S&P cuts Fleming, still on watch

Standard & Poor's downgraded Fleming Cos. Inc. and kept it on CreditWatch with negative implications. Ratings lowered include Fleming's senior notes, cut to CCC+ from B-, senior subordinated notes and convertibles, cut to CCC from CCC+ and bank loans, cut to B from B+.

S&P said it cut Fleming because it believes that the challenges Fleming faces in restructuring its wholesale business may weaken cash flow protection measures.

Although liquidity for the near term appears sufficient and Fleming intends to reduce debt with proceeds from the sale of its retail assets, debt service costs in relation to cash flow remain high, S&P added.

Fleming has announced a cost reduction plan, including overhead reduction and the closure of four distribution centers. Cash costs associated with the plan are expected to be $115 million. Noncash charges associated with the plan and other impairment charges may adversely impact the company's previously announced 2002 financial results.

The plan is expected to generate $60 million in cost savings on an annual run rate basis by the fourth quarter of 2003. However, ongoing business trends have typically been difficult to predict, given softness in the retail industry Fleming serves, higher employee benefit costs, and internal challenges, S&P said. Previously announced fourth quarter 2002 earnings (ended December 2002) were down 25% from earlier expectations.

Fleming still needs to fully integrate the CoreMark International Inc. acquisition, complete the sale of its retail assets, and manage the consolidation of two distribution centers. Moreover, the company has hired PriceWaterhouseCoopers to assist with shareholder lawsuits and a formal SEC investigation into accounting matters.

S&P said it believes management will be challenged to manage these processes smoothly while maintaining focus on its core distribution business.

S&P cuts Hollywood Casino Shreveport

Standard & Poor's downgraded Hollywood Casino Shreveport including cutting its $150 million 13% contingent interest notes due 2006 and $39 million 13% senior secured notes due 2006 to CCC+ form B-. The ratings were removed from CreditWatch with negative implications. The outlook is negative.

S&P said the downgrade follows the announcement by Penn National Gaming Inc., which is acquiring Hollywood Casino Shreveport and its parent, Hollywood Casino Corp., that it does not intend to provide financing or credit support to assist Hollywood Casino Shreveport in making the obligated offer to repurchase its outstanding notes upon a change of control.

In addition, Penn is seeking a waiver to the change of control provision under Hollywood Casino Shreveport's existing bond indentures.

The ratings reflect Hollywood Casino Shreveport's continued weak operating performance, high debt leverage, competitive market conditions, and limited liquidity, S&P said.

Moody's cuts Aurora

Moody's Investors Service downgraded Aurora Inc. including lowering its $175 million senior secured credit facility due 2005 and $600 million senior secured term loans due 2005-06 to B3 from B2 and its $400 million senior subordinated notes due 2007 and 2008 to Ca from Caa3. The outlook is negative.

Moody's said the downgrades reflect lower cash flow run rate levels than previously anticipated due to intensified competition in Aurora's retail markets, trade spending inefficiencies, and limited liquidity.

The negative outlook reflects the potential for liquidity challenges if targeted asset sales are not concluded and sustained cash flow enhancement is not achieved from the business strategies being pursued by the management team, Moody's added.

The ratings are limited by Aurora's extremely high leverage and a weak balance sheet with significant intangibles from its acquisition-oriented formation and growth. The company's acquisitions brought together multiple operations with diverse business practices, and Aurora has had major difficulties over the past few years with integration, systems and management, Moody's said.

In addition, recent results have been negatively impacted by Aurora's high level of 2002 trade spending to sustain volume growth, the rating agency added.

Fourth quarter 2002 EBITDA of about $38 million was well below projections due to promotional spending, mix, and volume weakness.

Aurora reported debt of about $1.1 billion at Dec. 31, 2002, which represented 143% of revenues, 8.2x EBITDA, and 96.5% of book capitalization, Moody's noted.

Moody's puts Shaw on review

Moody's Investors Service put The Shaw Group on review for possible downgrade including its senior secured bank credit facility at Baa3 and senior unsecured debt at Ba2.

Moody's said it began the review because it is concerned about the degree of downward pressure on Shaw's earnings and cash generation in fiscal 2003 and 2004 given the shift in the company's business mix due to ongoing weakness in the power generation segment of its EPC business.

The fall off of new construction activity in the power generation sector has resulted in Shaw recently announcing revised earnings guidance for 2003.

Moody's said it expects the downturn in new power plant construction to be protracted.

