S&P upgrades PDVSA, Citgo, PDV America

Standard & Poor's upgraded Petroleos de Venezuela SA (PDVSA), Citgo Petroleum Corp. and PDV America Inc. including raising PDVSA's corporate credit rating to B- from CCC+, Citgo' $200 million secured term loan due 2006 to BB+ from BB and $200 million 7.875% senior notes due 2006 and $550 million senior notes due 2011 to BB from BB- and PDV America's $500 million 7.875% notes due 2003 to B+ from B. The outlook is stable.

S&P said the upgrades reflect the upgrade of the foreign currency rating on the Bolivarian Republic of Venezuela to B- from CCC+.

Future ratings changes on PDVSA and its affiliates will be linked to rating changes on Venezuela, in addition to changes in either entity's financial or operational profile.

S&P said it maintains the same rating on PDVSA as on Venezuela because of the government's ability to exert substantial control over PDVSA's finances and its dependence on PDVSA's cash flow for meeting its own obligations.

As Venezuela recovers from the political and economic strife that has affected the company during the past year, S&P said it expects that the government will continue to use its authority to exploit PDVSA's financial resources to effectively consolidate the debt management of the country with PDVSA. This interrelationship has the potential to diminish PDVSA's access to international capital markets and trade credit on favorable terms.

As an operating entity, PDVSA has been one of the largest and most profitable oil companies in the world. Until labor relations rocked PDVSA over the past year, the company benefited from a low-cost production base, an accomplished operational staff and an enviable exploration acreage position that could be exploited for strong production growth.

However, PDVSA's operational skills have been weakened by the dismissal of several thousand skilled workers, S&P noted. Although PDVSA has increased production to more than 2.4 million barrels per day a from less than 500,000 barrels per day at the peak of the strike, questions remain about the long-term impact of the strike on PDVSA's production capacity.

The ratings upgrade of PDV America, which is the holding company for Citgo Petroleum, also reflects the strong improvement in Citgo's financial position during the first half of 2003.

Moody's cuts Northwestern

Moody's Investors Service downgraded NorthWestern Corp. including cutting its senior secured debt to B3 from B2, senior unsecured debt to Ca from Caa1 and trust preferred securities to C from Caa3. The outlook is negative.

Moody's said the downgrade reflects NorthWestern's high debt burden and poor coverage ratios; operating cash flow that is very weak relative to the company's high debt level; Moody's view that proceeds from NorthWestern's planned asset sales over time will not be sufficient to materially reduce its debt burden; Moody's belief that the company might execute a distressed exchange for a portion of its debt; and concerns that challenges to NorthWestern's liquidity could jeopardize its ability to meet its obligations on a timely basis.

The negative rating outlook reflects Moody's concerns about the significant execution risks that management faces as it pursues a strategy to return NorthWestern's focus to its core regulated electric and gas utility businesses, as well as Moody's view that after elimination of non-core businesses the remaining debt level will continue to be a very heavy burden relative to the cash flow generating capacity of the utility operations.

Moody's noted that NorthWestern's agenda for its August 26 shareholders' meeting includes seeking approval from its shareholders to substantially increase the authorized number of shares of common stock and to reduce the par value of the common stock from $1.75 per share to $.001 per share.

Given the level at which NOR's common shares have been trading, Moody's views this as an initial step towards creating the flexibility to initiate a possible distressed exchange offer of common equity for debt.

Moody's confirms SBA, ends review

Moody's Investors Service confirmed SBA Communications Corp. including its $269 million 12% senior discount notes due 2008 and $500 million 12.25% senior notes due 2009 at Caa2 with a stable outlook, ending a review for possible downgrade begun in October 2002.

Moody's said the confirmation acknowledges that recent company actions to sell 801 towers and to refinance its former secured credit facility have removed SBA from immediate financial distress.

Nonetheless, the ratings continue to reflect the high leverage of the company even after receiving approximately $203 million in gross proceeds from the sale of those towers, Moody's said.

Pro forma for the sale of all 801 towers, the company had total debt of $964 million and net debt of $786 million. The company's outlook for 2003 adjusted EBITDA is $64.5 to $67.5 million, making total debt/EBITDA over 14 times, and close to 12 times on a net basis.

Cash provided by operations over the last four quarters ended 1Q03 totaled $30.1 million and cumulative capital expenditures over this period were $65.7 million for negative free cash flow of $35.6 million. Moody's expects capital expenditures to fall sharply going forward and the company has guided to $10 to $15 million in capital expenditures for 2003.

Thus, even if SBA can continue to generate cash from operations at the $30 million level (which will be difficult as the 12% Discount Notes require their first cash coupon in September 2003), free cash flow would be approximately $15 to $20 million, a level insufficient to support so large a debt burden, Moody's said.

S&P cuts Denny's, on watch

Standard & Poor's downgraded Denny's Corp. including cutting its $120 million 12.75% senior unsecured notes due 2007 and $592 million 11.25% senior notes due 2008 to CCC from CCC+ and its $125 million senior secured revolving credit facility due 2004 to B+ from BB- and put it on CreditWatch negative.

