Moody's upgrades Chesapeake, rates notes Ba3, converts B3

Moody's Investors Service assigned a Ba3 rating to Chesapeake Energy Corp.'s proposed $300 million of senior unsecured notes due 2013 and a B3 rating to its $200 million offering of perpetual mandatory convertible preferred stock and upgraded its existing ratings including its senior unsecured notes to Ba3 from B1 and convertible preferreds to B3 from Caa1. The outlook is stable.

The upgrades reflect sustained improvement over the years in the quality of Chesapeake's reserve base as it produced-off shorter-lived reserves, and divested reserves in other regions, and reinvested proceeds from asset sales, cash flow, and external capital in its core mid-continent region at satisfactory finding and development costs, Moody's said.

Coupled with a resulting rising reserve life on proven developed reserves, satisfactory execution in the field, fortuitously strong prices and inspired hedging, and the recently adequate use of perpetual non-callable preferred stock and common equity as a funding source, the firm's operating and financial profiles and demonstrated acquisition and funding strategies warrant the Ba3 rating, Moody's added.

Furthermore, while Chesapeake's frequent acquisitions during a high price environment could run the inherent risk of stretching its due diligence capabilities and/or of simply overpaying for reserves, the company has been acquiring in regions it knows well, it has been able to hedge away much of its first year or two of price risk, and raised sufficient perpetual preferred and common stock to shift adequate acquisition risk to capital layers junior to the senior notes.

However, the ratings are restrained principally by high leverage on proven developed reserves, especially in light of ongoing aggressive acquisition risk and inherent sector reinvestment and price risks, Moody's said.

Moody's raises Alpharma outlook

Moody's Investors Service raised its outlook on Alpharma Operating Corp. to stable from negative and confirmed its ratings including its $150 million senior secured revolving credit facility due 2007, $116 million senior secured term loan A due 2007 and $314 million senior secured term loan B due 2008 at B2 and $200 million senior subordinated notes due 2009 at Caa1.

Moody's said the revision reflects Alpharma's decline in financial leverage (from total debt to EBITDA of about 5.1 times in mid-2002, to 3.8 times at year-end 2002), indications of improving results for 2003, and steps taken to resolve its issues with FDA.

The ratings also consider the company's significant working capital requirements including for its high inventory level (five to six months) and its numerous global facilities, foreign exchange fluctuation risk, the company's weak balance sheet with high leverage, negative tangible book equity, low retained earnings, low return on assets, and modest interest coverage, Moody's added.

The ratings also recognize the relatively low operating margins of the company's human generic products that comprise about 74% of total sales, and the fact that the company's animal health products (approximately 26% of 2002 revenue and 21.8% of operating income) are affected by cyclical poultry, swine and beef supply and demand factors, Moody's said.

Positives the company's established market positions in certain generic and branded products, the lack of product concentration (no product accounted for more than 5% of 2002 sales), customer diversification (no customer comprised more that 6% of 2002 sales), the contribution from its active pharmaceutical ingredients division (which contributed first half 2002 sales of $80 million and operating income of $37 million, or 7% of total sales and 26% of operating income, and the growth potential of Kadian (a branded extended release pain medication).

Fitch keeps Allegheny Energy on watch

Fitch Ratings said Allegheny Energy Inc. remains on Rating Watch Negative including its senior unsecured debt at B+, West Penn Power Co.'s medium-term notes at BB+, Potomac Edison Co.'s first mortgage bonds at BBB- and senior unsecured notes at BB, Monongahela Power Co.'s first mortgage bonds at BBB-, medium-term notes and pollution control revenue bonds at BB, preferred stock at BB-, Allegheny Energy Supply Co. LLC's senior unsecured notes at B, Allegheny Generating Co.'s senior unsecured debentures at B and Allegheny Energy Supply Statutory Trust 2001's senior secured notes at B.

Fitch said Allegheny Energy's closing of a new $2.4 billion credit facility averted the potential bankruptcy of these companies and provides sufficient liquidity to carry on operations.

The terms of the new facilities will, however, continue to put pressure upon the companies to sell assets and find new sources of capital, Fitch said.

Fitch said it will resolve the watch by mid-March following a meeting with management.

Moody's cuts Citic Hong Kong to junk

Moody's Investors Service downgraded Citic Hong Kong (Holdings) Ltd. to junk, affecting $232.7 million of debt including Citic Hong Kong Finance (Cayman) Ltd.'s Japan Bonds and Citic Hong Kong Finance Ltd.'s HK$500 million floating-rate note to Ba1 from Baa3. The outlook is stable.

