S&P cuts Dynegy

Standard & Poor's downgraded Dynegy Inc. and kept it on CreditWatch with negative implications. Ratings lowered include Dynegy's senior unsecured debt, cut to B- from B+; Dynegy Holdings Inc.'s senior unsecured debt, cut to B- from B+, and preferred stock, cut to CCC+ from B; Illinova Corp.'s senior unsecured debt, cut to B- from B+; Illinois Power Co.'s senior secured debt, cut to B+ from BB, and preferred stock, cut to CCC+ from B; and Northern Natural Gas Co.'s senior unsecured debt, cut to B+ from BBB-.

S&P said it cut Dynegy because its analysis indicates that the company's "cash flow deterioration continues unabated."

Cash flow from Dynegy's core merchant energy business is now expected to decline even further because it is likely industry counterparties are engaging in only low-margin spot gas transactions, a trend that is expected to continue, S&P said.

In addition, Dynegy has been unable to execute on asset divestitures, including the expected partial monetization of Northern Natural Gas, which further exacerbates credit difficulties, S&P said.

The downgrade of Northern Natural reflects S&P's view that the sale is uncertain and therefore Northern Natural's creditworthiness is commensurate with the consolidated credit rating of Dynegy, the rating agency said.

Dynegy's available sources of liquidity have diminished slightly recently as some cash collateral calls have been demanded, S&P said.

As evidenced by its inability to quickly sell assets or access capital markets, Dynegy's liquidity position is tenuous.

S&P said it estimated that the firm's liquidity position has eroded from the $800 million that Dynegy disclosed earlier this week. The sources of these funds are cash on hand, unused bank facilities, and commodity (natural gas) in storage.

Also, Dynegy has several near-term obligations on the horizon, with about $750 million in debt and bank facilities ($300 million at Dynegy and $450 million at Northern Natural) due to mature or expire by November 2002, and a $1.5 billion preferred stock right held by Dynegy's largest shareholder, ChevronTexaco Corp., which is redeemable in November 2003, S&P said.

S&P cuts Williams Cos. three notches

Standard & Poor's downgraded The Williams Cos. Inc. and its subsidiaries by three notches and kept the ratings on CreditWatch with negative implications. Ratings lowered include Williams' senior unsecured debt to B from BB and preferred stock to CCC+ from B+, the senior unsecured debt of Northwest Pipeline Corp., Texas Gas Transmission Corp., Transcontinental Gas Pipe Line Corp. and Williams Gas Pipelines Central Inc. to B+ from BB+, Transco Energy Co.'s senior unsecured debt to B from BB and WCG Note Trust's senior unsecured debt to B from BB.

S&P said the action is in response to rating triggers associated with the AES Ironwood, AES Red Oak, Georgia EMC, and Tenaska tolling agreements, which may require Williams to provide letters of credit to each entity.

AES stated in a conference call that the amount requested by them was about $900 million, although Williams believes the amount is much lower.

S&P said the requirements create "significant uncertainty in Williams' financial position," meriting a single B rating.

The triggers also add risk to Williams' ability to close on a potential $1.6 billion secured line of credit in the near term or to execute other options to meet liquidity needs, S&P said.

Moody's lowers Big Food outlook to negative

Moody's Investors Service lowered its outlook on The Big Food Group plc to negative from stable. Moody's gives Big Food a Ba1 senior implied and Ba3 issuer rating.

Moody's said the change reflects its concerns at the nature and speed of the deterioration in sales at frozen food retailer Iceland and the impact that a further weakening of sales could have on its ability to achieve the improvements in leverage and coverage measures that were anticipated at the time of the rating assignment.

The company said the decline in like-for-like sales disclosed in the first-quarter results has continued to deteriorate in the first few weeks of the second quarter, Moody's noted. Big Food has re-forecast the first-half operating result for Iceland as a loss of roughly £8 million, as opposed to the profit of £8 million for the comparative period of 2001/2.

Moody's added that the Booker cash-and-carry business continues to perform satisfactorily.

