Moody's cuts Shaw, rates notes Ba2, loan Ba1

Moody's Investors Service downgraded Shaw Group and assigned a prospective Ba2 rating to Shaw's proposed $250 million guaranteed private placement senior note issue and a prospective Ba1 rating to its proposed new senior secured credit facility. Ratings lowered include Shaw's LYONS, cut to Ba3 from Ba2. The outlook is stable.

Moody's said the prospective Ba1 rating for the bank facility reflects the collateral package granted to the bank lenders, which includes all receivables, inventory and other specified assets, excepting plant, property and equipment, the upstream guarantees from domestic subsidiaries and the pledge of the stock of domestic subsidiaries and 65% of the stock of foreign subsidiaries.

While the proposed new note issue will be unsecured, its prospective Ba2 rating reflects its structural benefit from the upstream guarantee of domestic subsidiaries, Moody's said. Such guarantees are not provided to the existing LYONS issue, which results in its being notched below the senior implied rating.

Moody's said it lowered Shaw's existing ratings because it expects continued pressure on Shaw's earnings and cash flow in fiscal 2003 and 2004. Curtailed investment in new power generation facilities in the U.S. has shifted Shaw's business mix to include more power plant maintenance and retrofit work, as well as lower margined environmental and infrastructure work.

These factors, together with the limited prospects for new EPC business development were contributing factors in the company's downward revision of its earnings guidance to about $60 million in 2003.

The rating actions also consider the significant shift in fiscal 2003 and to a lesser extent in 2004, in the company's free cash flow in light of the declining EPC power work, the work off of advanced billings and billings in excess of costs, Moody's said. The significant use of funds during 2003 will reduce the company's current sizable cash balances and in light of the potential put of the LYONs issue on May 1, 2004 prompts the current refinancing proposal.

Fitch cuts Dynegy, still on watch

Fitch Ratings downgraded Dynegy Holdings Inc.'s senior unsecured debt to CCC+ from B, Illinois Power Co.'s senior secured debt and pollution control bonds to B from BB- and preferred stock to CC from CCC and Illinova Corp.'s senior unsecured debt to CCC+ from B. All ratings remain on Rating Watch Negative.

Fitch said the downgrade reflects its latest assessment of Dynegy's overall credit profile and anticipates the successful renewal and restructuring on a secured basis of Dynegy Holdings' $1.3 billion of maturing bank credit facilities and a separate $360 million lease financing on communications assets (Polaris).

Dynegy's ratings recognize the structural subordination of unsecured lenders to its bank lenders based upon a likely resolution to ongoing negotiations.

However, if the bank facilities are not renewed on a favorable basis further ratings downgrades would likely be warranted, Fitch said. In particular, the current downgrade acknowledges the likelihood of lower recovery levels in a default scenario for the $2 billion of Dynegy Holdings-level debt which will remain unsecured following the conclusion of current bank negotiations.

Ratings also consider the practical difficulties facing management in executing a longer-term business plan under difficult market conditions that is designed to shed poor performing and cash draining operations and gradually de-leverage the balance sheet, Fitch said.

Moody's upgrades Carmike

Moody's Investors Service upgraded Carmike Cinemas, Inc. including raising its senior implied rating to B3 from Caa1 and senior unsecured issuer rating to Caa2 from Caa3. The outlook remains positive.

Moody's said the upgrades reflect Carmike's strong operating performance since its emergence from bankruptcy reorganization in 2002, which is expected to largely continue throughout the forward forecast period; improved financial flexibility following the closure of many underperforming theaters and the permanent repayment of debt and other obligations; and reduced probability of default given both the aforementioned and the very restrictive nature of the pre-bankruptcy bank debt financing that remains in place.

The strong operating performance has been driven in large part by the very robust box office, which has buoyed the entire theatrical exhibition industry on more of a broad-based level, Moody's said. However, the rating agency said investors should also note that Carmike has made good progress in reducing operating costs, especially with respect to concession expenses, which has resulted in an additive lift to improving operating margins.

