S&P cuts A&P

Standard & Poor's downgraded The Great Atlantic & Pacific Tea Co. Inc. and maintained a negative outlook. Ratings lowered include A&P's $200 million 7.7% senior notes due 2004, $200 million 9.375% senior unsecured notes due 2039, $275 million 9.125% senior notes due 2011 and $300 million 7.75% notes due 2007, cut to B+ from BB-, and its $425 million senior secured revolving credit facility due 2003, cut to BB- from BB.

S&P said it lowered A&P because of its deteriorating operating performance and diminished cash flow protection.

The weak earnings are only partially mitigated by A&P's satisfactory market shares in its major operating areas, S&P said.

Most of A&P's markets are experiencing increased promotional activity from both traditional supermarkets and nontraditional channels of distribution, as operators fight for market share in a soft consumer spending climate, S&P added. Trading down to lower-margin products by consumers and deflation in certain product categories are compounding the challenges in the sector.

Moreover, A&P has had difficulties in executing its store format effectively, and is burdened by a high cost structure.

A&P's operating profitability has declined significantly over the past two quarters, following two years of very inconsistent results, S&P said. Although same-store sales rose 0.1% in the third quarter ended Nov. 30, 2002, EBITDA fell to $41 million from $92 million in the prior year. This followed a 20% drop in EBITDA in the second quarter. Third quarter gross margins fell as A&P struggled to hold onto market share.

Combined with high operating expenses relative to sales, this reduced the EBITDA margin by 190 basis points, S&P said. Lease-adjusted EBITDA coverage of interest expense fell to 1.7x for the quarter from 2.4x in the year-ago period while total debt grew by $44 million. Management is considering several steps to improve performance and reduce debt, including reducing costs companywide, better managing working capital, and potential asset sales.

Moody's cuts Penhall

Moody's Investors Service downgraded Penhall Acquisition Corp. including cutting its $100 million 12% senior notes due March 2006 to Caa3 from B3 and its $30 million senior secured revolving credit facility due 2004 and $17 million senior secured term loan due 2004 to Caa1 from B2. The outlook is negative.

Moody's said the downgrade reflects the sharp decline in Penhall's operating performance as a result of contracting construction spending, and its constrained financial flexibility and weakened credit profile.

The ratings also reflect the company's high leverage and weak balance sheet, Moody's added.

The negative rating outlook reflects Moody's expectation of continuing weak public construction funding given the state and local governments' constrained fiscal budgets, as well as the company's possible violations of bank covenants in the coming quarters.

For the 12 months to Sept. 30, 2002, revenues declined about 10% from fiscal 2001 while EBITDA dropped 36%. This, combined with a higher debt load, increased Penhall's EBITDA leverage to about 4.9 times from 3.1 times in fiscal 2001, Moody's said. Cash flow has also turned negative. In the quarter ended September 30, 2002, the company's free cash flow was a negative $4.3 million, despite a substantial reduction in capital spending. Capital expenditure in the 12 month period was cut to $8.6 million from $18.5 million in fiscal 2001, far below the $17 million or so in depreciation.

Moody's is also concerned that Penhall's deteriorating performance may soon result in bank covenant violations. As of Sept. 30, 2002, the company reported that it had $2 million cash on hand and

$13 million of availability under its $30 million revolving credit facility. In the case of covenant violation, however, its access to bank funding may be restricted. In addition to $14 million of annual interest expense, the company will also need to repay $6 million of term loan amortization in fiscal 2003, further stretching its ability to service its debt obligations.

S&P says Solutia unchanged

Standard & Poor's said Solutia Inc.'s ratings are unchanged including its corporate credit rating at BB with a negative outlook on the company's announcement that its fourth-quarter 2002 earnings will be lower than analysts' expectations.

The earnings shortfall is primarily the result of weak demand, higher feedstock and energy costs, and a four cent per share charge related to a write-down of assets at the Flexsys joint venture, S&P said.

