S&P cuts Solutia

Standard & Poor's downgraded Solutia Inc. including cutting its $150 million 6.72% debentures due 2037, $250 million 11.25% senior secured notes due 2009 and $300 million 7.375% debentures due 2027 to CCC- from CCC+ and Solutia Europe SA/NV's €200 million 6.25% notes due 2005 to CCC- from CCC+. The outlook is negative.

S&P said the action is because of the possibility of a default in the near term.

The downgrade follows Solutia's announcement that it has initiated discussions with bondholders concerning a restructuring of debt obligations and reflects concerns that the company could default on its financial obligations, S&P added. Despite the recent settlement resolving the Abernathy and Tolbert PCB litigation and a new $350 million secured credit facility, significant refinancing and liquidity concerns remain, compounded by very weak earnings and cash flow generation.

In addition to a heavy debt level, the company has considerable postretirement benefit liabilities, ongoing environmental obligations and $150 million of debentures due 2037 that are putable in October 2004.

Given the company's financial condition and recent steps to proceed with a restructuring, there is an identifiable risk of default over the near term, S&P said.

S&P cuts Dan River, on watch

Standard & Poor's downgraded Dan River Inc. including lowering its $157 million 12.75% senior notes due 2009 to CCC from B-, and put it on CreditWatch negative.

S&P said downgrade and CreditWatch placement follow the company's recent 8-K filings, which presented weaker than expected operating performance for the third quarter ended Sept. 27, 2003, and anticipated continued weakness in the fourth quarter. As a result, financial performance and credit protection measures will be much weaker than expected for all of fiscal 2003.

As a result of its poor performance, Dan River was in violation of the maximum leverage covenant under its bank facility for the quarter ended Sept. 27, 2003, S&P said. The company has entered into an amendment and waiver agreement with its lenders in which the covenant violation was waived.

S&P said it is concerned about Dan River's ability to improve its operating results given the challenging business environment, expected higher raw material prices and the tighter liquidity position the company faces with the new minimum excess availability requirement under the bank facility.

S&P cuts Werner, on watch

Standard & Poor's downgraded Werner Holding Co. (DE) Inc. including cutting its $135 million 10% senior subordinated notes due 2007 to CCC+ from B- and $180 million term loan due 2009 and $50 million revolving credit facility due 2008 to B from B+ and put it on CreditWatch negative.

S&P said the action follows Werner's announcement that its largest customer, Home Depot, Inc., will discontinue purchasing stepladders from Werner and is performing an extension ladder supplier line review.

Sales of stepladders to Home Depot accounted for 16% of 2002 net sales, or $82 million, S&P said. For the first nine months of 2003, Home Depot stepladder sales amounted to $46 million.

S&P added that it believes it will be very difficult for Werner to replace these lost sales, as this is a mature market. Home Depot will begin purchasing stepladders from China, most likely before year-end.

Should Home Depot decide to also discontinue purchasing extension ladders from Werner, ratings could be lowered further. Home Depot accounted for 31% of Werner's total 2002 net sales, most of which consisted of stepladders and extension ladders, S&P said.

S&P upgrades Extendicare

Standard & Poor's upgraded Extendicare Health Services Inc. including raising its $150 million 9.5% senior unsecured notes due 2010 to B from B-, $200 million 9.35% senior subordinated notes due 2007 to B- from CCC+ and $105 million bank loan due 2007 to BB from BB-. The outlook is stable.

S&P said the upgrade reflects its belief that Extendicare will be able to sustain improving financial results at levels consistent with the higher rating.

The company has demonstrated its ability to manage significant industry risks and has benefited from the recently improved reimbursement environment.

The senior secured bank loan rating, which is two notches above the corporate credit rating, continues to reflect the very strong likelihood of full recovery of principal and interest in the event of default or bankruptcy, S&P added.

Extendicare's ratings reflect the difficulties the company has faced, and will continue to face in its industry, including a volatile reimbursement environment and rapidly escalating insurance costs, S&P said. These negative factors are offset by the geographical dispersion of its 153 nursing homes and 40 assisted living facilities. The company's management has also taken proactive steps to address reimbursement and insurance issues, including its exit from two states since 2000 and its increasing treatment of more profitable Medicare patients.

Improving results are evident in the company's growth in its return on capital to nearly 10% in 2003 from only 4.2% in 2001. Debt to EBITDA has improved to a level more consistent with the higher rating to about 4.2x in 2003 from 5.7x in 2001, S&P noted.

S&P puts McDermott on positive watch

Standard & Poor's put McDermott International Inc. on CreditWatch positive including its corporate credit at CCC+ and McDermott Inc.'s senior unsecured debt at CCC-.

S&P said the watch placement is based on the expectation that the company will successfully replace its current credit facility with stand-alone financing at its subsidiaries, improving liquidity and reducing financial stress.

Financial flexibility would be improved, giving McDermott some time to complete work on several troubled, cash-draining projects. Previous going-concern issues would be mitigated, resulting in modest upgrade potential.

The company has characterized this as a turnaround year, S&P noted. Profitability at J. Ray McDermott is improving, although this unit will be cash flow negative for the next four quarters reflecting working capital needed to complete work on four troubled projects. The first of three EPIC spar projects has been completed, and McDermott expects to complete all work on the other two projects by mid 2004.

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