Moody's said the action follows its downgrade of Citic Pacific Ltd.'s rating to Baa3 from Baa2.

Citic Hong Kong's 29% investment in Citic Pacific accounts for the majority of its total assets and provides stable and significant dividend income to the company, Moody's noted. The downgrade of Citic Pacific has therefore weakened Citic Hong Kong's quality of assets and cash flow.

Moody's cuts Sky Brasil

Moody's Investors Service downgraded some ratings of SKY Brasil Serviços Ltda. (formerly NetSat Serviços Ltda) including cutting its senior implied rating to Caa2 from Caa1 and senior unsecured issuer rating to Ca from Caa2. Its $200 million 12.75% senior secured notes due 2004 were left unchanged at Caa1. All ratings remain on review for downgrade.

Moody's said the downgrades principally reflect its expectation that SKY Brasil's balance sheet may need to be restructured, that current and likely projected operations are inadequate in terms of supporting the present capitalization structure, and that credit losses may subsequently ensue over the forward rating horizon.

In particular, Moody's noted SKY Brasil continues to have negative operating cash flow and needs ongoing annual capital contributions totaling $70-80 million from its equity sponsor to fund debt service and subscriber growth. The company also faces nearer-term refinancing risk related to the maturity of its senior secured debt in August 2004.

In addition, the downgrades reflect the likely continued lack of capital contributions from Globopar and an expected recovery rate for all existing obligations of the company of less than full value in an event of default scenario, particularly if further support from equity sponsors is not forthcoming, Moody's said.

The senior secured notes were left unchanged to reflect the company's ability to increase its subscriber base and market share during the continued macroeconomic turmoil that enveloped the Brazilian economy during the second half of 2002, partially driven by product differentiation created by its interactive programming features, Moody's added. Although they are secured by highly intangible assets, the senior secured notes not held by the equity sponsors have first-in-line status and may experience high recovery rates if NewsCorp supports a recapitalization plan.

Fitch rates J.C. Penney notes BB

Fitch Ratings assigned a BB rating to J. C. Penney Co., Inc.'s new $600 million 8% senior notes due 2010. The outlook is stable.

Fitch noted that J.C. Penney continues to make progress in turning around its department store and Eckerd drugstore operations.

Penney's department stores generated a 2.6% comparable store sales gain in 2002 due to improved merchandise assortments, more timely movement of goods into the stores and aggressive marketing efforts, Fitch noted.

At the same time, profitability of the department store segment continued to recover in 2002, with the operating margin expanding to 3.9% from 3.0% in 2001. The longer-term goal is 6%-8%. Nevertheless, Penney will face challenges in its efforts to sustain this turnaround momentum during a time of soft consumer demand and growing competition, Fitch said.

Eckerd's comparable store sales increased 5.2% in 2002 compared with 7.8% in 2001, as sales momentum slowed in the second half of 2002. The slowdown is attributed to the weak retail environment and increased levels of generic dispensing in the pharmacy mix. Despite slower growth, Eckerd was able to expand its FIFO operating margin to 3.0% in 2002 from 1.8% in 2001, toward a 2003 goal of 4%-4.5%, Fitch added.

Penney's liquidity remains strong, with $2.5 billion of cash on hand at the end of 2002, Fitch said. Together with the proceeds of the $600 million debt issue, this liquidity is more than enough to cover upcoming debt maturities (which total $1.2 billion over the next three years) and the company's seasonal borrowing requirements, which have historically peaked at $1.0-$1.2 billion. In addition, this liquidity will cover projected negative free cash flow of $250 million in 2003 as Penney's capital expenditures increase to a range of $900 million - $1.1 billion from $650 million in 2002.

S&P cuts iPCS

Standard & Poor's downgraded iPCS Inc. including cutting its $152 million 14% discount notes due 2010 to D from CC and iPCS Wireless Inc.'s $140 million senior secured bank loan due 2008 to D from CC.

S&P said the downgrade follows iPCS' Chapter 11 filing.

S&P raises Intrawest outlook

Standard & Poor's raised its outlook on Intrawest Corp. to positive from stable and confirmed its ratings including its corporate credit at BB-.

S&P said the revision is in response to Intrawest's intention to separate the real estate construction activity of its business into a new entity called Leisura Development Partnerships.

The transaction essentially will allow Intrawest to realize the preconstruction value-added of its land parcels through the sale of the land parcels to Leisura, after Intrawest has completed master-planning, predevelopment work, and marketing, S&P noted. Hence the capital and all associated risks required to physically construct the condominiums, hotels, and town homes will reside in Leisura, not Intrawest.