While not a significant ratings factor, given that some uncertainty concerning economic conditions is already factored into Solutia's ratings, the announcement underscores the exposure of many chemical companies to rising oil and gas prices, S&P said.

Solutia's agreement to sell its resins, additives, and adhesives businesses to UCB SA for $500 million will strengthen the company's balance sheet and liquidity, S&P added. However, despite the anticipated debt reduction, credit protection measures will remain subpar for the ratings and leverage will remain elevated. Accordingly, meaningful progress toward strengthening the balance sheet is expected to continue.

S&P says Westar unchanged

Standard & Poor's said Westar Energy Inc.'s ratings are unchanged including its corporate credit rating at BB+ on CreditWatch with negative implications on news that it will sell Oneok Inc. a portion of Oneok series A convertible preferred stock and exchange its remaining shares for new shares of Oneok series D non-convertible preferred stock.

S&P said it views this announcement as a positive development since the proceeds of up to $250 million will be used to reduce Westar's onerous debt burden but cautioned that additional substantial measures are still needed to stabilize current ratings.

S&P lowers United Stationers outlook

Standard & Poor's lowered its outlook on United Stationers Supply Co. to negative from positive. Ratings affected include United Stationers' senior secured bank loan at BB and subordinated debt at B+.

S&P said the outlook change is based on United Stationers' revised earnings guidance for the fourth quarter of 2002 and the rating agency's expectations that the company's performance for the full year will be well below 2001.

Weakness in the office products industry has resulted in a shift to lower margin consumable product sales and has negatively impacted the company's ability to take advantage of vendor allowances, S&P said. As a result, S&P expects United Stationers' EBITDA for 2002 will be well below 2001 levels. Although the company's expected 2002 credit measures and liquidity are well in line with the existing ratings, continued weakness in the office products sector could further pressure these measures and eventually result in a ratings downgrade.

Lease-adjusted operating margins are expected to decline to about 5% in 2002 from 6.4% in 2001, S&P said. The company's EBITDA coverage of interest expense is expected to be in the low 4x area in 2002 down from the low 5x in 2001. Total debt to EBITDA expected to be in the high 2x area for fiscal 2002 compared with the mid-2x in 2001 (figures include the effect of certain off-balance-sheet financing activities, such as accounts receivable securitization and operating leases).

Fitch cuts Citgo, PDV America, on watch

Fitch Ratings downgraded Citgo Petroleum Corp.'s senior unsecured debt to BB- from BBB- and PDV America, Inc.'s senior notes to B- from BB+. Both remain on Rating Watch Negative.

Fitch said the downgrades reflect its heightened concerns about the financial flexibility of both Citgo and PDV America due to the general strike in Venezuela, which has severely disrupted the country's oil exports.

As a result of the strike, Citgo has been forced to find alternate sources for much of the crude supplied by PDVSA, Fitch noted. Citgo typically purchases approximately 50% of its crude needs from PDVSA under long-term contracts. Citgo has been successful acquiring alternate crudes and other feedstocks to maintain refinery operations. However, spot market terms have increased working capital requirements and given the lowered credit ratings of Citgo related entities, additional working capital requirements are possible.

Near term obligations as well as a rating trigger in the company's trade accounts receivable program could significantly reduce Citgo's liquidity, Fitch said.

Unless Citgo achieves a waiver, Fitch's downgrade will result in termination of the accounts receivable program.

In mid-December, Citgo entered into a new $520 million credit facility, split into a $260 million three-year facility and a $260 million 364-day revolver. Concerns over the situation in Venezuela, however, have limited Citgo's ability to enter the capital markets for a planned bond issuance in the fourth quarter of 2002.

The Citgo downgrade and the more severe downgrade to the senior notes of PDV America are also based on the deteriorating creditworthiness of PDVSA and Venezuela. The $500 million of senior notes mature in August 2003 and are supported by mirror notes issued by PDVSA and held by PDV America. The senior notes and mirror notes have identical terms and conditions such that the interest income PDV America receives from PDVSA on the mirror notes pays the interest on the senior notes. In an absence of a return to normal oil operations, Fitch has significant concerns with the ultimate parent's ability and willingness to pay the maturity of the notes.

