chohung Bank. A final decision is expected in early 2003.

Chohung Bank is currently 80% owned by Korea Deposit Insurance Corp., after receiving a capital injection from the government in January 1999 amid the Asian financial crisis, S&P noted.

Shinhan is the holding company that owns 100% of Shinhan Bank, the fifth-largest Korean bank. Chohung Bank is the fourth-largest Korean bank in terms of asset size.

The placement of the ratings on Chohung Bank on CreditWatch with positive implications reflects the expected convergence in credit quality that would likely result over time from a combination with the stronger Shinhan Financial Group, S&P said.

If the acquisition is completed, the proven risk management skills and operational efficiencies of Shinhan Bank should rapidly start benefiting Chohung Bank and help improve its credit profile.

Fitch rates Minolta BB-

Fitch Ratings assigned a BB- long-term rating to Minolta. The outlook is stable.

Fitch said the ratings reflect Minolta's weakened financial status due to its sluggish business performance.

Minolta's profit has eroded since the fiscal year ended March 2000. Factors in this erosion include the company's late move into digital copiers and its inability to cut costs quickly enough.

Among items having a particular impact in the fiscal year to March 2002, Minolta rolled forward goodwill amortization on an American printer maker it bought and booked valuation write-downs on holdings in bank shares. As a result, net losses reached ¥34.4 billion, a level comparable to the fiscal year ended March 1992, when the company was forced to pay a settlement to Honeywell in a patent dispute.

For the six months ended September 2002, the company returned to profit as operating income reached ¥12 billion, a major improvement over the loss of ¥2.9 billion posted for the same period in 2001.

Moody's upgrades Big 5

Moody's Investors Service upgraded Big 5 Corp. including raising its $125 million senior secured revolving credit facility to Ba2 from Ba3 and $104 million 10.875% guaranteed senior unsecured notes to Ba3 from B1. The outlook is stable.

Moody's said the upgrade reflects Big 5's successful completion of an IPO and the use of its proceeds to reduce parent company debt, which represented future cash obligations; continued improvements in profitability and steady sales growth; and the ability to fund its growth through internally generated cash flow.

Big 5's ratings also reflect the company's geographic concentration in California and the Western U.S.; the risks of increasing competition from mass merchandisers and regional and national sporting goods retailers; and the volatility in demand for sporting goods brought by changing economic and leisure trends, Moody's said.

Moody's said it believes that the company can sustain recent improvements to leverage and coverage measures. The stable outlook also recognizes that the company will continue to expand its store base in a controlled manner using internally generated cash flows and continue to use excess cash flow for debt reduction.

Ratings could improve if Big 5 is able improve its top line and profitability measures while continuing to reduce debt, Moody's added. The ratings could respond negatively if Big 5 is unable to sustain improvements to its operations or if the company needs to increase leverage in order to fund its growth strategy.

Fitch keeps Kemper on watch

Fitch Ratings said Kemper Insurance Cos. remains on Rating Watch Negative including Lumbermens Mutual Casualty Co.'s surplus notes at BB-.

Kemper recently announced that the company has reached an agreement-in-principle with Berkshire Hathaway Inc. subsidiary, National Indemnity Co. under which National Indemnity will provide a cut-through endorsement on policies issued under the agreement beginning Jan. 1, 2003.

The company indicated that this cut-through will enable Kemper to continue operating its core businesses while restructuring its operations prior to a planned demutualization.

In connection with the transaction, Kemper will also repurchase for $125 million Berkshire's minority equity investment in a Kemper subsidiary company that was made in 2002. Closing of the transaction is expected in the first quarter of 2003.

Fitch believes that the cut-through was necessitated by recent rating downgrades of Kemper by other peer rating agencies that placed the ratings at approximately the level established by Fitch eight months ago. Kemper currently has no ratings in the A category by any major rating firm, which further affects the organization's competitive position.