While Shaw's business segments, other than new power plant construction, evidence a good underlying base of business, the company's earnings growth and cash flow in recent years has been driven by the EPC activity in new power plant construction.

In addition, the review reflects Moody's concerns over the expected level of cash burn in 2003, which the company advises to be in the $130 million to $150 million range, as the business transitions to a different portfolio mix and working capital requirements increase. The earnings and cash flow pressure, and the potential put in May 2004 of the LYONs issue against the anticipated, contracted business back drop are factors prompting the review.

S&P says Lucent unchanged

Standard & Poor's said Lucent Technologies Inc.'s ratings are unchanged including its corporate credit at B- with a negative outlook on news of an agreement in principle with the staff of the SEC that would resolve the commission's investigation of the company's revenue-recognition practices.

The agreement, which would close an investigation initiated in late 2000, is subject to final approval by the SEC. Lucent had discovered $679 million of improperly booked revenue that year and brought the matter to the commission's attention. Under the terms of the settlement, Lucent would pay no fines or penalties, would not be required to make any financial restatements, and would be enjoined from future violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.

S&P noted that Lucent's cost reduction actions have materially cut the magnitude of its operating losses and cash outflows in a very challenging communications marketplace.

Moody's raises Denny's outlook

Moody's Investors Service raised its outlook on Denny's Corp. to stable from negative and confirmed its ratings including its $120 million 12.75% senior notes due 2007 at Caa1 and $379 million 11.25% senior notes due 2008 at Caa2.

Moody's said the revision was prompted by recent improvements in the company's medium-term liquidity profile, modest reductions in leverage and cash interest expense through debt exchanges, and the company's success at maintaining cash flow levels during the current period of sales pressures on the restaurant industry.

The ratings consider the pressures on frequency of customer visits confronting the entire restaurant industry, the intense competition within the restaurant industry at Denny's price point, and the medium term requirement to extend the December 2004 maturity of the bank loan, Moody's said.

However, ratings reflect the strength of the "Denny's" trade name, the diversity of revenue inflows, and the company's recent success at using targeted promotions to increase average check during a period of decreased customer traffic, Moody's added.

The stable outlook acknowledges Moody's opinion that the company likely will internally generate enough operating cash to cover minimal obligations including cash interest expense and maintenance capital expenditures over the medium-term. However, failure to refinance the revolving credit facility in a timely manner would cause the ratings to be lowered.

Fitch cuts Metris

Fitch Ratings downgraded Metris Companies Inc.'s senior debt and bank credit facility to CCC from B- and removed them from Rating Watch Negative. The outlook is negative.

Fitch said the action reflects heightened execution risk as Metris attempts to address liquidity concerns with its various credit providers.

Fitch remains concerned with Metris' ability to renew or replace conduit facilities that mature in the June and July 2003 timeframe, coupled with a $100 million term loan drawn under the company's bank credit facility due in June 2003.

While Metris is in active negotiations with its credit providers, Fitch said it believes the pace and complexity of this process has increased overall risk to the company.

Furthermore, Fitch said it remains concerned with low excess spread levels in the Metris Master Trust, Metris' primary securitization vehicle. Excess spread levels have declined significantly over the past few months, and for many series are below 2%, eroding the cushion that once existed. Under the company's current bank credit agreement, Metris must maintain at least 1% excess spread in the MMT.

Moreover, if trust level excess spread becomes negative, on a three-month rolling average, an early amortization of the MMT would occur. If an early amortization of the trust were to take place, Fitch does not believe that Metris would have sufficient liquidity to withstand such an occurrence.

S&P says Integrated Electrical unchanged

Standard & Poor's said Integrated Electrical Services Inc.'s ratings are unchanged including its corporate credit rating of BB with a stable outlook on the announcement that it has signed an asset purchase agreement to acquire Encompass Services Corp.'s electrical contracting unit (formerly known as Riviera Electric).

Although the operation had revenues of approximately $83 million in 2002, S&P said it would expect revenue to meaningfully decline in 2003, given the distressed liquidity position of the operation's prior owners.

Nonetheless, the unit should enhance Integrated Electrical's position in the Colorado region, S&P noted.

Recently, the firm announced its expectations of generating $20 million to $30 million of free cash flow for fiscal 2003, with the majority being used for debt reduction and building its cash balance. As such, S&P said it expects Integrated Electrical's liquidity to remain fair during this period of severe weakness in the commercial and industrial construction markets. Over time, funds from operations to total debt should average in the 20% area, while total debt to EBITDA is expected to range between 3.0x-3.5x.

