Moody's downgrades Xerox

Moody's Investors Service downgraded Xerox Corp. affecting $9 billion of debt. Ratings lowered include Xerox's senior unsecured debt, cut to B1 from Ba1, subordinated debt, cut to B3 from Ba2, preferred stock, cut to Caa1 from Ba3, Xerox Credit Corp.'s senior unsecured debt, cut to B1 from Ba1, Xerox Overseas Holdings Ltd.'s senior unsecured debt, cut to B1 from Ba1, and Xerox Capital (Europe) plc senior unsecured debt, cut to B1 from Ba1. The outlook is negative.

Moody's said the downgrade reflects its concern about the level of free cash flow that Xerox's core non-finance business generates relative to the company's debt level, the large debt maturities over the next few years, its dependence on capital market access to refinance debt obligations and the need for continued cost reductions in the face of modest revenue growth prospects

Moody's said those factors outweigh the financial and operational progress to date.

During 2001, the company's core non-finance operations generated about $374 million (after paying $478 million for restructuring cash outflows of cash flow but prior to interest, taxes, capital expenditures and working capital) compared to nearly $700 million in 2000, Moody's noted.

Cash flow leverage for the core, non-finance operations remains extremely high. After adjusting for debt attributable to finance receivables, gross debt to core EBITDA adjusted for restructuring cash outflows approximates 20 times for fiscal 2001, versus approximately 10 times in fiscal 2000, though such financial statements remain subject to restatement, Moody's said.

While the company has made very good progress in reducing debt through asset sales and lowering its overhead though cost containment initiatives, its ability to generate meaningful cash flow going forward is in good part dependent on revenue growth, the rating agency commented.

A potential revenue boost could come from the series of new introductions expected during 2002 throughout the range of its product lineup.

S&P rates new UCAR notes B, upgrades existing

Standard & Poor's assigned a B rating to UCAR Finance Inc.'s new $100 million senior unsecured notes due 2012, confirmed its B+ corporate credit rating on UCAR International Inc. and upgraded its senior unsecured ratings to B from B-.

S&P said its ultimate recovery analysis indicates recovery prospects for unsecured noteholders have improved, given the reduced amount of priority secured debt in the capital structure following the new note issue coupled with the company's $400 million of senior unsecured notes sold in February 2002. Proceeds of both notes were used to repay secured term loans.

Moody's downgrades Dillard's

Moody's Investors Service downgraded Dillard's, Inc. The outlook is negative. Ratings lowered include Dillard's senior unsecured bonds, debentures, notes, reset put securities and expiring bank credit agreement to Ba3 from Ba1, and its capital securities to B2 from Ba2.

Moody's said its action reflects Dillard's continued decline in debt protection measures, increased competition and promotional activities in its major trade areas and the challenges that the company faces in achieving a significant and sustainable improvement in its operating performance.

The rating assumes Dillard's will put in place a new bank facility before its current revolving credit agreement expires on May 9.

Moody's said Dillard's debt protection measures have continued to steadily decline since its debt-financed acquisition of Mercantile Stores in August 1998.

Like many traditional department stores, Dillard's has also been impacted by sated consumer demand for apparel, competition from new entrants and discounters, and a slower economy, Moody's added.

Moody's cuts Sovereign Specialty

Moody's Investors Service downgraded Sovereign Specialty Chemicals, Inc. The outlook is negative. Ratings lowered include Sovereign Specialty's $150 million 11 7/8% senior subordinated notes, due 2010 to Caa1 from B3.

Moody's said the action reflects Sovereign Specialty's lower operating earnings and credit protection measurements caused primarily by the impact of the slowdown in the economy on demand for its end products, in particular in the industrial, auto, furniture, printing and graphics segments.

While the company saw a pick-up in orders in April 2002 and expects some new business, the timing of a sustainable level of earnings improvement is unclear, Moody's said.

In addition, raw material costs are expected to rise, although they are currently lower than one year ago.

Moody's also noted that Sovereign Specialty has limited liquidity, tight financial covenants in its credit facility, its scheduled amortization payments of $11 million for the remainder of 2002 and $16 million in 2003 and the uncertain future support by its banks if earnings do not improve.

Moody's cuts Orius, NATG

Moody's Investors Service downgraded Orius Corp. and its subsidiary NATG Holdings, LLC. Ratings affected include NATG's senior subordinated debt, cut to C from Caa2, and its senior secured debt, cut to Caa2 from B3.

Moody's said its action follows the Feb. 1 missed interest payment on NATG Holdings' 12.75% $150 million senior subordinates notes due 2010, deferral of a principal payment due on its secured credit agreement, a severe deterioration in liquidity and the uncertainty associated with the continued forbearance that senior lenders have extended to Orius.

Failure to make the coupon represents a default under Moody's criteria and the rating agency said recovery for the notes will be well below principal.

Moody's also expects senior creditors will suffer a significant loss to principal.

S&P confirms Hawk

Standard & Poor's confirmed Hawk Corp.'s ratings and removed them from CreditWatch with negative implications. The outlook is negative. Ratings affected include Hawk's $100 million 10.25% senior notes due 2003 rated CCC+ and its $35 million secured term loan due 2003 and $50 million secured revolver due 2003, both rated B.