Going forward, Moody's said it will look for continued margin improvements as well as a focus on further leverage reductions.

Finally, the sale of certain real estate holdings, both recent and as expected, has also boosted the company's financial flexibility by allowing it to further extinguish debt and other obligations on a permanent basis.

Fitch rates Peabody loan BB+, notes BB

Fitch Ratings assigned a BB+ rating to Peabody Energy's proposed $600 million revolving credit facility and $600 million term loan and a BB to its proposed $500 million senior unsecured notes due 2013. The outlook remains positive.

Since March 31, 1999, Peabody has reduced its total debt by over $1.5 billion, Fitch noted. At the end of fiscal 2002 Peabody had a debt/EBITDA of approximately 2.5 times and an EBITDA/interest of 4.0x. Internally generated funds will be used for further debt reduction.

The ratings also incorporate the likelihood of tuck-in acquisitions as the industry continues to consolidate, Fitch said. However, any large acquisition that would substantially increase leverage could affect the company's financial flexibility and negatively impact Peabody's credit quality.

Peabody's legacy postretirement health care and pension liabilities are significant but Fitch said it feels that these are manageable.

Fitch cuts Allegiance Telecom notes

Fitch Ratings downgraded Allegiance Telecom's 11 ¾% senior discount notes due 2008 and 12 7/8% senior notes due 2008 to CC from CCC and its $500 million secured credit facilities to CC from CCC. The CC rating indicates that default is on the horizon.

The downgrade reflects that Allegiance will have great difficulty meeting the debt reduction obligations of its amended credit agreement, Fitch said.

In November 2002, the company reached an agreement with its creditors modifying some of the terms of its $500 million senior secured credit facility. Under the agreement, Allegiance received a waiver of its existing financial covenants through April 30 and replaced them with a free cash flow from operations covenant and a leverage covenant. The leverage covenant states that Allegiance must reduce its total indebtedness to $660 million from $1.2 billion by April 30. In the interim, the company was required to pay down $15 million of the outstanding balance on the credit facility. Following the paydown, the company had $470 million outstanding on the facility.

At year-end 2002, Allegiance had approximately $285 million in cash on its balance sheet and was not generating any cash flow from operations.

Fitch said that the current market environment will make it extremely difficult for the company to obtain the outside funding that would be required in order for the debt reduction obligation to be met by the April 30, 2003 deadline. In addition, KPMG, the company's external auditors, has indicated that if the reduction does not occur before it issues its 2002 audit report, it will contain a "going concern" qualification. Fitch said it is likely that Allegiance will be required to enter into a restructuring situation, given that the company has no other sources of liquidity and has a financing shortfall.

S&P confirms Matria, off watch

Standard & Poor's confirmed Matria Healthcare Inc. and removed it from CreditWatch with negative implications. Ratings confirmed include Matria's $125 million 11% senior notes due 2008 at B+ B+ and $35 million senior secured revolving credit facility due 2004 at BB-. The outlook is stable.

S&P said Matria was put on watch on Sept. 10, 2002 after protracted delays installing new information technology systems and a new packaging line frustrated Matria's efforts to achieve sales and margin targets, and the company violated certain financial covenants under its senior secured bank facility.

Matria resolved the covenant violations by replacing the bank facility with a new $35 million two-year senior secured revolving credit line with more flexible financial covenants, S&P said. And both the IT and packaging systems are now operating successfully.

Despite a leading niche-market position, Matria's ratings reflect the company's limited scale of operations, somewhat lengthy sales cycle in disease-state management, its position as a small vendor supplying products for larger medical products manufacturers, and an aggressive capital structure, S&P noted.

Partly offsetting these limitations, Matria has acquired businesses during the past few years that have broadened its clinical infrastructure and disease-state management platforms, S&P said. Employers and managed-care organizations are Matria's targeted clients, and the company has recently signed important new contracts and built a pipeline of several more.