S&P cuts Wickes

Standard & Poor's downgraded Wickes Inc. including cutting its $100 million 11.625% notes due 2003 to D from C.

S&P said the downgrade follows Wickes' completion of its offer to exchange new senior secured notes due 2005 for its outstanding senior subordinated notes due Dec. 15, 2003. Approximately 67% of the $64 million of senior subordinated notes were tendered in this transaction. The company also completed the refinancing of its senior credit facility with a new $125 million facility.

Although the note holders who tendered received security and maintained the same 11.625% cash coupon on the new notes along with a non-cash interest component from and after Dec. 15, 2003, by extending the maturity to 2005 from 2003, Wickes did not meet all of its obligations as originally promised under the subordinated note issue, S&P noted. In addition, the 33% of subordinated note holders that did not agree to the exchange are disadvantaged to the holders of the new senior secured notes, who are senior to them but junior to the bank facility.

As a result, S&P said the rating treatment is identical to a default on the specific debt issue involved.

Moody's raises Paiton Energy

Moody's Investors Service upgraded Paiton Energy Funding BV to B3 from Caa2, affecting $180 million of securities. The outlook is positive.

Moody's said the upgrade follows successful completion of the company's debt restructuring on Feb. 14.

Moody's said all conditions and required consents for the lenders have been fulfilled and obtained, that the pre-funding of all required debt service reserve accounts and the drawdown of US EXIM take-out loan have taken place. Furthermore, Paiton has already secured majority approval from the bondholders for the restructuring.

Moody's added that it also understands that the conditions precedent to effectiveness of the PPA Amendment were satisfied on Dec. 25, 2002. Regarding the coal supply restructuring, all settlement agreements have been reached with the related parties and primary coal supply contract has been entered into with PT Adaro Indonesia, the major coal supplier of the project. It is expected that other coal supply contracts will be executed shortly.

The amended power contract is expected to make Paiton's power costs more competitive within the Java-Bali grid, Moody's added.

S&P withdraws Unilab ratings

Standard & Poor's withdrew its ratings on Unilab Corp. including its $110 million term B bank loan due 2006, $25 million revolving credit facility due 2005 and $50 million term A bank loan due 2005 previously at BB- and its $155 million 12.75% senior subordinated notes due 2009 previously at B.

S&P said the action follows the purchase of Unilab by Quest Diagnostics Inc.

Quest will repay approximately $100 million of Unilab's bank debt, and it has launched a cash tender offer for the outstanding $101 million principal amount of Unilab's senior subordinated notes, S&P noted.

S&P confirms Sotheby's, off watch

Standard & Poor's confirmed Sotheby's Holdings Inc. and removed it from CreditWatch with developing implications. Ratings affected include Sotheby's $100 million 6.875% notes due 2009 at B+ B+. The outlook is stable.

S&P said the action follows an announcement by Sotheby's that it and the Taubman family agreed to terminate proceedings involving the possible sale or merger of the company, or sale of the Taubman stake in the company.

The rating had been on CreditWatch with developing implications because any buyer could have a stronger or weaker credit profile than Sotheby's, S&P explained.

The rating on Sotheby's continues to reflect S&P's expectations that the worldwide art auction market may experience further difficulties during 2003 given a very challenging economic environment and a volatile stock market that is impacting wealth.

Although Sotheby's made good progress in 2002 in reducing its costs, auction revenue was held back by margin pressures on high-end consignments when compared with the year before.

The ratings also take into account the possibility of minor liabilities that could stem from a March 13, 2002, adverse ruling by the U.S. Second Circuit Court of Appeals. This ruling renewed Sotheby's exposure to liabilities from additional class action litigation, S&P noted. The court effectively overruled an earlier decision by a trial judge that would have prevented plaintiffs who purchased or sold art at overseas auctions from filing price-fixing claims in U.S. courts against Sotheby's.

S&P rates AmeriPath's loan B+, notes B-

Standard & Poor's rated AmeriPath Inc.'s proposed $365 million senior secured credit facility at B+ and proposed $210 million senior subordinated notes maturing in 2013 at B-. The outlook is positive.

The credit facility consists of a $75 million six-year revolver and a $290 million seven-year term loan. The $116 million currently outstanding on the company's $175 million facility will be refinanced and at the time of closing, the company is expected to have full availability under its revolver.

