Moody's rates Quest Diagnostics' loan Baa3; upgrades other ratings

Moody's Investors Service assigned a Baa3 rating to Quest Diagnostics Inc.'s $275 million senior unsecured term loan due 2007. In addition, Moody's upgraded the company's $325 million revolver due 2006, $275 million 6.75% senior notes due 2006, $275 million 7.5% senior notes due 2011 and $250 million contingent convertible debentures due 2021 to Baa3 from Ba1. The senior implied rating and senior unsecured issuer rating were withdrawn. The outlook is stable.

These actions complete the review of Quest, which began on April 2.

The upgrades reflect Quest's ability to sustain positive operating trends, solidified leading market position with the acquisition of American Medical Laboratories Inc. and pending acquisition of Unilab, and disciplined management team, Moody's said.

On the flip side, the company will now face issues relating to the integration of two companies simultaneously. Moody's anticipates that the integration will go smoothly as key management from both companies are expected to be retained. In addition, Quest may need to rely on product mix shift and volume increases to support positive operating trends. Moody's also notes that Medicare and Medicaid pricing has been flat while managed care pricing will continue to be subject to constraints and that there are very preliminary proposals in Congress to make changes to Medicare that contemplate some type of competitive bidding procedures for labs.

The stable outlook is due to the anticipation that favorable operating trends will continue, that leverage will be reduced quickly, continued improvement in the credit profile and CFO/total debt levels will be in the 30% to 40% range toward the end of 2003, Moody's said.

Moody's keeps Sierra Pacific on review

Moody's Investors Service said Sierra Pacific Resources and its utility subsidiaries Nevada Power Co. and Sierra Pacific Power Co. remain on review for possible downgrade. Sierra Pacific Resource's senior unsecured rating is B2 while the utilities senior secured debt is at Ba2. Moody's also withdrew the utility companies' short-term ratings of Not-Prime, noting the move had been requested by management and that neither have commercial paper outstanding nor do they intend to issue any in the forseeable future.

Moody's said the continuation of the review takes into account recent regulatory actions, including the decision by the Public Utility Commission of Nevada to allow Sierra Pacific Power to recover $149 million of the $205 million in deferred energy costs that had built up on its books during 2001.

The decision by the Public Utility Commission to disallow just $58.6 million of Sierra Pacific Power's deferred energy costs because they were deemed imprudent appears to represent a more tempered view by the state regulators compared to the extremely harsh decision they rendered in Nevada Power's deferred energy case on March 29, Moody's said.

In Nevada Power's deferred energy rate case, the commission disallowed the recovery of approximately $438 million of the $922 million in deferred energy costs that had built up on Nevada Power's balance sheet during 2001, having determined that the disallowed costs were not prudently incurred, Moody's noted. The harsh decision in Nevada Power's deferred energy rate case led to a significant writedown by Nevada Power in the first quarter of 2002 and precipitated a tight liquidity position. By comparison, Sierra Pacific Power's writedown will be more modest.

In addition to the more tempered decision by the commission in Sierra Pacific Power's deferred energy rate case, it is also worth noting that late last week the commission approved a one-cent per kilowatt hour rate increase for Nevada Power for the month of June 2002, Moody's commented. This action, while not actually representing a rate increase, does provide for accelerated recovery of approximately $16 million of energy supply costs previously approved for recovery on March 29, 2002.

The additional revenue will assist Nevada Power in meeting power supply funding requirements during the coming summer.

Notwithstanding the most recent regulatory actions, Sierra Pacific Resources still faces a tight liquidity position, Moody's said.

S&P keeps Sierra Pacific on negative watch

Standard & Poor's said the deferred power cost recovery decision by Nevada regulators allowing Sierra Pacific Power Co. (B+/Watch Neg/--) to recover $149 million out of $205 million in deferred costs will not affect ratings on Sierra Pacific Resources (SRP; B+/Watch Neg/--) or its utility subsidiaries, Nevada Power Co. (B+/Watch Neg/--) and Sierra Pacific Power.

S&P lowered the ratings of Sierra Pacific and subsidiaries to B+ in April 2002 following an analysis of the liquidity position of SRP pursuant to the regulators' decision to disallow $437 million of deferred power costs incurred by Nevada Power.

S&P factored in a disallowance for Sierra Pacific Power that is largely comparable with the commission's actual order today.

While this order is considerably more supportive than the nearly 50% disallowance for Nevada Power, Sierra Pacific continues to face a critical liquidity situation as the summer approaches.