S&P confirms Smurfit-Stone

Standard & Poor's confirmed the ratings of Smurfit-Stone Container Corp. including its preferred stock at CCC+, Jefferson Smurfit Corp. (U.S.)'s senior secured debt at B+ and senior unsecured debt at B, Stone Container Corp.'s senior secured debt at B+ and senior unsecured debt at B, Stone Container Finance Co. of Canada's senior unsecured debt at B and Smurfit Newsprint Corp.'s senior unsecured debt at B.

S&P said the confirmation follows Smurfit-Stone's announcement it will buy MeadWestvaco Corp.'s Stevenson, Ala. corrugated medium mill and associated operations for $350 million in cash plus an additional $25 million over the next 12 months related to financing arrangements.

The Stevenson mill is a large (830,000 tons of annual capacity), low-cost producer of corrugated medium, S&P said. This acquisition should enable Smurfit-Stone, the world's largest containerboard producer, to continue the progress it has made during the past few years in optimizing its manufacturing base and improving its cost structure.

Management expects at least $40 million in synergies from the transaction, S&P noted.

The announcement of this transaction closely follows news that Smurfit-Stone has agreed to sell its industrial packaging operations to Caraustar Industries Inc. for about $80 million in cash, retaining about $12 million in receivables. Smurfit-Stone did not have a leadership position in this business, the manufacturing of tubes, cores, and partitions.

Pro forma for these two transactions, credit measures will weaken slightly from current levels, with debt to EBITDA rising to the low-to-mid-5 times area from about 5x currently and EBITDA interest coverage declining to the mid-2x area from the upper 2x area, S&P said.

However, containerboard and box markets are showing signs of gradual strengthening from cyclical lows. This should lead to credit strengthening over the intermediate term, S&P said.

Moody's cuts Telus to junk

Moody's Investors Service downgraded Telus Corp. to junk, affecting US$4.3 billion of securities. Ratings lowered include Telus' senior unsecured debt, cut to Ba1 from Baa2. The outlook is negative.

Moody's said it cut Telus because it is concerned the company's free cash flow to repay debt will be modest in relation to its debt level even in 2004.

In the interim, Telus will incur negative free cash flow this year and likely next, Moody's said. This is driven by continued gross cash consumption in its competitive local operation in Eastern Canada, offset by modestly positive gross cash generation in its national wireless operation and gross cash generation in its incumbent properties, all before allocation of interest, taxes and dividends.

Telus has also been negatively affected this year by two major regulatory decisions, which will reduce EBITDA by C$300 million on an annualized basis, Moody's added.

The negative outlook reflects Moody's view that the company has execution risk on its downsizing program and its broader business plan.

Additionally the company may have little flexibility to react to adverse developments, as it has already reduced its dividend, has few significant non-strategic assets available to sell, and is quickly moving to a maintenance level of capital expenditures, Moody's said.

Moody's rates Jostens loan B1, raises outlook

Moody's Investors Service rated Jostens, Inc.'s new $150 million senior secured revolving credit facility due 2006, $108 million senior secured term loan A due 2006 and $330 million senior secured term loan C due 2009 at B1. Moody's also confirmed its existing debt including its $225 million 12.75% senior subordinated notes due 2010 at B3 and $60 million 14% PIK preferred stock due 2011 at Caa1 and raised the outlook to positive from stable.

Moody's said it raised the outlook because it expects Jostens' operating results will continue to improve and that management will remain focused on debt reduction.

Given the fundamentally stable demand and market shares in the school-affinity industry, Jostens' sales are likely to grow in the low single digit range, while Jostens' product development and cost containment efforts should offset any margin pressures that arise from challenging economic trends or increased raw material prices, Moody's said.

Moody's said it does not anticipate that Jostens will engage in any significant acquisition transactions, and that it will use free cash flow primarily to repay debt or preferred stock. Jostens increased year-over-year EBITDA for the 12 months ended June 2002 to $159.6 million from $150.7 million and reduced long-term debt by nearly $40 million. Due in large part to disciplined cost control and operational efficiency, Jostens' EBITDA margins improved to 21.1% from 20.7%, Moody's said.

