S&P rates Duane Reade convertible at BB-

Standard & Poor's assigned a BB- rating to drug store operator Duane Reade's proposed $110 million senior unsecured convertible notes due 2022. Proceeds from the debt issuance will be used to repay amounts outstanding under the company's credit facility and a portion of the 9.25% senior subordinated notes.

The BB- corporate credit rating on the company was affirmed. The outlook is stable. New York, N.Y.-based Duane Reade had $247.1 million debt outstanding as of Dec. 29.

The ratings are based on a good New York City market position in the favorable chain drug store industry and consistent improvements in operating performance, said S&P credit analyst Diane Shand. However, these strengths are partially offset by its leveraged capital structure and narrow geographic focus.

S&P said Duane Reade's financial profile modestly improved following a successful secondary stock offering in June 2001 and the use of the $130.6 million of proceeds to repay a portion of its senior credit facility.

Total debt to EBITDA decreased to 5.5 times in 2001 from 5.9 times in 2000. EBITDA coverage of interest was 1.9 times in 2001 versus 1.8 times in 2000.

Credit protection measures are expected to improve slightly due to the lower cost of the proposed note issue and the expectation for better operating results.

However, significant improvement is not anticipated as S&P expects Duane Reade to use internally generated cash to fund growth. The company has good financial flexibility, with $69.2 million available under its $80 million secured revolving credit facility as of Dec. 29 and no significant near-term debt maturities.

Moody's rates new Duane Reade convert at Ba3

Moody's rated Duane Reade Inc. proposed $110 million 20-year senior cash to zero convertible notes at Ba3 on a preliminary basis. Also, Moody's upgraded Duane Reade's $236 million secured credit facility to Ba2 from Ba3 and confirmed other ratings. The rating outlook is positive.

The ratings reflect the company's leveraged financial condition, risks associated with a continued rapid increase in store count and uncertainties about the ultimate disposition of shares still held by the equity sponsor. The ratings recognize challenges involved in expanding outside of Manhattan where there is more competition.

Also considered is the industry-wide trend of decreasing gross margins as low margin drugs steadily make up a larger proportion of the sales mix.

However, the ratings recognize a leading market share in the New York metropolitan area generally and relatively modern condition of the store base. The general expectation that prescription drug sales growth will exceed 10% annually for the foreseeable future also provides a foundation to build front-end sales.

The positive outlook reflects expectations of an upgrade over the intermediate term if operating margins remain relatively constant as gross margins decline, debt protection measures such as adjusted leverage modestly improve and the company maintains an adequate liquidity cushion.

Inability to find efficiencies that keep operating margins at a constant level, difficulties in achieving strong performance at the significant number of new non-Manhattan stores, or failure to maintain an adequate liquidity cushion would place downward pressure on the ratings.

Moody's rates new Starwood notes at Ba1

Moody's assigned a Ba1 rating to Starwood's new senior notes due 2007 and 2012 and confirmed other ratings, including the 0% convertible senior notes at Ba1, maintaining a negative outlook.

The ratings reflect increased risk of earnings volatility due to the weak economy and continued softness in the travel industry, as well as the likelihood that it will take time for the company's earnings to rebound. The rating confirmation also reflects Starwood's brand equity, scale and geographically diversified hotel portfolio.

Proceeds of the new notes will be used to repay the senior secured notes facility and a portion of the senior credit facility, so the issue should not impact credit statistics. All new debt will be pari passu with existing debt.

Moody's noted that Starwood's debt protection measures have improved substantially since its acquisition of Sheraton and Westin. Prior to the events of Sept. 11, Starwood's credit statistics had deteriorated slightly from prior year levels due to the negative RevPar (revenue per available room) trends.

The events of Sept. 11 had an immediate and significant negative effect on earnings, given the precipitous decline in travel and the inherent negative operating leverage of the company as an owner operator of hotels. However, RevPar trends at Starwood hotels have rebounded to some degree and continue to show improvement.

Absent asset sales, Moody's does not expect that the company can improve its credit statistics quickly given its reliance on owned hotels, as well as its concentration in the upscale segment.

S&P keeps Verizon ratings on negative outlook

Standard & Poor's said Verizon Communications Inc.'s (A+/Negative/--) announcement that it expects to post operating earnings of 72c per share for first quarter has no impact on its credit rating or outlook because the slower revenue growth for 2002 is anticipated to be partially offset by continued cost reductions, resulting in a higher growth rate for EBITDA.