Both the credit facility and the notes will be issued as part of a leveraged buyout by the company's equity sponsor, Welsh, Carson, Anderson, and Stowe, who will contribute $300 million of equity to the buyout. Using funds from 11-year notes issued to Welsh, Carson, Anderson, and Stowe, AmeriPath will create a $67 million cash reserve to fund its expected level of contingent note payments during the next three to five years.

The rating reflects the company's leading U.S. position in the field of anatomic pathology services, a narrow market sector that is subject to reimbursement risks and competitive uncertainties due to entrance of Quest Diagnostics Inc. and Laboratory Corp. of America Holdings Inc. into the field, S&P said.

Pro forma for the transaction, the company's total debt to EBITDA is expected at 4.6 times and funds from operations to total lease-adjusted debt is expected at 16.3%.

The positive outlook reflects S&P's expectation that AmeriPath will use excess cash flow to reduce financial leverage, which is currently 58% adjusted-debt to capital pro forma for the transaction. The company is also expected to de-emphasize acquisitions as a mode of growth.

Moody's confirms Intrawest

Moody's Investors Service confirmed Intrawest Corp. including its senior notes at B1. The outlook is stable.

Moody's said the confirmation is prompted by Intrawest's announcement that it will be entering into two new partnerships, Leisura Development Canada and Leisura Development US, for the primary purpose of reducing debt levels and lowering capital requirements in its real estate business.

Intrawest will be a minority investor in both partnerships but will not provide any guarantees or financial support and any construction financing will only be recourse to the partnerships.

Although the partnerships may result in a reduction in on balance sheet leverage over the long term, Moody's said it does not view the transactions as having a near-term effect on ratings.

The stable ratings outlook reflects Moody's view that Intrawest will continue its deleveraging efforts as well as its expectation that the company's Ski and Resort operations should begin to generate positive free cash flow as capital requirements in this segment decline to more normal levels.

Moody's confirms Citgo, rates loan Ba2

Moody's Investors Service confirmed Citgo Petroleum Corp.'s senior unsecured debt at Ba3 and assigned a Ba2 rating to its $200 million senior secured term B loan. The confirmation ends a review for possible downgrade. The outlook remains negative.

The confirmations reflect Citgo's enhanced liquidity position following the expected completion of three financings totaling $950 million, Moody's said. The financings will alleviate near-term liquidity stress stemming from the disruptions in crude deliveries under Citgo's long-term crude supply agreements with affiliates of its parent, Petroleos de Venezuela. They include a $550 million senior note issue and a $200 million senior secured three-year term loan, together providing $750 million of new cash, and a $200 million accounts receivable facility that will provide replacement funds for a similar recently canceled facility.

These funds will help address Citgo's working capital needs, including the impact of shortened payment terms on third-party crude purchases and maturing bank letters of credit that will need to be repaid or refinanced, Moody's said.

Moody's also has factored into the ratings the expectation that, to the extent Citgo maintains adequate liquidity for its own internal needs, these financings will provide cash to retire some portion of PDV America's $500 million of senior notes that mature in August 2003.

Moody's said its continuing negative outlook reflects ongoing uncertainty over the impact of reduced crude production and exports from Venezuela on Citgo's operations and working capital needs, and the possibility that future actions by Citgo to undertake additional secured financings could result in the notching down of its senior unsecured ratings.

S&P puts Sol Melia on watch

Standard & Poor's put Sol Melia SA on CreditWatch with negative implications including its €200 million 1% convertible bonds due 2004 at BBB-, Sol Melia Europe BV's €340 million 6.25% bonds due 2006 and Sol Melia Finance Ltd.'s €106.9 million 7.8% bonds at BB.

S&P said it put Sol Melia on watch because of concern that, following weak 2002 financial results, the company will find it challenging to restore its credit measures to investment-grade levels in the medium term.

Although the company's European operations recorded a limited decline in revenue per available room in 2002, Sol Melia nevertheless continued to suffer from its exposure to the North African (mainly Tunisia) and Latin American tourism markets, which were affected by weak customer demand owing to economic and geopolitical problems in those regions, S&P noted.

In the face of weakening hotel demand worldwide and its exposure to volatile emerging markets (which account for about 30% of EBITDA), the company has implemented cost cutting measures, reducing operating costs by about €30 million in 2002, and has started to divest from loss-making and underperforming affiliate hotels, mostly in Tunisia.

While these measures should help improve Sol Melia's profitability, it remains highly unlikely that the company will be able to restore its credit measures to levels more commensurate with an investment grade rating by the end of 2003, primarily due to the continuing uncertainty regarding the pace of economic recovery in Europe and the Americas, S&P said.

