S&P cuts WorldCom to junk, still on watch

Standard & Poor's downgraded WorldCom Inc. three notches to junk, cutting its long-term debt to BB from BBB, its preferred stock to B from BB+ and its short-term debt to B from A-3. The company remains on CreditWatch with negative implications.

S&P said it cut WorldCom because of a "significant deterioration in the company's financial condition due to a continued weakening of WorldCom's business position, which in turn will limit the company's ability to reduce debt leverage."

S&P also said it has concerns about liquidity beyond the near term.

S&P said recently granted waivers on the accounts receivable securitization program combined with prospects for a renegotiated credit facility are favorable for near-term liquidity.

While revision of the asset securitization program avoids what would have been a material negative impact on working capital, the program has nevertheless been downsized, which will require a cash outlay of about $400 million when the new terms take effect on May 23, S&P noted.

WorldCom has indicated that it anticipates it will be able to put in place a longer-term, secured bank facility within the next month. This suggests more surety regarding liquidity because $2.65 billion of bank facilities are scheduled to term out in June 2003. However, the ultimate value of a longer-term secured facility will depend on the terms of the facility, S&P said.

In particular, if financial covenants of a facility materially effectively limit drawdowns, then the additional liquidity realized from obtaining such a new facility may be limited.

Despite resolution of the securitization issue and even assuming that a new bank facility is put into place on favorable terms, material degradation in operating cash flow would jeopardize WorldCom's financial condition, S&P continued.

"New management may be able to craft a strategic approach that more effectively positions WorldCom to leverage its formidable network assets and capabilities," S&P commented.

"Nevertheless, the challenges are formidable: a still weak economic environment; continuing margin pressure in residential long distance; and the likely emergence of the Bell companies as competitors for enterprise customers as they gain interLATA entry suggest a far more competitive environment for WorldCom."

To resolve the CreditWatch, S&P said it will examine the bank agreements, potential asset sales, and a strategy to address a much more competitive environment.

S&P also said it is "particularly concerned" WorldCom's much publicized recent financial travails may negatively impact its ability to attract and retain customers.

S&P keeps US Airways on watch

Standard & Poor's said US Airways Group Inc. and its subsidiary US Airways Inc. remain on CreditWatch with negative implications. The corporate credit rating for both is CCC+.

S&P's announcement follows US Airways' confirmation it will file an application for a federal loan guaranty and its warning that it would have to consider a bankruptcy filing if it cannot implement a financial restructuring.

S&P said the statements were the most explicit yet about a loan guaranty application and the first mention of bankruptcy as an option.

S&P cuts Solutia to junk

Standard & Poor's downgraded Solutia Inc. to junk, cutting its long-term corporate credit, senior unsecured and bank loan ratings to BB+ from BBB- and its short-term corporate credit and commercial paper ratings to B from A-3. The outlook is negative.

S&P said the downgraded reflects the likelihood that needed improvement to Solutia's financial profile could take longer than anticipated as well as the company's "continued poor operating performance and subpar financial condition."

Slower-than-expected progress on asset sales in addition to the continuation of challenging industry fundamentals and an increase in liabilities and expenditures related to the company's PCB exposure have weakened the financial profile and are likely to limit the improvement anticipated in the prior rating, S&P said.

The rating agency still expects Solutia will refinance its bank credit facility, which matures in August 2002, and its $150 million notes due October 2002.

Moody's upgrades Flowserve; rates loan Ba3

Moody's Investors Service upgraded Flowserve Corp.'s existing ratings and assigned ratings to the company's new credit facilities. Upgraded ratings include Flowserve's $300 million senior secured revolver due 2006 and $238.4 million term A due 2006 to Ba3 from B1, $244 million senior subordinated notes due 2010 to B2 from B3, senior implied rating to Ba3 from B1 and senior unsecured issuer rating to B1 from B2. New ratings include Ba3 for the $95.3 million term A add-on due 2006 and Ba3 for the new $700 million senior secured term C due 2009.

The upgrade reflects the company's improved operating and financial performance, its success in large-scale integration, strategic acquisition of Invensys' flow control division and improvement in capital structure.

Ratings reflect significant debt and leverage, sizable goodwill and intangibles on the balance sheet, challenges in integrating Invensys' division and cyclical end-markets, Moody's said.