S&P raises Avado

Standard & Poor's upgraded Avado Brands Inc.'s $100 million 11.75% senior subordinated notes due 2009 to C from D and its corporate credit rating to CC from SD. The outlook is negative.

S&P said the action follows Avado's payment of interest on the notes. The interest payment was originally due on Dec. 15.

Avado's financial flexibility continues to be limited, S&P added. On Dec. 27, the company executed an amendment to its $75 million credit facility whereby its lenders agreed to forbear from exercising their remedies with respect to existing events of default until May 31, 2003. The amendment also revised certain financial covenants and requires the company to reduce its obligations under the facility to zero by May 25, 2003.

At Sept. 29, 2002, Avado had $36 million of cash borrowings and $15 million of letters of credit outstanding under the credit facility, S&P said. During the third quarter of 2002, the company fell out of compliance with certain EBITDA requirements contained in its credit facility and master equipment lease.

Fitch cuts heavy oil projects

Fitch Ratings downgraded the senior secured debt of four Venezuelan heavy oil projects to B from BB+ including cutting Petrozuata Finance Inc.'s $300 million series A bonds due 2009, $625 million series B bonds due 2017 and $75 million series C bonds due 2022, Cerro Negro Finance, Ltd.'s $200 million bonds due 2009, $350 million bonds due 2020 and $50 million bonds due 2028, Sincrudos de Oriente Sincor, CA's $1.2 billion senior bank loans and Petrolera Hamaca, SA's $627.8 million senior agency loan due 2018 and $470 million senior bank loan due 2015. The ratings remain on Rating Watch Negative.

Fitch said the downgrade follows the recent rating downgrade of the Bolivarian Republic of Venezuela's foreign currency rating to CCC+ from B.

The rating actions reflect the inability of the four heavy oil projects to maintain normal operations due to the disruption of activities in Venezuela's oil sector, Fitch said.

Since early December, the prolonged national strike has significantly curtailed operations of Petroleos de Venezuela SA. Operations at the four strategic associations rely exclusively on critical raw material inputs from PDVSA.

Due to the lack of gas supply from PDVSA and interruptions to Venezuela's oil exports, the four heavy oil projects have been shutdown since mid-December, Fitch said. As a result, the projects have been unable to export and generate oil revenues for approximately a full month period.

If the current situation remains unchanged and no revenues are generated, each project's liquidity position required to cover fixed operating expenses will deteriorate in the coming months, Fitch added. However, the projects should be able to continue meeting scheduled debt service obligations over the next several months with funds available under their respective debt service reserve accounts.

S&P says Graftech unchanged

Standard & Poor's said GrafTech International Ltd.'s ratings are unchanged including its corporate credit rating at B+ with a stable outlook after the announcement of a $14 million restructuring charge related to organizational changes and workforce reductions.

The estimated benefits of these actions are expected to save $6 million in 2003 and $12 million in both 2004 and 2005, S&P noted.

The actions are part of Graftech's $80 million in annual cost savings plan. Graftech expects to achieve recurring cost savings of $30 million, $60 million, and $80 million from 2003 through 2005 respectively, S&P said.

However, if current weak end market conditions do not improve in the near term, a "step-up" of covenants under the bank facility in September could result in covenant violations, S&P cautioned. This is somewhat concerning considering that during the nine month period ending Sept. 30, 2002, Graftech was unable to generate positive funds from operations while free cash flow was a negative $76 million.

Moody's rates CSX Lines loan Ba3

Moody's Investors Service assigned a Ba3 rating to CSX Lines, LLC's $25 million revolver due 2007 and $175 million term loan B due 2008. The outlook is stable.

Moody's said CSX Lines' ratings are supported by the company's strong revenue base, expectations of stable cash flow generation to repay debt, protected market position in the niche U.S. flag sector, and strong equity sponsorship from The Carlyle Group.