S&P said the rating actions were based on Denny's deteriorating operating performance and cash flow protection measures and S&P's concern that continued poor performance will constrain its liquidity.

Operating performance continued to decline as EBITDA dropped 37% to $47.7 million in the first half of 2003, S&P said. A weak economy, intense competition in the restaurant industry, and rising costs negatively affected operating performance.

Same-store sales fell 0.5% in the first half of 2003, following a 1% decline in all of 2002. Operating margins for the 12 months ended June 25, 2003, fell to 17%, from 18.5% the year before, with most of the decline coming in the first half of 2003. Margins were negatively affected by a decline in sales leverage and higher food, labor and utilities costs.

As a result, cash flow protection measures are very thin, with lease-adjusted total debt to EBITDA covering interest by only 1x for the six months ended June 25, 2003. Despite using the $32.5 million proceeds from the divestiture of FRD Acquisition Co. to repay debt, leverage is high with lease-adjusted total debt to EBITDA of 6x for the 12 months ended June 25, 2003, S&P said.

Liquidity is limited to $4.5 million in cash and $36.8 million of availability on the company's $125 million revolving credit facility as of June 25, 2003. Subsequently, the company made its $21.3 million interest payment leaving it with $25.5 million of availability as of July 31, 2003.

S&P cuts Solutia

Standard & Poor's downgraded Solutia Inc. including cutting its $150 million 6.72% debentures due 2037 and $300 million 7.375% debentures due 2027 to CCC+ from B+ and $300 million credit agreement due 2004 to B from BB, SOI Funding Corp.'s $250 million 11.25% senior secured notes due 2009 to CCC+ from B+ and Solutia Europe SA/NV's €200 million 6.25% notes due 2005 to CCC+ from B+.

S&P said the downgrade is in response to increased refinancing risk and continued weak operating performance.

The downgrade reflected significant deterioration in the company's credit quality, liquidity concerns and a meaningful increase in refinancing risk, S&P said. Adverse developments with regards to the company's PCB litigation, including unfavorable verdicts and diminished prospects for a comprehensive resolution, along with weak earnings and cash flow generation, will make the company's refinancing efforts more difficult and will constrain the company's liquidity position. Solutia has stated that it is examining all available alternatives with regards to the PCB issue and future liquidity needs.

Solutia's leverage and cash flow protection are strained as a series of debt-financed acquisitions in 1999 and 2000 stretched the balance sheet, S&P noted. In addition, the company has significant unfunded postretirement benefit liabilities, which increased in 2002. Liabilities and expenditures related to the company's PCB exposure remain a draw on cash flow. Cash flow will also be pressured by a possible $50 million contribution related to the Astaris joint venture and a possible voluntary contribution to the pension trust. In addition, the company purchased a cogeneration facility for $32 million in the first half of 2003.

Solutia's profitability and cash flow have been constrained by high raw material and energy costs and generally sluggish global economic conditions, S&P said. Operating margins (before depreciation and amortization) have averaged about 11% in the past three years (compared with 19% for the previous three-year period), and declined to about 5% in the first half of 2003.

The company's liquidity position is very weak. Despite $146 million in borrowing capacity, cash, and cash equivalents at June 30, 2003, the company has significant bond maturities coming due over the next one to two years and projected pension contributions beginning in 2005. Also, the company's secured $300 million revolving credit facility matures in August 2004, and recent covenant relief only applies through Sept. 29, 2003, S&P said. Accordingly, the company may need to seek relief from restrictive financial covenants to preserve access to its bank facility.

Moody's cuts United Refining

Moody's Investors Service downgraded United Refining Co. including cutting its $181 million senior unsecured notes due 2007 to Caa1 from B3. The outlook remains negative.

Moody's said the downgrade reflects the continuing imbalance between the company's cash generating performance through the cycles and its working capital needs; curtailment of mid-cycle performance by high natural gas prices and below average sweet/sour differentials; the continued erosion of the company's credit metrics; inherently volatile cash flows; tight near term liquidity; high leverage; low retail network profitability; and reduced direct ownership of retail assets.

The ratings are supported by United's current mid-cycle conditions for the sector; NW Pennsylvania niche; ability to run 50% medium/heavy sour crude due to its asphalt business; diversification from its 371 unit (184 United owned) retail network, though facing stiff competition; and to a small degree implicit shareholder, Red Apple Group (RAG) support, Moody's said.

The outlook remains negative due to high leverage; the need for sustained higher crack spreads for United's earnings and cash flow; and weak liquidity position upon the step down of the company's revolver to its original $50 million level (by Sept. 30) following a temporary increase to $70 million.

This capacity reduction will constrain liquidity given that current borrowings are approximately $48 to $49 million and current cash on hand is approximately $5-$6 million, Moody's said.

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