Flowserve has achieved an improvement of over 110 basis points in EBIT margins from 9.5% in 2000 to 10.6% in 2001. Also, the company has reduced its leverage from 5.2 times EBITDA after the consummation of the IDP acquisition in 2000 to 3.7 times at end-2001, and further down to 3.6 times at the end of Q1 2002, according to Moody's.

Moody's rates Las Vegas Sands and Venetian

Moody's Investors Service rated co-issuers Las Vegas Sands Inc. and Venetian Casino Resorts LLC's $75 million senior secured revolver due 2007 and $300 million senior secured term B due 2008 at B2 and $850 million second mortgage notes due 2010 at Caa1. In addition, Moody's confirmed the senior implied rating at B3 and long-term senior unsecured issuer rating at Caa2.

Proceeds from the notes and loan will be used to repay outstanding debt and fund the Phase 1A addition. After the refinancing is completed, the company's rating outlook is expected to change to stable from negative, Moody's said.

Ratings reflect the single property nature of the company, impact from Sept. 11, 2001 on gaming revenues and RevPar and considerable pro forma leverage. Pro forma debt to EBIDTA will be over 7.0x compared to 6.0x for the 12 month period ending March 31, 2002, Moody's said.

Positive factors reflected in the rating include Venetian's high quality property, strong conference business and the size of Las Vegas's entertainment market.

"The expected change in ratings outlook to stable from negative once the proposed refinancing is complete acknowledges that Venetian's cash flow and liquidity profile should improve over the next few years as FF&E related scheduled principal repayments and FY2004 and FY2005 scheduled long-term debt maturities are eliminated," Moody's said. "While the new notes will increase overall leverage, it does provide funding for the Phase 1A tower project which Moody's believes has a good risk/reward profile."

Moody's rates new Sun notes B2, raises outlook

Moody's Investors Service assigned a B2 rating to the new $200 million senior subordinated notes due 2011 of Sun International Hotels Ltd. and its co-issuer and wholly-owned subsidiary Sun International North America, Inc., confirmed the existing ratings and raised the outlook to stable from negative. Ratings confirmed include Sun International's $200 million senior secured revolver due 2002 at Ba3 and $100 million 8.625% senior subordinated notes due 2007 and $200 million senior subordinated notes due 2011 at B2.

Moody's said it changed the outlook to stable in response to the recent improvement in Sun International's operating results and gradual improvement in overall lodging and resort industry trends.

Although Sun International's RevPar and cash flow results have not yet returned to pre-Sept. 11, 2001 levels, improving travel trends combined with the company's cost cutting efforts and maintenance of average daily rates are expected to support creditor protection measures consistent with its Ba3 senior implied rating. For the 12-month period ended Mar. 31, 2002, debt/EBITDA was about 3.9 times.

In addition, Moody's noted Sun International has been able to maintain a strong liquidity profile despite the difficulties brought on by last year's tragedy.

Moody's also has positive expectations about its free cash flow generating ability going forward.

S&P raises United Industries outlook

Standard & Poor's raised its outlook on United Industries Corp. to positive from stable and confirmed its corporate credit rating and senior secured debt at B and its subordinated debt at CCC+.

S&P said the improved outlook follows the recent amendment to the company's bank credit facility, which increased the term loan B by an incremental $35 million and the revolving credit facility by an incremental $10 million.

The ratings reflect United Industries' high debt leverage, seasonal business and competitive industry dynamics, S&P said.

Somewhat offsetting the negatives are its solid market positions in consumer lawn and garden pesticides and fertilizers and household insecticides, a more diversified product portfolio and customer mix, S&P added. In addition the company benefits from favorable industry growth prospects.

For the 12 months to March 31, 2002, EBITDA coverage of interest improved to about 2 times with debt to EBITDA now about 6 times, S&P said.

Moody's cuts Merrill ratings

Moody's lowered Merrill Corp.'s $56 million term A loan and $137 million term B loan to Caa1 from B3 and its $135 million 12% senior subordinated notes due 2009 to Caa3 from Caa2. Also, Moody's lowered Merrill's senior implied rating to Caa1 from B3 and the senior unsecured issuer rating to Caa2 from Caa1.

The outlook is stable.

The ratings recognize that the company is in default. While recognizing that company is well into the process of restructuring, the ratings reflect the absence of a finalized restructuring to date.