S&P said its action follows Hawk's recent amendment to its bank credit facility. Covenants were adjusted to be more compatible with the company's near-term business plan but flexibility is modest because the revolver was reduced to $25 million from $30 million, S&P said.

Hawk also faces significant refinancing risk in the next 18 months as both its bank and public debt mature during 2003, S&P said.

The company has publicly indicated that it is currently in the process of pursuing strategic financing alternatives which are not expected to be coercive in nature, the rating agency added.

S&P rates Pride International's loan BBB-

Standard & Poor's assigned a rating of BBB- to Pride International Inc.'s proposed $250 million senior secured revolver due in 2005 and its $200 million senior secured term loan due in 2007. In addition, Pride's senior unsecured debt rating was lowered to BB from BB+ due to the level of secured debt that subordinates unsecured debt holders.

The loans are secured by two semisubmersible drilling rigs and 28 jackup rigs, which S&P said provides confidence of full principal recovery in case of default.

Proceeds from the term loan and the expected $100 million draw on the revolver will be used to retire outstanding bank lines and capital market debt.

The corporate credit rating of BB+ with a stable outlook reflects the company's competitive position in the cyclical contract drilling market, a geographically diverse fleet, multiyear contracts that provide sufficient cash flow to meet debt service through 2003, and aggressive financial leverage," the release said.

In 2002, EBIDTA interest coverage is expected to be around 3.0 times, total debt to EBIDTA is expected to be above 4.5x and total debt to capital should remain in the 50% to 55% range, according to S&P.

S&P keeps Foster Wheeler on watch

Standard & Poor's kept Foster Wheeler Ltd.'s corporate credit rating of B+ on CreditWatch with negative implications, where it was placed on Jan. 15, 2002. The company's senior unsecured debt is rated B+ and the subordinated debt is rated B-. Foster Wheeler announced Wednesday that an extension until May 30, 2002 of a waiver under its revolver was granted and that discussions with lenders regarding a new long-term facility are taking place.

Other news announced Wednesday included the expected finalization on that day of its request for an extension on the forbearance of remedies for its lease financing facility until May 30, 2002, that the company is in discussions with financial institutions to replace its $50 million accounts receivable facility sale arrangement which was terminated April 30, that net debt decreased in the quarter by about 16% to about $682 million at March 30, 2002 and a net loss of $24.6 million was reported for the quarter ended March 30, 2002, compared with net earnings of $8.1 million in the previous year's comparable period, S&P said

"The ratings will remain on CreditWatch until the bank negotiations are completed and the company's financial flexibility assessed," S&P commented. "However, should liquidity weaken or negotiations appear to become more challenging than expected, the ratings could be lowered in the very near term. Furthermore, Standard & Poor's will meet with management to discuss the outlook in its equipment and construction operations, its operating controls and risk management techniques, the potential for further asset impairment charges, cash flow generation (and uses), and the potential for asset sales in the near-term."

Moody's rates AFC loan Ba2, upgrades existing debt

Moody's Investors Service assigned a rating of Ba2 to AFC Enterprises Inc.'s proposed $275 million new secured credit facility, which consists of a $75 million five-year revolver, a $75 million five-year term A and a $125 million seven-year term B. In addition, Moody's upgraded ratings on $127 million 10.25% senior subordinated notes due in 2008 to Ba3 from B2, the senior implied rating to Ba2 from Ba3 and the long term issuer rating to Ba3 from B1. The Ba2 rating on $104 million secured credit facility due June 2002 was confirmed. Ratings have a stable outlook.

Once proceeds from the new bank loan are used to pay down the existing facility and senior subordinated notes, the ratings on these debts will be withdrawn, Moody's said.

Ratings reflect Moody's view that operating cash flow will improve and financial leverage will decline and the success that the company has had "in finding domestic and international franchisees to use their own capital to develop restaurants, to operate profitable restaurants, and to pay high-margin royalties," the release said.

Negative factors affecting the ratings include, the company's financial leverage, intense competition in the sector, seasonality and reliance on a few key commodities.

"Ratings could move upwards over the medium term if the company uses a substantial proportion of expected future free cash flow to amortize debt, the several concepts continue to successfully improve both from strong new store openings and existing store performance, and Cinnabonand Seattle Coffee Company contribute more to the overall company," the release said. "However, ratings could be negatively impacted if performance, particularly at Popeyes and Churchs, were to falter, if the company were to (in Moody's opinion) imprudently spend cash, or if franchisees were to experience financial difficulties."

Moody's confirms Parker Drilling

Moody's Investors Service confirmed Parker Drilling's existing ratings and assigned a B1 rating to its pending senior unsecured 10.125% notes, to be issued in exchange for a like amount of its 9.75% of senior unsecured notes. Ratings confirmed include the company's $450 million 9.75% senior unsecured notes due 2006 at B1 and $175 million 5.50% convertible subordinated notes due 2004 at B3. The outlook is negative.