Ongoing negotiations with power suppliers, which account for about half of the utility's summer energy needs, remain critical to Sierra Pacific's financial solvency.

S&P raises Coast Hotels outlook

Standard & Poor's raised its outlook on Coast Hotels & Casinos Inc. to positive from stable. The company's subordinated debt is rated B.

S&P said the action follows the filing by parent company Coast Resorts Inc. of a registration statement for a proposed initial public offering of its common stock.

The offering is expected to raise up to $200 million in cash proceeds, although a meaningful portion will relate to shares sold by existing individual stockholders, S&P said. Still, total proceeds to Coast Resorts are expected to be sufficient to fully repay the outstanding balance of Coast Hotels' senior secured credit facility ($65 million outstanding at March 31, 2002).

Additional proceeds are expected to be invested in short-term securities pending use for general corporate purposes, including expenditures related to current and future planned expansion projects, S&P added.

Despite its many projects, Coast Hotels continues to grow its cash flow base and has maintained modest debt leverage, largely due to the success of Suncoast, S&P noted. The anticipated equity offering is expected to allow the company to continue its growth objectives while sustaining credit measures that are somewhat strong for the current rating. Pro forma for the offering, Standard & Poor's expects that debt leverage, as measured by total debt to EBITDA, will be in the mid-2 times area.

Debt leverage, however, is expected to increase modestly in the next few years as the company moves forward with its growth plans, S&P added.

S&P confirms LodgeNet

Standard & Poor's confirmed its ratings on LodgeNet Entertainment Corp. maintained the stable outlook and assigned a preliminary B senior unsecured rating and preliminary B- subordinated rating to the company's $225 million Rule 415 shelf registration. A preferred stock issue would be rated at the time of drawdown, based on its terms.

LodgeNet generated higher revenue and EBITDA in the first quarter of 2002 despite a 3% drop in occupancy rates, which contributed to a 3.5% decline in average revenue per room, S&P noted. This reflects the company's growing room base and cost control measures.

Profit growth will remain constrained by lower occupancy rates, which will further weigh on the company's negative discretionary cash flow, S&P added.

LodgeNet's revenue and EBITDA increased 7.2% and 12.9%, respectively, in the first quarter of 2002, S&P said. For full fiscal 2002, the company projects that EBITDA will increase by 6%-10%, despite the likelihood that average occupancy levels will remain materially below last year's levels for the first three quarters. Still, lower profit growth, combined with high capital expenditures for expansion and digital upgrades, will worsen the company's already negative discretionary cash flow. For the 12 months ended March 31, 2002, debt to EBITDA totaled 4.3 times and EBITDA coverage of interest was 2.3x.

In light of reduced occupancy levels, it will be important for LodgeNet to continue to closely monitor its expenses and capital expenditures, S&P said. A shortfall in projected profitability or an increase in debt levels could jeopardize compliance with tightening financial covenants or force the company to slow its expansion.

Moody's rates Big Food notes Ba3, loan Ba1

Moody's Investors Service assigned a Ba3 rating to The Big Food Group plc's planned £150 million of senior guaranteed unsecured notes due 2012 and a Ba1 to the £300 million unsecured senior credit facility due March 2007 of its BF Ltd. subsidiary. The outlook is stable.

Moody's said Big Food has moderately high financial leverage and moderate cash flow coverage measures but also has generally stable and relatively predictable cash flows generated by its two principal businesses, Booker and Iceland. The businesses each have leading positions in their sectors of operation but face significant challenges.

The rating is supported by a focused and experienced management team, whose conservative financial strategy should lead to a modest improvement in leverage and cash flow coverage measures over the intermediate term, Moody's said.

Moody's added that Big Food's ratings are weakly positioned in the categories.

Any strengthening of the rating will primarily depend on management's ability to realize strategic objectives and improve overall operating performance. Financial leverage is expected to moderate over the intermediate term. On a pro-forma basis, based on unaudited figures March 29, 2002 net debt on a lease adjusted basis and before operating exceptional items to EBITDAR is 4.0 times with interest coverage adjusted fully for rentals at 1.9 times.

S&P upgrades Simmons

Standard & Poor's upgraded Simmons Co. Ratings affected include Simmons' $80 million revolving credit facility due 2004, $70 million term loan due 2004, $70 million term loan due 2005 and $50 million term loan due 2006, all raised to BB- from B+, and its $125 million 10.25% subordinated notes due 2009, raised to B from B-. The outlook is stable.

S&P said the upgrades is in response to improved operating performance.