Construction financing will be arranged by Leisura and secured by the projects. None of Leisura's debt is guaranteed by Intrawest.

S&P said it expects the announced transaction will accelerate and bring greater certainty to Intrawest's previously announced plan to improve its credit measures and achieve significant free cash flow.

S&P cuts Foamex

Standard & Poor's downgraded Foamex LP and Foamex Capital and removed them from CreditWatch with negative implications. The outlook is negative. Ratings lowered include Foamex's $100 million revolving credit facility due 2005, $100 million senior secured term C facility due 2006, $110 million senior secured term B facility due 2005, $110 million senior secured term D facility due 2006, $31.59 million senior secured term E loan due 2005 and $25 million term F bank loan due 2005, cut to B+ from BB-, $100 million 13.5% senior subordinated notes due 2005 and $150 million 9.875% senior subordinated notes due 2007, cut to CCC+ from B-, and $300 million 10.75% senior secured second-lien notes due 2009, cut to B- from B.

S&P said the downgrade is in response to Foamex's weak operating performance amid high raw material costs and a sluggish domestic economy, which if not reversed, will likely elevate near-term liquidity concerns.

The downgrade reflects the extension of unfavorable profitability levels that followed a sharp increase in the cost of the company's main raw materials during the second half of 2002, S&P added. The price increase for the company's primary raw material - toluene diisocyanate (TDI) - which is used to make foam, was largely attributable to supply shortages, although recent crude oil trends have acted as a secondary force to keep TDI costs elevated.

As a result of weak domestic demand for foam products, the company has been unable to fully recover these cost increases, S&P noted. These developments suggest that Foamex may breach recently amended financial covenants related to the company's bank credit facility unless profitability can be restored soon.

S&P said ratings could be lowered during the next year if Foamex is unable to preserve its liquidity position or if profitability continues to deteriorate and leads to a further weakening of the financial profile.

S&P rates Southern Natural Gas notes B+

Standard & Poor's assigned a B+ rating to Southern Natural Gas Co.'s planned $400 million senior notes due 2010. The outlook is negative.

S&P said Southern Natural Gas' ratings are based on the consolidated strength of itself and parent El Paso Corp. so Southern Natural Gas' ratings are expected to mirror those of El Paso.

Of paramount importance to El Paso's ability to persevere through current conditions is renegotiating its credit facilities and regaining access to capital markets at the holding company level, S&P noted. El Paso's ability to refinance its obligations will most likely be delayed until the FERC's ongoing investigation into market manipulation in California is resolved.

Without such access, the company will be severely challenged to repay nearly $2.5 billion of borrowings in 2003 and $3.5 billion in 2004 (assuming current borrowings of $1.5 billion are termed out), S&P said. Thus, executing on planned asset sales (targeted at $3.4 billion in 2003) is crucial to meeting debt maturities and accounting for the continued shortfall in cash flow (expected at about $2.5 billion in 2003) versus capital spending ($2.6 billion) and dividend requirements ($200 million) in 2003.

The underlying credit quality of Southern Natural Gas reflects a stable customer base, firm contracts, and fully contracted volumes, S&P added. These strengths are slightly offset by the risks associated with shorter pipeline contracts, a changing pipeline customer profile, and the potential for heightened industrywide safety compliance.

S&P rates ANR notes B+

Standard & Poor's assigned a B+ rating to ANR Pipeline Co.'s planned $300 million senior notes due 2010. The outlook is negative.

S&P said ANR's ratings are based on the consolidated strength of itself and parent El Paso Corp. so ANR's ratings are expected to mirror those of El Paso.

ANR's underlying credit quality reflects its sizable storage capacity, nearly fully contracted volumes, and stable customer base, mostly in weather-sensitive Wisconsin and Michigan, S&P said. These strengths are offset slightly by stiff competition that forces ANR to discount rates, the risks associated with shorter pipeline contracts, and the potential for heightened industrywide safety compliance.

Moody's puts National Wine on review

Moody's Investors Service put National Wine & Spirits, Inc. on review for possible downgrade including its $60 million secured credit facility at Ba3 and $110 million 10.125% senior unsecured notes due 2009 at B2.

Moody's said the review is in response to National Wine's announcement of further losses of brand distribution rights, specifically for Future Brands and Canandaigua Wine Co. for the State of Illinois approximating $114 million in revenue for affected brands.

These losses bring the aggregate amount of lost revenue to approximately $193 million, roughly 27% of National Wine's revenue for the 12 months ending December 2002, Moody's noted.

The review for possible downgrade reflects the absence of tolerance in the existing ratings categories for further deterioration in the business thereby pressuring its financial profile, Moody's added.