S&P cuts General Chemical

Standard & Poor's downgraded General Chemical Industrial Products Inc. including cutting its $100 million 10.625% senior subordinated notes due 2009 to CCC from B- and $85 million revolving credit facility due 2004 to B- from B+. The outlook remains negative.

S&P said the it lowered General Chemical because of continued deterioration in market conditions that have increased near-term liquidity concerns.

The downgrade reflects continued profitability weakness in the company's key markets, resulting in further deterioration to the financial profile and tightening liquidity, S&P added. The domestic soda ash market continues to suffer from overcapacity and downward pressure on pricing, while natural gas costs are trending higher. The resulting decline in profitability suggests that General Chemical may soon breach the financial covenants in its bank credit facility. Access to the credit facility is a key rating consideration in light of the company's low cash balance, persistent operating challenges, and significant debt service requirements.

Operating margins have declined to about 13% for the past 12 months and debt levels remain high, straining credit protection measures and financial flexibility, S&P said. Funds from operations to total debt is less than 10% and EBITDA interest coverage is about 2x. The significant upswing in pricing needed to provide meaningful and sustainable improvements in cash flows is not expected to occur in the near term, due to the apparent lack of pricing power among soda ash producers in the current business environment.

S&P lowers Trico Marine outlook

Standard & Poor's lowered its outlook on Trico Marine Services Inc. to negative from stable and confirmed its ratings including its senior unsecured debt at B.

S&P said the outlook revision follows a review of 2002 results and expected 2003 earnings and reflects its concerns that continued weakness in the company's primary offshore support markets could lead to additional financial deterioration.

In the near term, Trico Marine's financial profile will reflect both the current malaise in the Gulf market and the effects of its newbuild program, S&P noted. For year-ended Dec. 31, 2002, day rates, utilization, and the number of vessels working all declined when compared with 2001 figures.

Total debt to capital is expected to remain above 55% with debt to EBITDA likely will exceed 10x during 2003, S&P said. Leverage is expected to decrease with the recovery of the Gulf of Mexico market, however near-term debt levels are expected to remain very aggressive. Fixed-charge coverage measures are expected to remain weak for the rating, with EBITDA to interest coverage around 1x and EBITDA to interest plus capital expenditures below 1.0x in 2003.

S&P keeps Allegheny Energy on negative watch

Standard & Poor's said Allegheny Energy Inc. remains on CreditWatch with negative implications including its senior unsecured debt at B.

S&P said its continued watch follows its newly restructured loan agreement totaling $2.4 billion, which adds immediate liquidity to the company, thus reducing the near-term bankruptcy risk.

S&P said its review of Allegheny Energy will focus on the loan agreements that contain myriad loan covenants, and aggressive amortization schedules that could substantially increase debt service obligations and trigger another round of liquidity crises.

S&P added that its analysis will also consider reliance on asset sales and capital markets transactions to stabilize already weak credit measures for the rating and bolster poor liquidity in a challenging business environment.

In addition, the rating agency will review the detailed mechanics of the loan covenants, management's revised financial projections, and the implications for cash flow before resolving the CreditWatch listing. If it concludes that financial covenants associated with its refinancing actions are highly onerous and increase default risk, ratings will be lowered. On the other hand, if the covenants are considered to be manageable and management's plans feasible, then the ratings may be affirmed.

An upgrade, however, is very unlikely due to high financial leverage, a depressed power market, and considerable execution risk associated with implementing management's plan, S&P said.

Moody's rates AmeriPath notes B3, loan B1

Moody's Investors Service assigned a B3 rating to AmeriPath, Inc.'s planned $210 million senior subordinated notes due 2013 and a B1 rating to its planned $75 million senior secured revolver due 2009 and $290 million senior secured term loan B due 2010. The outlook is stable.

Moody's said AmeriPath's ratings are limited by its weak credit metrics following its proposed recapitalization, as well as margin pressures.

Positives include Ameripath's positive operating performance, favorable industry growth trends and an experienced management team.

The stable outlook anticipates that operating trends will remain favorable despite a modest loss in business from two national labs. Moody's said it believes revenues and EBITDA will continue to grow between 9% to 10% annually, driven by organic growth as well as modest acquisition activity.

The company should have adequate liquidity to fund its acquisition activities over the near term through internally generated cash flow and its new credit facility.

Because the B1 senior implied rating is comparatively weakly positioned within the rating category, Moody's said that even though it expects the company to prepay debt going forward, the stable outlook will likely be maintained for the foreseeable future.

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