S&P takes Sun World off watch

Standard & Poor's confirmed Sun World International Inc.'s ratings and removed it from CreditWatch. The outlook is negative. Ratings affected include Sun World's senior secured debt at B.

S&P said the confirmation follows Sun World's announcement that Sun World and Kingdom Agricultural Development Co., a private Egyptian firm, have mutually agreed not to complete the combination of their two companies at this time. However, the two companies will continue to work together under a project management agreement established in 1999.

The ratings for Sun World reflect the company's highly levered financial profile, the commodity nature of its products, and potential earnings and cash flow volatility, S&P said. The refinancing risk and investment strategy of the company's parent, Cadiz Inc., is another rating consideration.

S&P said it analyzes Sun World's financials on a consolidated basis with Cadiz. EBITDA to interest is very weak, at less than 1.0 times for the last 12 months ended March 31, 2002. The decline in Sun World's EBITDA coverage in the past two years has been due to difficult agriculture industry conditions, which resulted in the oversupply of certain crops and put pressure on prices, S&P said. While the company has taken steps to improve operating performance, it is too early to determine the effect on fiscal 2002 operating and financial performance because earnings are highly seasonal (one half of EBITDA occurs in July).

S&P takes Berry Plastics off watch, outlook positive

Standard & Poor's confirmed Berry Plastics Corp.'s ratings, removed them from CreditWatch and gave them a positive outlook. Ratings confirmed include Berry Plastics' senior secured debt at B+ and subordinated debt at B-.

S&P said the action follows completion of Berry Plastics' acquisition by an investor group led by GS Capital Partners 2000 LP.

The ratings reflect a below-average business risk profile and very aggressive debt leverage, S&P said.

Berry's business position reflects large market shares in its niche segments, strong customer relationships, and sole-supplier arrangements, advantages that provide some barriers to entry, the rating agency added. The bulk of the company's output is sold to dairy, food, and other consumer goods producers, a relatively recession-resistant customer base. The continuing conversion to plastic containers from paper and other materials in the company's end markets is an important growth driver.

Steady volume growth and attractive operating margins should continue to support Berry's modest free cash generation, S&P said.

While the company remains very aggressively leveraged, earnings growth is expected to support a modest delevering in the intermediate term, with total debt (adjusted for capitalized operating leases) to EBITDA ranging between 4.5 times to 5x, benchmark levels for the rating, S&P added.

Fitch cuts Broadwing preferred, lowers all outlooks

Fitch Ratings downgraded Broadwing Communications, Inc.'s 12.5% series B junior exchangeable preferred stock to C from B and changed the outlook for parent Broadwing, Inc.'s ratings to negative from stable.

Fitch said the action follows Broadwing's announcement it will defer the cash payment of the quarterly dividend due on Aug. 15.

The negative outlook reflects the company's limited financial flexibility in terms of available liquidity resources and continued compliance with the financial covenants contained within the company's senior secured credit facility, Fitch said.

The rating agency estimates that the company has approximately $200 million of additional availability under its senior secured credit facility. However, the liquidity available under the revolver amortizes to approximately $140 million by year-end 2002 and will provide very limited availability during the first half of 2003.

The company's liquidity position will be further pressured in 2003 as the term loans under the company's bank facility begin to amortize during the second quarter of 2003.

Fitch said it acknowledges the steps the company has taken to maximize and preserve cash flow including reductions to capital spending, operating cost controls and the suspension of the dividend on the exchangeable preferred stock.

While the company has made significant progress towards being free cash flow positive in the fourth quarter 2002, Fitch said it expects that the company will need to access capital markets to solidify its liquidity position entering 2003.

S&P cuts Schuff

Standard & Poor's downgraded Schuff International Inc. and maintained the negative outlook. Ratings lowered include Schuff's $100 million 10.5% senior notes due 2008 cut to B from B+.

S&P said the action is in response to Schuff's announcement of weak earnings.

In the second quarter Schuff generated $2.3 million of EBITDA versus $7.5 million in the prior-year period, S&P noted.