Moody's lowers Marsh outlook

Moody's Investors Service lowered its outlook on Marsh Supermarkets, Inc. to negative from stable and confirmed its ratings including its $135 million 8.875% senior subordinated notes due 2007 at B2.

Moody's said the revision was prompted by initial indications that new competitive openings including supercenters are adversely impacting the company's margins, the increased likelihood that cash flow will be pressured over the next 12 months following a disappointing third quarter of fiscal 2003, and the company's decision to increase the dividend.

Ratings may decline if the incremental supermarket square footage around Indianapolis further adversely affects operating results or the company permanently loses market share, Moody's said. While the company currently has sufficient liquidity, the requirement to make significant drawings on the credit facility to fund cash interest payments, capital expenditures, dividend payments, and/or debt & equity repurchases also would adversely impact Moody's view of the risks facing the company.

The ratings are constrained by the effects of intense competition from conventional supermarkets and supercenters, as measured by declining operating margins, Moody's added. Exposure to the economic fortunes of a narrow geographic region, low return on assets, and increased dividends of about $650,000 during a period of pressured operating cash flow also adversely impact our opinion of the company.

However, the ratings acknowledge the company's well established competitive position as a leading supermarket operator around Indianapolis, its adequate liquidity, and the revenue diversity provided by the convenience store segment.

S&P says Broadwing still on watch

Standard & Poor's said Broadwing Inc. remains on CreditWatch with negative implications and its ratings unchanged including its corporate credit rating at B-.

The announcement comes after Broadwing said it will sell the assets of its long-haul data unit, Broadwing Communications Services Inc., to a group of investors.

Although the proposed sale is a favorable development, it does not address two significant concerns, S&P said.

First, without obtaining a material extension of the bank amortization schedule and favorable amendments to maintenance covenants through its bank negotiation process, Broadwing's risk of a liquidity issue in 2003 substantially increases, S&P said. Moreover, after the divestiture of its data business for a low price Broadwing is unlikely to be able to reduce its debt level materially for many years given the relatively small size of free cash flow generated by its healthy local incumbent and wireless businesses.

Moody's rates Constellation loan Ba1, bridge loan Ba2

Moody's Investors Service assigned a Ba1 rating to Constellation Brands, Inc.'s planned $1.6 billion credit facility consisting of a $400 million revolver, $400 million term A loan and $800 million term B loans maturing in 2008 and 2009 and a Ba2 rating to its $450 million senior unsecured bridge facility maturing 2010. Moody's also confirmed Constellation's existing ratings including its senior unsecured notes at Ba2 and senior subordinated notes at Ba3 and maintained a negative outlook.

Moody's said the ratings reflect Constellation's stretched financial profile pro forma for the proposed acquisition of BRL Hardy Ltd. and concurrent refinancings and acknowledge Constellation's ability to absorb the associated business and financial risks.

The negative ratings outlook reflects little tolerance within the ratings categories for any deterioration in credit statistics or for operating mis-steps given the magnitude of financial leverage and the absence of significant free cash flow relative to pro-forma debt, Moody's added.

Moody's said it is expecting the company to take out the bridge loan with proceeds of an equity offering.

The confirmation of the senior implied rating reflects $500 million cash of common equity into the acquisition, the complementary nature of the two businesses, and the favorable industry trends supporting the proposed acquisition (e.g. global consumption, price flexibility, and demographics), Moody's said.

However, the ratings reflect higher financial leverage pro forma for the transactions, no tangible equity, and reduced financial flexibility resulting from this sizable transaction, Moody's added. The ratings also reflect the weak pro-forma credit statistics which include modest coverage of pro-forma interest expense after capital expenditures and reduced free cash flow, notably as a percentage of pro-forma total debt.

Pro forma as of the end of fiscal 2003 for the acquisition and the proposed debt transactions, financial leverage is high with total debt to EBITDA at approximately 4.0 times, Moody's said. Pro forma debt is 72% of total revenue of approximately $3.2 billion. Pro-forma EBITDA less capital expenditures coverage of cash interest expense is solid at approximately 3.1 times.

Moody's puts Sovereign Bancorp on upgrade review

Moody's Investors Service put Sovereign Bancorp on review for possible upgrade including its senior unsecured debt at Ba2, Sovereign Real Estate Investment Trust's preferred stock at Ba2 and the preferred stock of Sovereign Capital Trust I, II and III at Ba3.

Moody's said the review is in response to the announcement that Sovereign Bank (the thrift) would issue $400 million of subordinated debt that would qualify as regulatory capital, allowing the thrift to make an equally large dividend to the holding company, which would then buy back a sizable proportion of its debt maturing in 2004 and a smaller proportion of its debt maturing in 2006.