Fitch said it is also concerned that the repurchase of the Berkshire investment will adversely impact Kemper's capital and liquidity position.

Moody's cuts Texas Industries

Moody's Investors Service downgraded Texas Industries, Inc., affecting $1.1 billion of debt. Ratings lowered include Texas Industries' senior unsecured debt, cut to Ba2 from Ba1, and TXI Capital Trust I's preferred stock, cut to B1 from Ba2. The outlook is stable.

Moody's said it lowered Texas Industries because despite substantial expansionary capital investment in recent years, the company's operating performance has not demonstrated a commensurate improvement, resulting in weakened financial metrics.

Continued soft economic trends affecting its structural steel and concrete, aggregates and cement segments could result in continued operating pressures.

Borrowings incurred to fund these expansion initiatives elevated Texas Industries' total debt burden (including convertible preferreds and receivables securitization), and while Moody's noted that some debt reduction has taken place, future debt reduction may be more prolonged than originally anticipated.

S&P rates Studio Re notes BB+, preference shares BB

Standard & Poor's assigned a BB+ rating to Studio Re Ltd.'s $150 million floating-rate notes due 2006 and a BB rating to its $25 million preference shares redeemable 2006.

S&P upgrades Stericycle

Standard & Poor's upgraded Stericycle Inc. including raising its $125 million 12.375% senior subordinated notes due 2009 to B+ from B and $100 million term A loan due 2006, $75 million term B loan due 2007 and $80 million revolving credit facility due 2006 to BB from BB-. The outlook was revised to stable from positive.

S&P said the upgrade reflects Stericycle's improved financial profile, stemming from stronger profitability and debt reduction.

Stericycle is well positioned in view of its broad range of integrated services, leadership (a 22% market share is many times that of its next largest competitor in a fragmented market), and a low-cost structure, S&P said.

The firm's growth strategy has focused on its highly profitable small account customers (55%-60% of revenues), such as medical and dental offices, that also proved to be good candidates for new services aimed at regulatory compliance and training, S&P added.

Other elements of growth include tuck-in acquisitions in core services, potential transactions in related areas, such as the proposed purchase of Scherer Healthcare Inc., and selected expansion into international markets, which currently represent a very small percentage of revenues, S&P said. Management is expected to pursue a balanced financial policy and capital allocation with regard to acquisitions and potential share repurchases.

Stericycle's competitive strengths and good efficiencies enable it to achieve impressive operating profit margins of about 30%, S&P noted. Increasing free cash flow allowed the firm to reduce debt by about $60 million in 2002. As a result, credit protection measures have steadily improved, with debt to EBITDA about 2.0x, EBIT interest coverage of 3.75x-4.00x, and debt to capital, adjusted for operating leases, at 45%-50%.

S&P cuts Northwestern to junk

Standard & Poor's downgraded Northwestern Corp. and maintained a negative outlook. Ratings lowered include Northwestern's $105 million 6.95% debentures due 2028 and $720 million notes due 2012, cut to BB from BBB, and $60 million 7.1% mortgage bonds due 2005, cut to BBB- from BBB+. S&P assigned a BBB- rating to Northwestern's $390 million term loan due 2006.

S&P also cut Northwestern Energy LLC's $150 million 7.3% first mortgage bonds due 2006, $50 million 7% first mortgage bonds due 2005, $50 million 8.95% first mortgage bonds due 2022 and $55 million 8¼% first mortgage bonds due 2007 to BBB- from A-, medium-term notes to BB from BBB, $50 million 6.875% preferred stock, $50 million preferred stock and 2.15% cumulative preferred stock to BB- from BBB-, NWPS Capital Financing I's $32.5 million 8.125% trust preferred capital securities to BB- from BBB-, Montana Power Capital I's $65 million cumulative QUIPS series A to BB- from BBB-, Northwestern Capital Financing I's $55 million trust preferred capital securities to BB- from BBB-, Northwestern Capital Financing II's $200 million trust preferred securities to BB- from BBB- and Northwestern Capital Financing III's $100 million 8.1% trust preferred securities due 2032 to BB- from BBB- .