Revenues have grown over the past couple of years, due to increased marketing efforts and the solid acceptance of Simmons' brands, particularly the Beautyrest line of no-flip mattresses, S&P said.

Management's strategy is to continue to gain market share by emphasizing premium and new products on which it can increase prices, improving profitability, S&P added. The company regards manufacturing as a means to gain competitive advantage. Through its Zero Waste Initiative, Simmons has improved profitability despite a weak retail environment.

Despite the loss of sales from bankruptcies of several top accounts, EBITDA for the latest 12 months ended March 30, 2002 rose 20.8% versus the previous year, S&P said. A favorable mix shift to higher margin products offset volume declines.

With lower material costs from the company's Zero Waste Initiative and the favorable mix shift, Simmons's gross margin strongly improved, reaching a peak of 47.1% in the first quarter of fiscal 2002 from 37.3% the prior year, S&P added.

As a result of improved profitability, credit-protection measures strengthened. For the latest 12 months ended March 30, 2002, EBITDA coverage of interest expense rose to 2.8 times versus 2.0x in 2000. Total debt to EBITDA was 3.4x versus 4.2x in 2001. Liquidity is adequate, with $52.2 million available on the company's revolving credit facility.

S&P raises Henry outlook

Standard & Poor's raised its its outlook on Henry Co. to stable from negative and affirmed its CCC+ corporate credit and bank loan ratings and CCC senior unsecured debt ratings.

S&P said it raised Henry's outlook because of prospects that the company's credit measures will strengthen in 2002, helped by an agreement placing Henry brand roof and driveway coating products in over an additional 500 Home Depot Inc. stores.

Henry Co.'s credit quality also incorporates its leading position in products for roofing, sealing, and driveway applications, offset by a modest revenue base ($200 million-$225 million annually), a narrow product offering, low operating margins, and aggressive debt leverage measures, 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.

The operating loss for first-quarter 2002 was smaller than a year ago, benefiting from lower asphalt costs, modest selling price increases, and an improved cost structure, S&P said. However, recent results were hurt by less-than-normal rainfall in the company's western markets and by a disruption in sales volume as a result of the new Home Depot agreement. As a consequence of that agreement, Henry lost its business with its second-largest account, Lowe's Cos. Inc.

The first quarter saw the phase-out from Lowe's and the phase-in of the new Home Depot stores. Incremental revenues from the additional Home Depot stores will exceed the loss in Lowe's revenues, and Henry's operating income for full-year 2002 is expected to improve from the prior year, S&P added. Operating margins should also strengthen from the 6% area.

Total debt to EBITDA remains very aggressive at almost 8 times and EBITDA interest coverage is 1.2x, S&P said.

Moody's confirms KoSa

Moody's Investors Service confirmed KoSa, BV and removed it from review for possible downgrade. The outlook is stable. Ratings confirmed include KoSa's $200 million senior secured revolving credit facility due 2004, $477 million senior secured term loan A due 2004 and $237 million senior secured term loan B due 2006, all at Ba3.

Moody's said the action reflects KoSa's amendment of its credit facility in March, resetting financial covenants at levels that the company believes are achievable in the intermediate term, thereby providing additional liquidity from renewed availability under its revolving credit facility.

The ratings also reflect the difficult business conditions that the company is currently facing, including the adverse impact of the economic slowdown on demand for its intermediates and polymers, the exit of former U.S. apparel textile customers and the company's exit from portions of its textile fiber business, material restructuring and asset impairment charges in 2001, rising raw material costs during this second quarter and potentially in the second half 2002 putting pressure on margins, volatile energy prices, and the foreign exchange impact of a strong U.S. dollar and Mexican peso, Moody's said.

The ratings also continue to reflect high leverage, persistent global overcapacity and trough industry conditions in the company's commodity products, and the risk of unfavorable Mexican currency conversion for a portion of its operations.

Positives include KoSa's leading global position in polyester products, a sizable cash flow despite difficult industry and economic conditions that has been aided by the company's significant reduction of operations, on-going working capital and asset management and cost control efforts, and management of discretionary capital expenditures, Moody's said.

S&P puts Graham Packaging on positive watch

Standard & Poor's put Graham Packaging Holdings Co. and its Graham Packaging Co. subsidiary on CreditWatch with positive implications. Ratings affected include Graham Packaging Holdings Co.'s senior unsecured debt at CCC+ and subordinated debt at CCC+ and Graham Packaging Co.'s senior secured debt at B.

S&P said its action follows Graham's filing for an initial public offering of common stock.