These results have heightened financial risk, with trailing 12-month total debt to EBITDA of about 5.7 times, S&P added.

Credit protection measures may decline further as the company now anticipates EBITDA of $14 million-$16 million in 2002, down from about $22 million in 2001, S&P warned. Liquidity is marginal, with just $12 million of cash and $4 million of bank availability at June 30, 2002.

Fitch cuts Dynegy

Fitch Ratings downgraded Dynegy Inc. including lowering its senior unsecured debt along with the senior unsecured debt of Dynegy Holdings Inc., Illinova Corp. and Illinois Power Corp. to B from BB-. Fitch also cut Dynegy Capital Trust I's trust preferreds to CC from B- and Illinois Power's senior secured debt and pollution control bonds to BB- from BB and preferred stock and trust preferred to CCC from B-.

Fitch said the downgrade is in response to a continued weakening in Dynegy's credit profile.

Cash flow projections for year 2002 disclosed by Dynegy on Tuesday were materially weaker than prior estimates, Fitch noted. In addition, the company announced that it had terminated its pending $325 million bond financing at Illinois Power.

Cash from operations after changes in working capital are now expected to range between $600-700 million. Prior estimates were closer to $1 billion. Based on new estimates, consolidated cash flow from operations for the remainder of 2002 has been cut approximately in half, Fitch said.

The company has stated that the revisions have resulted from a downturn in marketing and trading activities, partially the result of industry conditions, and lower-than-expected prices for power, natural gas and natural gas liquids. Based on available information, Fitch said it is unable to have a high level of confidence in estimates of sustainable cash from operations, other than from the regulated electric and gas pipeline operations.

Dynegy is in the process of executing a restructuring plan designed to reduce consolidated debt and improve liquidity, Fitch said. But capital market conditions continue to worsen and the negative over-hang from the SEC's investigation of accounting and trading issues, ongoing FERC inquiries, and potential litigation exposure have not abated. Therefore, Dynegy's ability to successfully execute its restucturing plan has become less assured.

S&P says Ball could reach high grade

Standard & Poor's said Ball Corp. could be raised to investment grade if management continues its commitment to preserving its strengthened financial profile. S&P currently assigns Ball a BB+ corporate credit rating with a positive outlook.

S&P made its comments after Ball announced continued strong earnings and free cash flows for the second quarter although S&P added that the results do not have an impact on Ball's ratings or outlook.

Although higher earnings from cost reduction initiatives and higher volumes, and reduced debt levels have improved Ball's credit measures to levels in line with a BBB- rating, S&P said it is not clear that management is committed to maintaining these levels as it announced that it is exploring strategic opportunities.

S&P raises U.S. Timberlands Klamath Falls

Standard & Poor's upgraded U.S. Timberlands Klamath Falls LLC including raising its $225 million 9.625% senior notes due 2007 to CCC+ from CCC-. The outlook is negative.

S&P said the upgrade follows management confirmation that the May 15 interest payment on the $225 million notes was made within the 30-day grace period.

The revised ratings reflect the fact that the volume of merchantable timber on Klamath's properties (about 500,000 acres in Oregon) has deteriorated significantly during the past few years, primarily because of aggressive harvest levels, S&P said.

Despite strong demand due to a high level of housing construction and remodeling, log prices have fallen sharply during the past few years, S&P noted. This has occurred as a result of industry consolidation, sawmills' higher log yields and, recently, low-cost imported logs and wood products.

Consequently, in order to generate cash flow to meet the interest expense on its heavy debt load, the company has had to harvest at levels well above the timber growth rate and original harvest plans, S&P said. The inventory of merchantable timber had fallen to an estimated 1.2 billion board feet at the end of 2001 from 2.1 billion in 1997.

To date, harvest restrictions contained in the indenture governing the notes have not meaningfully curtailed cutting, S&P added. In addition, property transfers to an affiliate have caused Klamath's timberland acreage to decline.