The outlook remains negative.

S&P said the downgrade is in response to Northwestern's deteriorating balance sheet, continued poor performance in its Expanets and Blue Dot subsidiaries, and management's inability to adequately project the performance of the non-regulated businesses.

As a result, credit protection measures for the company are expected to be substantially weaker over the next two years, S&P said.

The financing plan for the Montana Power acquisition in early 2002 included $200 million of equity, to be issued in the first quarter 2002. Northwestern did issue about $83 million of equity in September 2002, but given the company's current stock price of half its book value, and general equity market conditions, S&P said it does not believe the company will issue addition equity in the foreseeable future.

Instead, Northwestern may potentially incur additional debt to substitute for equity issues. A new $390 million credit facility, which will be used to replace existing Northwestern bank loans and fund capital expenditures at the utilities, will give the company additional liquidity, but will further weaken coverages for debtholders.

S&P said it is also concerned about the performance of Northwestern's non-regulated businesses, specifically Expanets and Blue Dot. The company does not expect these businesses to contribute to operating income this year. However, Northwestern expects the non-regulated businesses to potentially contribute more than 15% of operating income in the near term starting next year, which requires a turnaround in operations that may be difficult to achieve.

S&P cuts Petroleum Geo-Services, on watch

Standard & Poor's downgraded Petroleum Geo-Services ASA and put it on CreditWatch with negative implications. Ratings lowered include Petroleum Geo-Services' $200 million 6.625% senior notes due 2008, $200 million 8.15% senior notes due 2029, $250 million 6.25% senior notes due 2003, $360 million 7.5% notes due 2007 and $450 million 7.125% senior notes due 2028, all cut to C from CCC, PGS Trust I's $125 million trust preferred securities, cut to D from CC, and Oslo Seismic Services, Inc.'s $165.7 million 8.28% first preferred mortgage notes due 2011, cut to CC from CCC+.

S&P said the downgrade follows Petroleum Geo-Services' decision to not pay a scheduled interest payment on Dec. 30 on its bonds maturing in 2008 and 2028. In addition, the company announced that it would begin deferring distributions on its PGS Trust I preferred securities.

S&P upgrades J.L. French notes, on positive watch

Standard & Poor's upgraded J.L. French Automotive Castings' notes and put all ratings on CreditWatch with positive implications. Ratings raised are J.L. French's $175 million 11.5% senior subordinated notes due 2009, lifted to CCC- from D. Its $190 million term B bank loan due 2006 and $75 million revolving credit facility due 2005 were confirmed at CCC+. The rating was withdrawn on J.L. French's $105 million term A loan due 2005, previously at CCC+.

S&P said the action follows J.L. French's announcement that it made its interest payment on its 11.5% senior subordinated notes before the end of the grace period, and is in compliance with its bond indenture.

The revision also reflects J.L. French's announcement that it has concurrently completed a $190 million debt refinancing, including the repayment of its $105 million term loan A, and has amended its bank financial covenants. As a result, the firm was able eliminate all its scheduled debt amortization until 2006, significantly reducing near-term liquidity issues, S&P said.

Moody's cuts Interep

Moody's Investors Service downgraded Interep National Radio Sales, Inc. including cutting its $99 million senior subordinated notes due 2008 to Caa2 from B3. The outlook is negative.

Moody's said it downgraded Interep because it considers the capital structure over leveraged.

The expected ongoing cash flow of the company, as measured by operating EBITDA, may not be sufficient to service its debt and net contract liability payments, Moody's noted. In addition, the company has opted to bolster its liquidity position by layering additional debt ahead of the senior subordinated notes and issuing convertible preferred equity rather than supporting this class of debt entirely with equity. This further subordinates senior subordinated noteholders and adds incremental strain to the company's ability to service debt.