The ratings are constrained, however, by relatively high lease-adjusted debt levels, modest asset coverage, and thin operating margins, Moody's added.

The ratings were assigned under the assumption of quick debt repayment, and may be subject to downward pressure should the company's free cash flow not meet expected levels, Moody's said.

Proceeds from the term loan B will be used for the re-capitalization of CSX Lines associated with the acquisition of CSX Lines from its current parent company, CSX Corp., by a venture led by The Carlyle Group for total consideration of $315 million.

The company's cash flows are generated at thin margins, but are likely to be sufficient to pre-pay senior debt principal. Pro forma 2002 EBITDA is estimated to be $70 million, or 8% of total revenue. Margins are thin due largely to high levels of operating leases, especially on vessels (nine of the company's 17 vessels are leased-in, with expiry between 2003-2015).

As a result, on an initial drawing of $175 million of the term loan (revolver to be undrawn), debt is estimated to be 2.5x pro forma 2002 EBITDA. However, taking the high lease levels into account, adjusted debt is estimated to be 4.2x pro forma 2002 EBITDAR, and 4.9x when reducing EBITDAR by drydock expenses (normally amortized, but represents required periodic maintenance more similar to operating expenses than capex). Interest coverage is likely to be adequate, but not robust. Although pro forma 2002 EBITDA is expected to be approximately 5x interest expense, EBITDAR covers interest plus rental payments by only 1.6x, Moody's said.

S&P puts Rural Cellular on watch

Standard & Poor's put Rural Cellular Corp. on CreditWatch with negative implications including its $125 million 9.625% senior subordinated notes due 2008 and $300 million 9.75% senior subordinated notes due 2010 at B-, $237.5 million senior secured 8.5 year term loan B, $237.5 million senior secured 9 year term loan C, $275 million senior secured 8 year reducing revolver and $450 million senior secured 8 year amortizing term loan at B+ and its $100 million senior exchangeable preferred stock redeemable 2010, $140 million junior exchangeable preferred stock and $25 million senior exchangeable preferred stock at CCC+.

S&P said the CreditWatch placement reflects the impact of lower roaming yield on revenue growth, the tight debt leverage bank covenant in the fourth quarter of 2003, and overall slower industry growth.

In addition, the payment of cash dividends on the company's senior exchangeable preferred stock commencing August 2003 could impact the growth of the company's free cash flow position, S&P said.

In the third quarter of 2002, total revenue was relatively flat compared with the same period in 2001 and slightly higher compared with the second quarter of 2002, reflecting slower subscriber growth and relatively flat roaming revenue, S&P noted.

Roaming revenue has been impacted by the decline in roaming yield, offset somewhat by higher roaming minutes. Roaming minutes have increased in part due to the activation of additional cell sites and a new roaming agreement with Cingular Wireless that is effective through January 2008.

Although the company's free cash flow position has improved steadily, the payment of cash dividends on its senior exchangeable preferred stock commencing in August 2003 and on its junior exchangeable preferred commencing February 2005 will likely impact growth in free cash flow, S&P said.

S&P said resolution of the CreditWatch is dependent upon its review of the company's strategy to meet bank covenants and debt maturities and maintain a competitive position.

S&P cuts Telesystem International

Standard & Poor's downgraded Telesystem International Wireless Inc. including cutting its $220 million 14% notes due 2003 to CCC+ from B-. The outlook is negative.

S&P said the downgrade reflects the refinancing risk of the notes, which mature in December

2003 and the structural subordination of the debt at the corporate level.

Telesystem International has taken recent actions to reduce debt at the corporate level, and the performance at its Mobifon subsidiary has been solid.

Still, the most significant challenge facing the company is the refinancing of its $220 million notes.

Even if Telesystem International is successful in selling its Brazilian and Indian assets, the expected proceeds, coupled with estimated distributions from Mobifon, would not be sufficient to repay the notes in December, S&P cautioned.

The prospects for refinancing the notes should improve following repayment of Telesystem International's $47.5 million corporate credit facility.

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