The ratings could see a "modest upgrade" if the stock offering is successfully completed because Graham has stated that expected net proceeds of around $200 million would be used to repay debt, S&P said.

In addition to the expected improvement to credit protection measures, the proposed debt refinancing will significantly extend Graham's debt maturities and improve liquidity, S&P added.

Pro forma for the proposed refinancing plan, key credit measures are expected to improve with total debt (adjusted for capitalized operating leases) to EBITDA in the 4.5 times to 5.0x range, compared with more than 6x for the 12-month period ended March 31, 2002, S&P said. Coverage ratios are also expected to benefit from a combination of continuing EBITDA growth (driven by continued conversion to rigid plastic packaging in the food and beverage segments, and the benefits of European restructuring actions), and following the IPO, lower debt-servicing costs.

As a result, pro forma EBITDA to interest coverage ratio is expected to improve to about 2.5x, from the current level of about 2.0x, S&P added.

S&P cuts Iron Age

Standard & Poor's downgraded Iron Age Holdings Inc. and its subsidiary Iron Age Corp. and kept them on CreditWatch with negative implications. Ratings affected include Holdings' $25 million senior discount notes due 2009, cut to CCC- from CCC, and Corp.'s $30 million working capital facility due 2004 and $35 million acquisition facility due 2004, cut to B- form B, and $100 million senior subordinated notes due 2008, cut to CCC- from CCC.

S&P said it cut Iron Age because of the company's continued deterioration in operating performance, high debt service burden, and constrained liquidity.

Operating results came under significant pressure in recent quarters due to declining demand for its safety shoes, stemming from plant closings and employee layoffs, overall weakness in the U.S. economy, and increased competitive pressure from nationally branded shoe products, S&P said. Sales declined 11% to $105.5 million while EBITDA slipped 32% to $13 million for the year ended January 2002.

S&P said it expects operating conditions to remain difficult due to the uncertain economic outlook.

Iron Age's poor operating performance, coupled with high debt levels, resulted in extremely weak credit protection measures, with total debt to EBITDA of about 10.0 times and EBITDA interest coverage of about 1.0x for the year ended Jan. 26, 2002, S&P said. Financial flexibility is very limited, with about $10 million available under its $20 million revolving credit facility.

S&P keeps Berry Plastics on watch

Standard & Poor's said Berry Plastics Corp. and parent BPC Holding Corp. remain on CreditWatch with developing implications where they were placed March 22, 2002. Ratings affected include Berry's subordinated debt at B- and BPC Holding's senior secured debt at B-.

S&P made its announcement in response to news that First Atlantic Capital, JPMorgan Partners, and Aetna Life Insurance Co. signed a definitive agreement to sell Berry to GS Capital Partners 2000 LP for $837.5 million, including repayment of existing debt.

Although no details of the forthcoming transaction have been disclosed, a strengthened financial profile could result in higher ratings, S&P said. Conversely, initiatives that would deteriorate the firm's financial profile could result in a downgrade.

S&P added that it will meet with management to resolve the CreditWatch as more information is made available.

Berry's current ratings reflect a weak, but improving financial profile, which overshadows a fair business position as a leading producer in several rigid packaging markets, S&P said.

S&P rates Intermet notes B+, loans BB-

Standard & Poor's assigned a B+ rating to Intermet Corp.'s planned $175 million senior unsecured notes due 2009 and a BB- rating to its $300 million senior secured bank facility due 2004. The outlook is stable.

The ratings reflect Intermet's leading niche business positions within the highly fragmented and cyclical automotive casting market, combined with a somewhat aggressive financial profile, S&P said.

The North America automotive casting market is about $8 billion in size, highly fragmented, and experiences intense pricing pressures, the rating agency noted. In addition, the market is cyclical and operating leverage is high due to meaningful fixed capital needs.

Intermet's product breadth, technology, and good customer relationships are considered competitive advantages, S&P said. However, Intermet's limited geographic diversity (10% of sales are outside North American) and heavy customer concentration (DaimlerChrysler AG represents 22% of Intermet's sales) are business risks.

Intermet has a somewhat aggressive financial profile with total debt to EBITDA in the 3.7 times (x) and EBITDA to interest coverage of about 3.0x, S&P added. Intermet is expected to produce a fair amount of free cash flow, which will most likely be used for debt reduction. Nevertheless, over time, debt-financed acquisitions may occur. In the future, total debt to EBITDA is expected in the 3.0x-3.5x range and funds from operations to total debt is expected in the 15%-20% range.

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