The stable outlook reflects Moody's expectation of flat to somewhat improved financial performance and resulting credit statistics given our belief that the fundamentals and the execution of its core businesses remain sound in spite of continued challenging conditions in certain of Merrill's operations.

Positive movement in the ratings could result from successful conclusion of a restructuring which materially reduces financial leverage.

Moody's raises Quanex's loan to Ba1; convertibles to Ba3

Moody's Investors Service upgraded Quanex Corp.'s $250 million unsecured revolver to Ba1 from Ba2, $59 million 6.88% convertible subordinated debentures due 2007 to Ba3 from B1 and senior implied and senior unsecured issuer rating to Ba1 from Ba2. The outlook is stable.

The upgrades reflect strong performance over the last two years, moderate leverage and prospects for improved financial performance with the recovery of the U.S. economy, Moody's said.

Ratings also reflect the competitiveness of the sector, the cyclical nature of Quanex's markets and lower margins and returns on capital associated with its Nichols Aluminum and Piper Impact businesses, Moody's said.

"The stable outlook balances the company's solid debt protection measurements against its relatively small size and the competitive and cyclical nature of its businesses," Moody's said. "The outlook could be changed to positive if Quanex's cash flow expands to appreciably higher levels without a proportionate increase in leverage, or if operating income at Nichols Aluminum increases, which would improve the balance between the building products and vehicular products segments, which the MacSteel division dominates. The rating outlook could be revised to negative if there were a sharp decline in operating performance or a sizable debt-financed acquisition of risky assets."

At Jan. 31, 2002, the Houston, Tex. manufacturer of engineered materials and components for vehicular and building products markets company had $215 million of debt and $227 million of tangible equity. Debt to LTM EBIDTA was 2.1x. On May 9, the company announced plans to redeem the $59 million of convertible subordinated notes on June 12 and convert them to common stock. After the conversion, Quanex is anticipated to have less than $130 million of debt.

S&P raises Louisiana-Pacific outlook

Standard & Poor's raised its outlook on Louisiana-Pacific Corp. to stable from negative and confirmed the company's ratings including its senior secured debt at BB+, senior unsecured debt at BB- and subordinated debt at B+.

S&P said its action follows Louisiana-Pacific's announcement of a major asset sale program and plans to significantly reduce debt and improved market conditions so far this year for most of its products which, with cost reductions, have caused credit measures to strengthen somewhat from the very weak levels of the past year.

"Focusing on profitable segments in which LP has favorable cost and market positions and good growth opportunities makes strategic sense," S&P said.

"If the company is successful in selling assets and debt reduction is permanent, lower debt leverage and more targeted capital investment would be major advantages in countering the extreme cyclicality LP faces."

The businesses to be sold have generally not performed well, but various assets could be attractive to certain buyers, S&P said.

Earnings and cash flow will remain subject to wide swings due to the company's narrow product focus within cyclical, commodity markets, S&P added.

Credit measures, although greatly improved, are still sub-par for the ratings. EBITDA interest coverage was about 2.6 times during the first quarter and 1.9x during the last 12 months, with funds from operations to debt almost 10%, S&P said.

S&P downgrades General Chemical

Standard & Poor's downgraded General Chemical Industrial Products Inc. and kept it on CreditWatch with negative implications. Ratings lowered include General Chemical's $100 million 10.625% senior subordinated notes due 2009, cut to B- from B, and its $85 million revolving credit facility due 2004, cut to B+ from BB-.

S&P said the company suffers from elevated debt levels as a result of the 1999 issuance associated with the spin-off of GenTek Inc. by The General Chemical Group Inc., parent company of General Chemical Industrial Products.

Profitability and cash flow have been poor due to overcapacity and soft demand in global soda ash markets, weak pricing in the calcium chloride segment, and significantly higher energy costs in early 2001, the rating agency added.

Consequently, operating margins have fallen to about 10% and debt levels remain high, straining credit protection measures and financial flexibility. Funds from operations to total debt (FFO/TD) is less than 10%.

"The significant upswing in pricing needed to provide meaningful and sustainable improvements in cash flows is not expected to occur in the near term," S&P said. Still, lower energy costs and some improvement in soda ash pricing should help earnings in 2002.

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