The two-notch downgrade to Caa2 implies an expected credit loss of a material amount on the senior subordinated notes, Moody's added.

The negative outlook incorporates the uncertainty that continues to surround the economic environment and the expectation that the company's capital structure and liquidity position will remain strained over the intermediate term, Moody's said.

Fitch cuts Inpower loan

Fitch Ratings downgraded Inpower Ltd.'s senior secured bank loan DD from C.

Fitch said the action follows the deferral of principal payable to the senior lenders under the £905 million facility due on Dec. 31, 2002.

AES Drax Holdings Ltd.'s senior secured bonds remain at CC and AES Drax Energy Ltd.'s senior notes remain at C.

All ratings remain on Rating Watch Negative.

The deferment of principal on the bank loan, agreed under the terms of the standstill agreement between Drax and its senior lenders on Dec. 13, 2002, amounts to a change in payment terms and according to Fitch's rating methodology is considered an event of default.

S&P cuts AirGate, iPCS

Standard & Poor's downgraded AirGate PCS, Inc. and put it on CreditWatch with negative implications and lowered iPCS Inc. and kept it on CreditWatch with negative implications. Ratings lowered include AirGate PCS' $300 million senior subordinated discount notes due 2009, cut to CC from CCC-, and iPCS Wireless Inc.'s $140 million senior secured bank loan due 2008, cut to CC from CCC-. iPCS' senior unsecured debt remains at CC.

S&P said it lowered AirGate and put it on watch because of the company's delay in filing its form 10-K annual report originally scheduled for Dec. 30, which constitutes an event of default under both its bank credit agreement and indenture for the senior subordinated discount notes, and S&P's increased concerns that AirGate's limited liquidity may not be sufficient to cover both execution risks and potential contingencies that could arise from a restructuring of its wholly owned subsidiary iPCS Inc.

Resolution of AirGate's CreditWatch depends on the company filing its annual report to cure a default under its bank credit agreement and bond indenture, S&P said. Separately, maintenance of current ratings depends on the company showing favorable trends in liquidity and cash flow metrics.

The downgrade of iPCS is due to the company's announcement that any restructuring of iPCS would involve a bankruptcy filing. Once iPCS files for bankruptcy, its corporate credit rating would be lowered to D and removed from CreditWatch status.

S&P raises Henry outlook

Standard & Poor's raised its outlook on Henry Co. to positive from stable and confirmed its ratings including its senior unsecured debt at CCC.

S&P said that while raw material cost increases for petroleum-based products are a continuing concern but additional sales as a result of the Home Depot agreement bolster operating income prospects.

Further improvement of fragile credit measures could lead to a ratings upgrade near term, S&P added.

Credit quality incorporates Henry's leading position in products for roofing, sealing, and driveway applications and improved, albeit still mediocre, operating margins, offset by a modest revenue base ($200 million-$225 million annually), a narrow product offering, and an aggressive debt load, S&P said.

Support for Henry's business position is provided by its well-established brand names, its manufacturing capabilities across North America, and its sales through multiple distribution channels, S&P added.

Operating income in 2002 was up sharply from the prior year, and results will continue to benefit from an improvement in brand mix resulting from the expanded relationship with Home Depot Inc. and cost-reduction actions, S&P said. Operating margins (before depreciation and amortization) have strengthened to about 9%, versus 5% in previous years.

Internal funds generation at significantly higher levels enhance prospects that working capital needs, capital expenditures, and debt maturities will be manageable and not exert any meaningful upward pressure on debt usage, S&P said. Total debt to EBITDA has improved to about 5.5x, and EBITDA interest coverage is 1.7x; current ratios are fully satisfactory for the rating. However, the modest-size financial base makes these credit ratios vulnerable to wide fluctuations.