Moody's rates Pantry loans B1, B2, raises outlook

Moody's Investors Service assigned a B1 rating to The Pantry, Inc.'s new first lien bank loan and a B2 rating to its new second lien loan. Moody's raised the company's outlook to stable from negative and confirmed its existing ratings including its $339 million senior secured bank loan due 2006 at B1 and $200 million 10¼% senior subordinated notes due 2007 at B3.

Moody's said the outlook revision reflects management's success at partially offsetting volatile gasoline margins through stimulating moderate growth in merchandise sales, recent initiatives to more profitably merchandise gasoline, and the company's improved liquidity position following completion of the new bank loan.

The ratings recognize the company's reliance on the two commodities of gasoline and tobacco (costs for both products highly influenced by political decisions), the uncertainty of the new gasoline branding strategy, and the long-term probability that demand for tobacco products will continue falling, Moody's said. The expected small free cash flow cushion even with a modest capital expenditure program and the modest return on assets also constrain the ratings.

However, the ratings consider that the company enjoys purchasing and operating efficiencies compared to smaller convenience store operators, management's prudent decision to focus on more effectively operating stores, and the company's success at consistently growing merchandise comparable store sales.

S&P says Reliant unchanged

Standard & Poor's said Reliant Resources Inc.'s ratings are unchanged including its B- corporate credit rating on CreditWatch with developing implications.

S&P was responding to the $80 million pre-tax trading loss reported on March 7.

Reliant's decision to exit the proprietary trading business as a result of the $80 million loss and the fact that the company had sufficient liquidity to close its position is positive, S&P said.

Nevertheless, the loss will negatively affect 2003 cash flow at a time when cash from operations has already weakened due to overall increased financing costs, and covenant restrictions on cash distributions, primarily related to the Orion subsidiary.

S&P also pointed out Reliant already has low non-investment grade ratings and more imminent refinancing risks.

Moody's cut NUI, still on review

Moody's Investors Service downgraded NUI Corp. including cutting its senior unsecured debt to Ba2 from Baa3 and its utility subsidiary NUI Utilities, Inc. including cutting its senior unsecured debt and medium-term notes to Baa3 from Baa2. The ratings remain under review for further possible downgrade.

Moody's said the rating reflects NUI's weak financial condition due to its underperforming unregulated businesses as reported in previous quarters that led to substantial writedowns.

NUI's recent disclosure of the technical defaults on the $60 million note purchase agreement dated Aug. 20, 2001 which prevailed for all of 2002 also raises fundamental questions as to the quality of its internal financial controls.

Moody's said it assumed in its rating action that the bank lenders and note purchase investors will amend their respective agreements to eliminate certain contradictions and grant the necessary waivers to enable continuance of financial support. In addition, the internal controls and operating procedures necessary to ensure that these issues do not recur have yet to be fully formulated or implemented. In the meantime, management has yet to define and implement its strategic decisions concerning the future handling of the underperforming non-regulated businesses that have led to poor financial results.

Moody's noted the recent cold weather experienced in NUI's service territories is expected to result in material earnings improvement for the utilities.

Fitch upgrades Sovereign Bancorp

Fitch Ratings upgraded Sovereign Bancorp, Inc.'s long-term debt to BBB- from BB+ and its thrift subsidiary Sovereign Bank to BBB from BBB-. The outlook is now stable.

The rating upgrade largely reflects the progress the company has made in improving its risk profile and financial flexibility, Fitch said. Over the course of the past two years, management has strengthened the company's capital structure through a disciplined program of earnings retention and stock and trust preferred issuances. The continuing fortification improves the company's ability to withstand risk related shocks.

Parental debt contraction, through redemptions and maturities, relieves Sovereign Bank's dividend obligations and financing pressures, Fitch added. Additionally, the recent repositioning of debt from the parent to the bank through a series of transactions, including a new subordinated debt issuance at Sovereign Bank, augments the necessary patient restructuring that the company has executed to date.

The ratings also take into account the company's solid New England, Pennsylvania and New Jersey banking franchises, which provide Sovereign Bank with a growing stable core funding base and a healthy liquidity position, Fitch said.

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