Moody's said the outlook is negative pending Parker Drilling's adoption of spending and funding patterns that significantly reduce debt and its ability to demonstrate that its expansion program will yield much stronger trough cash flow coverage of debt.

Moody's said the ratings are restrained by Parker's high leverage and currently tough trough conditions in the Gulf of Mexico, though Gulf of Mexico rig utilization and dayrates may be firming with strong natural gas prices.

Positives include Parker's diversification across various political environments, fleet diversification and important growing contract and joint venture relationships with major oil companies pursuing high impact hydrocarbon structures. The ratings are further supported by the expectation that Gulf of Mexico activity will significantly firm during the second half of 2002.

Moody's lowers Borden Chemical's ratings

Moody's Investors Service lowered Borden Chemical Inc.'s ratings and removed them from review for downgrade. Affected ratings include its $250 million revolver due 2002, $117 million debentures due 2021, $250 million notes due 2023, $78 million sinking fund debenture due 2016, $49 million sinking fund debenture due 2019 and $8 million industrial revenue bonds due 2012, all lowered to B1 from Ba3, senior implied lowered to B1 from Ba3 and issuer rating lowered to B2 from Ba3. The outlook is negative.

The downgrade is a result of weaker operating margins and creditor protection measurements, losses, the uncertain timing of an improvement in the cyclical housing and automotive end markets and concerns about potential future common dividends and distributions in the intermediate term, Moody's said.

"The ratings continue to reflect high leverage, negative book equity, modest interest coverage, and the fact that a significant portion but not all of the company's sales are under contracts that provide for quarterly price adjustments with a lag for periods of raw material price increases during which there may be margin pressure," Moody's said.

Positive factors affecting the ratings include the company's leading market positions in resins and formaldehydes and the lack of refinancing risk once the credit facility that matures in July 2002 is replaced.

"The ratings also take into account uncertainty with regard to pending litigation commenced in November 2001 against the company by creditors of a successor to Borden Decorative Products Holdings, Inc., a former wholly owned subsidiary of the company," the rating agency said. "The action seeks to have a 1998 recapitalization transaction avoided as a fraudulent conveyance and asks for over $314MM. The company believes that it has strong defenses. In the event that Borden were to become liable, a negative rating action would result."

At Dec. 31, 2001, revenue was $1.4 billion and operating income was negative $71 million. Also, at Dec. 31, 2001, the company has a $250 million revolver maturing July 13, 2002 and is currently in discussions with its lenders about replacing the facility, according to the release.

Moody's rates Sonic Automotive convertibles B3

Moody's Investors Service assigned a B3 rating to Sonic Automotive's proposed convertible subordinated debt and confirmed the existing ratings. The outlook is stable. Ratings confirmed include Sonic's $600 million guaranteed senior secured revolving credit facility due 2003 at Ba3 and its $200 million 11% guaranteed senior subordinated notes due 2008 at B2.

Moody's said the ratings reflect Sonic's high leverage and high level of debt-financed intangibles as a result of its ongoing acquisition strategy; continued integration risk; thin operating profit margins typical of automotive dealerships; repricing and gross margin risk due to volatile pricing of used cars; sensitivity to changing consumer tastes and economic factors; some geographic concentration, which resulted in Sonic under-performing some of its public competitors during 2001; and a high reliance on the captive credit subsidiaries of automotive manufacturers for its floor plan and other working capital needs.

Positives include its brand diversification, which has continued to improve; satisfactory coverage of fixed financing and operating costs; demonstrated variability in its operating costs, which allowed Sonic to maintain appropriate margins for its ratings despite a weak year for automotive sales; and by continuing to grow higher-margin non-vehicle sales more rapidly than revenues from vehicle sales.

Moody's said Sonic has continued to finance acquisitions with debt as well as small amounts of equity, so that intangibles continue to exceed net worth despite increases in retained earnings. However, leverage has remained consistent relative to total assets and to capital, and debt protection measures have shown modest improvements over time. The ratings incorporate the expectation that acquisitions will continue to occur at rates consistent with historical experience, totaling under $1 billion in additional revenues per year.

S&P rates Sonic convertibles B+

Standard & Poor's assigned a B+ rating to Sonic Automotive, Inc.'s new issue of $130 million convertible senior subordinated notes due 2009 and confirmed its existing ratings.

S&P said the ratings reflect Sonic's below-average business profile as a leading consolidator in the U.S. automotive retailing industry, combined with high debt leverage and modest cash flow protection.

Thanks to numerous acquisitions, revenues for 2001 exceeded $6 billion compared to $500 million in 1997, S&P said. An increasing share of revenue comes from the sale of higher-margin and more stable used vehicles, finance and insurance services, and repair parts and maintenance services. These revenue sources represent about 40% of sales, up from 36% in 1997, and about 70% of gross profit.

In addition, Sonic's market presence has expanded beyond the Southeast to include fast-growing markets in the West and Southwest, S&P noted.

Brand diversity has also improved, with a greater proportion of sales coming from higher-margin luxury and foreign vehicles. Sonic will continue to face significant challenges integrating purchased dealerships, including the recently acquired Don Massey Dealerships which was the 19th largest dealership group in the U.S.

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