Moody's puts XM Satellite on review

Moody's Investors Service put XM Satellite Radio Holdings Inc.'s on review for possible downgrade including its $325 million 14% senior secured discount notes due 2010 at Caa1, $79 million convertible subordinated notes due 2006 at Caa3 and $43 million 8.25% convertible redeemable preferred stock due 2012 at Ca.

Moody's said the review was prompted by the recently announced plan to recapitalize the company.

Moody's said it is concerned that the plan, which includes additional indebtedness at the senior secured level, will further strain the company's balance sheet and further subordinate existing subordinated noteholders and preferred stockholders.

Moreover, XM's liquidity position has been weak. Without the closing of this or some other liquidity event, it is unlikely that the company will be able to operate beyond the first quarter of 2003.

Moody's review will focus on the uncertainty regarding the ability of the company to support the proposed capital structure. In addition, the review will consider the adequacy of the new financing relative to the company's expected need through the rating horizon and the likelihood of additional financial support from XM's strategic partners.

However, as a consequence of the high level of uncertainty regarding both the company and the sector in which it operates, the severity of the possible downgrade is unclear.

Moody's puts Elwood on review

Moody's Investors Service put Elwood Energy, LLC on review for downgrade to junk including its $400 million senior secured debt at Baa3.

Moody's said it began the review because of the credit deterioration of one of Elwood's key contract counterparties, Aquila, Inc. Moody's downgraded Aquila's senior unsecured debt to Ba2 from Baa3.

Elwood holds power purchase agreements for capacity and energy that expire in 2012 and 2017. Under the terms of these agreements, Exelon Generation (senior unsecured debt at Baa1) is required to make capacity payments to Elwood on five of the nine units (55%) through 2012, while Aquila is required to make capacity payments on the remaining four of the nine units (45%) through 2016 and 2017. The project is fully reliant on payments from Aquila beginning in 2013.

Moody's cuts Centennial Cellular

Moody's Investors Service downgraded Centennial Cellular Operating Co. including cutting its $1.2 billion senior secured credit facility to B3 from B1 and $370 million 10.75% senior subordinated notes due 2008 to Caa2 from B3. The outlook is stable.

Moody's said it downgraded Centennial Cellular because of the higher default risk of the company as cash flow growth slows due to slowing domestic wireless subscriber growth, declining roaming revenues, and the pressure on operating profits from a tougher competitive environment in the Caribbean.

The pressure on cash generation comes as principal amortization of the secured credit facility increases, Moody's noted.

The stable outlook reflects Moody's opinion that the company can remain liquid through continued access to undrawn amounts of its revolving credit facility, and that financial performance will continue to improve.

The B3 rating on the $1.2 billion senior secured credit facility reflects its consumption of the vast majority of the value of the company, Moody's said. This credit agreement is secured by substantially all the assets of the company's subsidiaries and guaranteed by those subsidiaries.

Moody's said all three of Centennial's business lines have experienced operating challenges and weaker than anticipated financial performance.

The Caribbean Wireless operations, primarily PCS services in Puerto Rico, but also upstart operations in the Dominican Republican, have experienced high levels of churn and eroding revenues per user.

The broadband business, CLEC operations in Puerto Rico as well as long distance operations in the Dominican Republic, and cable TV operations in Puerto Rico, have also faced tough business conditions from heightened levels of competition.

In the U.S., the domestic wireless operations have been challenged by declining roaming revenues and two consecutive quarters of negative subscriber growth.

Despite these difficulties, the company has been able to improve its free cash flow profile as cash provided by operations began to exceed capital expenditures in the quarter ended May 31, 2002, due both to cash flow growth and reduced capital spending, Moody's said.

Nonetheless, Moody's said it fears that such amounts of free cash flow will be insufficient to meet upcoming term loan amortizations that total $73.5 million in calendar 2003 and $96 million in 2004, thus requiring incremental draws on the company's $250 million revolving credit facility ($190 million of which was drawn at the end of August 2002).

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