The negative outlook indicates that the company will need to reduce debt levels over the next 12 months either through improved cash flow or non-strategic asset sales, S&P said.

Fitch affirms Hasbro senior debt at BB

Fitch Ratings affirmed the BB ratings for Hasbro Inc. senior unsecured debt and assigned a BB+ rating to its new $380 million secured bank credit facility, which replaces its previous $650 million facility and continues to be secured by receivables, inventories and intellectual property. As of Dec. 31, Hasbro had total debt of about $1.2 billion. The outlook remains negative.

The ratings reflect strong market presence and a diverse portfolio of brands balanced against the cyclical and shifting nature of the toy industry. The ratings also consider the challenges the company continues to face in refocusing its strategy on its core brands and its weak financial profile.

The negative outlook reflects uncertainty as to Hasbro's ability to successfully execute its strategy and achieve revenue targets for its core brands as well as Star Wars in 2002.

The company has made progress in reducing its cost structure, eliminating about $100 million in operating expenses in 2001 and projecting another $100 million reduction over the next several years as it brings its cost structure in line with its smaller revenue base. Thus, profitability measured by EBITDA as a percent of revenues, though still below historical levels, increased to 15.2% in 2001 from a low point of 9.2% in 2000.

While the long-term goals appear sound, the ultimate success of its initiative remains uncertain.

Despite improvements in cost structure, Hasbro's financial profile remains weak due to the substantial acquisition and share repurchase activity from 1997-1999, which nearly doubled the debt burden.

However, increased profitability, coupled with nearly $200 million in debt reduction, helped improve Hasbro's credit protection measures in 2001. Leverage and EBITDA coverage of interest improved to 2.8 times and 4.2 times, respectively, in 2001 from 4.0 times and 3.1 times in 2000.

S&P assigns BBB rating to Brinker convertible

Standard & Poor's assigned a BBB rating to Brinker International's $388.5 million zero coupon convertible senior debentures due in 2021 and $375 million bank credit facility that matures on Dec. 12, 2005. A BBB corporate credit rating was also assigned. The outlook is positive.

The ratings are based on a solid position in the casual dining industry, good track record as a restaurant operator and satisfactory financial profile, said S&P credit analyst Diane Shand .

The bank loan is rated the same as the corporate credit and senior unsecured debt, reflecting equal status with other senior unsecured creditors.

Brinker is moderately leveraged, with total debt to total capital of 51% as of Dec. 26. The company increased leverage in fiscal 2001 and fiscal 2002 to acquire 86 units from two franchisees and an equity interest in Rockfish Seafood Grill.

Typically, Brinker's leverage is in the low- to mid-40% level. Other credit protection measures are good, with funds from operations to total debt of 33%.

Nevertheless, credit protection measures have declined due to the increased leverage. Funds from

operations to total debt was 40% in fiscal 2001 and 45% in fiscal 2000.

S&P rates Valero notes at BBB

Standard & Poor's affirmed its ratings on oil refiner and marketer Valero Energy Corp. (BBB/Stable/--) and assigned a BBB senior unsecured rating to its three-tranche issue of $1.8 billion of senior unsecured notes. The outlook is stable.

San Antonio, Texas-based Valero has about $5.9 billion of lease-adjusted obligations including preferred stock as of Dec. 31 proforma for recently completed and pending asset divestitures.

Ratings on Valero reflect a good competitive position in the North American refining industry and moderate financial policies, said S&P credit analyst Bruce Schwartz. However, these factors are tempered by the risks associated with its aggressive, acquisitive growth strategy.

S&P expects Valero will deleverage to below 50% total debt-to-total capital, unadjusted for goodwill and off-balance sheet items, from a comparable level of about 54% now, which should be achievable by year end.

Until the company strengthens its capital structure, S&P expects future large acquisitions to be financed conservatively.

Other factors that could trigger revisions of the rating and/or outlooks include mounting operating liabilities at the subsidiary level, which rank structurally ahead of Valero's senior notes because of a lack of upstream guarantees, and pending litigation surrounding various patents on reformulated gasoline held by Unocal.

S&P downgrades Spherion

Standard & Poor's downgraded Spherion Corp. The outlook is stable

Ratings affected include Spherion's $150 million 4.5% convertible subordinated notes due 2005, cut to B+ from BB+ and its $325 million revolving credit facility due 2004 and $75 million 364-day facility, both cut to BB from BBB-.

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