Moody's said the actions could improve the liquidity and reduce the double leverage of Sovereign Bancorp's holding company, thus enhancing the financial flexibility of Sovereign's operating thrift, Sovereign Bank.

Moody's said Sovereign and its subsidiaries would be raised one notch each and the new subordinated debt would be rated Baa3.

S&P cuts National Wine, still on watch

Standard & Poor's downgraded National Wine & Spirits, Inc. and kept it on CreditWatch with negative implications. Ratings lowered include National Wine's $100 million 10.125% notes due 2009, cut to CCC+ from B, and $60 million revolving credit facility due 2003, cut to B from BB-.

S&P said the rating action follows National Wine's announcement that two suppliers, Future Brands and Canandaigua Wine Co., have terminated the company's distribution rights of their brands in the state of Illinois. Revenue for the affected brands from these companies totaled about $114 million for the 12 months ended Dec. 31, 2002, or an estimated 17% of total revenues for fiscal year ended March 31, 2002.

This announcement follows previous announcements that the company had not been chosen as the exclusive distributor of Diageo brands in Illinois and had lost its distribution rights for Pernod Ricard in Illinois, S&P noted.

S&P estimated that the amount of revenues for these affected brands together total approximately 35% of total revenues for the fiscal year ended March 31, 2002.

The ratings could be lowered further if more distribution rights are lost, or if the announced lost revenues cannot be replaced in a timely manner, S&P said.

S&P cuts Aurora Foods

Standard & Poor's downgraded Aurora Foods Inc. and maintained a negative outlook. Ratings lowered include Aurora's $100 million 9.875% senior subordinated notes due 2007 and $200 million 8.75% senior subordinated notes series E due 2008, cut to CC from CCC, and $175 million revolving credit facility due 2005 and $225 million term loan due 2005, cut to CCC from B-.

S&P said the downgrade reflects Aurora's inability to meet its expectation of improved operating and financial performance in a timely manner.

The company has been undertaking numerous initiatives and cost-cutting programs during the past fiscal year to strengthen its operating performance. However it has failed to achieve credit measures appropriate for the previous rating, S&P said.

Financially, the firm is highly leveraged due to a history of debt-financed acquisitions. Moreover, weak operating performance has resulted in credit measures below S&P's expectations. The company's total debt to EBITDA for the fiscal year ended Dec. 31, 2002, was 8.2x (before noncash charges), while EBITDA to interest coverage was also weak at about 1.4x (before noncash charges).

S&P upgrades Charles River

Standard & Poor's upgraded Charles River Laboratories International Inc. and its subsidiary Charles River Laboratories Inc. including raising Charles River Laboratories International's $185 million 3.5% senior convertible debentures due 2022 to BB from B+. The outlook is stable.

S&P said the upgrade reflects Charles River's favorable operating performance as a leader in the animal models business, demonstrated discipline in building its drug development services business, and the maintenance of sound financial policies, offset by its still-narrow business profile.

Charles River is expanding its biomedical products and services business, which provide various contract research services; analytical, biosafety, and endotoxin testing; and production services, S&P noted. The services business now accounts for 59% of the company's revenues, an increase from 41% in 2000. Although services generate lower operating margins than the animal models business (18% compared to 27%), it diversifies the company's offerings and enables the company to leverage its existing relationships with customers.

Charles River should continue to benefit from the increased R&D activity at the pharmaceutical and biotech companies that are its main customers, S&P added. It is expected that the number of drug targets entering development will sharply increase over the next few years, aided by recent advances in genomics.

The company's financial performance remains strong. EBITDA operating margins are a robust 29%, and return on capital was a healthy 23%, S&P said. Funds flow from operations to total debt amount to roughly 60%.

Moody's puts Packaged Ice on upgrade review

Moody's Investors Service put Packaged Ice, Inc. on review for possible upgrade including its $270 million 9.75% senior unsecured notes due 2005 at Caa3.

Moody's said the review is in response to the company's announcement of its pending refinancing and/or recapitalization strategy and the company's cumulative improvements in its credit profile during fiscal 2002.

Moody's cuts Ahold passthroughs

Moody's Investors Service downgraded the ratings of two classes of Ahold Lease Series 2001-A passthrough trust to B1 from Baa3. Both classes remain on review for possible downgrade.

Moody's said the downgraded is based on the support of the triple net leases guaranteed by Koninklijke Ahold NV, which was cut to B1 by Moody's on Feb. 25.

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