Moody's cuts Hanover Compressor

Moody's Investors Service downgraded Hanover Compressor. Ratings lowered include Hanover Compressor's $192 million 4.50% non-guaranteed senior convertible notes to B1 from Ba3 and its $86 million of non-guaranteed parent trust convertible preferreds to B2 from B1, Hanover Equipment Trust 2001A $300 million 8.50% partly secured senior notes due 2008 to B1 from Ba3 and Hanover Equipment Trust 2001B's $250 million 8.75% partly secured senior notes due 2011 to B1 from Ba3.

Moody's said the new ratings better reflect "more leisurely debt reduction, more growth capital expenditures, or covenant compliance issues that could evolve if 2002 quarterly results do not rise sufficiently above first quarter 2002 levels."

Moody's said it believes that part of Hanover Compressor's 2000 and 2001 organic gas compression growth derived from exploration and production firms' desire to accelerate production of existing reserves into a natural gas price environment of then historic dimensions.

If that was the case, near term growth may be slower than expected, Moody's added.

Moody's puts AES Red Oak on review

Moody's Investors Service put AES Red Oak LLC's Baa3 senior secured rating on review for possible downgrade, affecting $384 million of debt.

The action follows the downgrade of the unsecured rating of The Williams Companies to below investment grade. Williams guarantees the payment obligations of its subsidiary Williams Energy Marketing and Trading Company under a 20 year Fuel Conversion Services, Capacity and Ancillary Services Purchase Agreement with AES Red Oak.

If Williams' senior unsecured rating is cut below investment grade then the purchase agreement requires Williams,as guarantor of its subsidiary, to provide AES Red Oak with acceptable credit support within 90 days.

Failure to provide such credit support is an event of default and could give AES Red Oak the right to terminate the agreement, which could trigger further provisions requiring Williams to pay damages, Moody's said.

Moody's puts AES Ironwood on review

Moody's Investors Service put AES Ironwood LLC's Baa3 senior secured rating on review for possible downgrade, affecting $308 million of debt.

The action follows the downgrade of the unsecured rating of The Williams Companies to below investment grade. Williams guarantees the payment obligations of its subsidiary Williams Energy Marketing and Trading Company under a 20 year Fuel Conversion Services, Capacity and Ancillary Services Purchase Agreement with AES Red Oak.

If Williams' senior unsecured rating is cut below investment grade then the purchase agreement requires Williams,as guarantor of its subsidiary, to provide AES Red Oak with acceptable credit support within 90 days.

Failure to provide such credit support is an event of default and could give AES Red Oak the right to terminate the agreement, which could trigger further provisions requiring Williams to pay damages, Moody's said.

S&P puts Cereol on positive watch

Standard & Poor's put Cereol SA on CreditWatch with positive implications, changed from CreditWatch with developing implications.

Ratings affected include Cereol's €152.45 million 8.7% bonds due 2005 at BB-.

S&P upgrades Sovereign Bank

Standard & Poor's upgraded Sovereign Bank . The outlook is stable.

Ratings raised include Sovereign Capital Trust I's $100 million 9% subordinated capital income securities, raised to BB- from B, Sovereign Capital Trust II's $287.5 million 7.5% trust preferred income equity/redeemable securities due 2030, raised to BB- from B, Sovereign Capital Trust III's $100 million preferred capital securities, raised to BB- from B, and Sovereign Real Estate Investment Trust's $161.792 million 12% non-cumulative exchangeable preferred stock series A, raised to BB+ from BB.

Moody's cuts Atlantic Express

Moody's Investors Service downgraded Atlantic Express Transportation Corp. including lowering its $120 million senior secured notes due 2004 to Ca from B2. The outlook is negative.

Moody's said the action is in response to Atlantic Express' deteriorating operating results, limited financial flexibility and liquidity concerns.

Atlantic Express experienced continuing operating losses in the quarter ended March 2002, due in large part to significant increases in both vehicle insurance and employee health and welfare premiums, Moody's said.

Operating loss for the first nine months of fiscal 2002 was $5 million, compared to operating profit of $6.6 million for the same period last year.

Moody's said the negative outlook reflects uncertainty in the company's ability to restructure debt payments in the near term, which will likely be necessary given the current adverse operating environment.

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