Moody's cuts HealthSouth, still on review

Moody's Investors Service downgraded HealthSouth Corp. including cutting its senior notes to Caa2 from Caa1 and subordinated notes, including the convertible notes due on April 1, 2003, to C from Caa3. The senior notes remain on review for possible further downgrade.

Moody's said the actions reflect the fact that HealthSouth's bank lenders have determined that the recently announced SEC and DOJ investigations constitute an event of default under the credit facility. As a result of this default, HealthSouth is prohibited from making any interest or principal payments to holders of either the senior subordinated or convertible notes.

Furthermore, Moody's actions acknowledge HealthSouth's statement that its previous financial statements cannot be relied upon.

The new ratings reflect Moody's estimate of likely recovery values based on information contained in the SEC's Complaint Filing. The Caa2 ratings on the senior notes reflect the likelihood that senior noteholders will receive less than full recovery.

The C ratings on the subordinated notes reflect Moody's view that recovery prospects for the subordinated bondholders are extremely poor.

S&P cuts Reliant Resources, on watch

Standard & Poor's downgraded Reliant Resources Inc. and put it on CreditWatch with negative implications. Previously the company was on CreditWatch with developing implications. Ratings lowered include Reliant Energy Mid-Atlantic Power Holdings LLC's $210 million 8.554% passthrough certificates series A due 2020, $421 million 9.237% passthrough certificates series B due 2017 and $220 million 9.681% passthrough certificates series C due 2026, cut to CCC from B-, and Orion Power Holdings Inc.'s $200 million 4.5% convertible senior notes due 2008 and $375 million 12% senior notes due 2010, cut to CC from CCC. Reliant Energy Power Generation Benelux BV's €185 million senior unsecured bank loan due 2003 remains at B+ and is now on watch developing instead of positive watch.

S&P said the rating action follows the Federal Energy Regulatory Commission's show cause order relating to power trading during the California energy crisis. The penalty for this may be a revocation of Reliant Resources' authority to sell power at market-based rates. Reliant Resources has 21 days to show cause of why their authority should not be revoked. The alternative for selling power at market-based rates is to sell at cost of service-based rates. This adds another element of uncertainty to Reliant Resources' business risk, S&P said.

The order by the FERC comes at a time that Reliant Resources is in the midst of completing a $5.9 billion global refinancing, S&P noted. The FERC order could significantly hinder reaching an agreement with bank lenders on the global refinancing.

RRI has a $2.9 billion maturity on March 28. Should less than 100% of the bank lenders agree to commit to the terms of a renegotiated deal representing a long-term solution, a default could occur.

Moody's upgrades Trump AC

Moody's Investors Service upgraded Trump Atlantic City Associates including TAC Funding I's $1.2 billion first mortgage notes due 2006, TAC Funding II's $75 million first mortgage notes due 2006 and TAC Funding III's $25 million first mortgage notes due 2006 to B3 from Caa1. The outlook is stable.

Moody's said the upgrade follows the company's announcement that Trump Casino Holdings, LLC closed the private placement of mortgage notes totaling $490 million.

The upgrade reflects the elimination of Trump Atlantic City's exposure to potential problems related to near-term maturities at Trump's Castle and debt service requirements at Trump Hotels and Casino Resorts, Moody's said. A portion of the proceeds from Trump Casino's new mortgage notes will be used to redeem Trump's Castle Funding 11.75% mortgage notes due 2003 and Trump Hotels and Casino Resorts, Holdings, L.P. 15.5% senior notes not already owned by the company.

The B3 rating and stable ratings outlook continue to acknowledge the increased competition from new supply in Atlantic City once the Borgata opens in the summer of 2003, Moody's added. While the Borgata project is viewed as a positive with respect to the overall development of the Atlantic City market, it could also result in a significant amount of near-term direct competition. Longer-term, tribal gaming in New York as well as the expansion of gaming in other neighboring jurisdictions could have an eventual impact.

Moody's raises Yum! outlook

Moody's Investors Service raised its outlook on Yum! Brands Inc. to positive from stable and confirmed its ratings including its senior unsecured debt at Ba1 and bank facility at Baa3.

Moody's said the outlook change is based on Yum!'s improved leverage ratio, its growing cash flow that is more than sufficient to fund all capital spending and to support continued absolute debt reduction, the steady improvement in same store sales at the Taco Bell concept that had experienced significant sales declines and the successful integration of the A&W and Long John Silver brands.

Yum!'s ratings could be raised if the company continues to drive earnings growth through profitable increases in same store sales that are supported by new product introductions, and properly timed promotional activity, appropriate returns on new unit additions, continued success with its multi-branding strategy and if the company uses a sizable portion of its projected free cash flow to reduce debt further, Moody's said.

Yum!'s current ratings are supported by the brand equity and strong global market share of the company's three core quick service restaurant concepts - KFC, Pizza Hut, and Taco Bell - that have been complemented by the addition of A&W and Long John Silvers, Moody's added. Yum!'s ability to multi-brand in one location has improved the unit economics of the company's core brands and will enable the company to add units in trade areas that would not support a standalone brand.

The company's diversification by food concept mitigates the risk of changing consumer tastes to some degree and enables the company to capture more meal occasions since they can satisfy customers' desire for variety.

The rating recognizes that the company will continue to face serious challenges from low-price menu offerings and promotional activity of its competitors, as well as high ongoing capital needs to meet modest unit growth goals, to multi-brand existing restaurants and to improve the quality and image of the company's aging store base, Moody's said.

S&P says Caraustar unchanged

Standard & Poor's said Caraustar Industries Inc.'s ratings are unchanged including its corporate credit at BB with a stable outlook following the company's announcement that it is closing its Buffalo, N.Y. paperboard mill and six tube and core converting facilities.

Caraustar's credit measures are currently weak for the ratings due to industry overcapacity, weak economic conditions and volatile raw material and energy costs, S&P noted. However, the ratings incorporate expectations that the company's capacity utilization rate will improve as it integrates the recently acquired industrial packaging group and shuts excess capacity.

The closures outlined in Caraustar's announcement are consistent with the actions that S&P said it expects the company will take to strengthen earnings and cash flows. Nonetheless, credit measures will need to improve to levels more appropriate for the ratings over the next few quarters for Caraustar to maintain its current rating and outlook.

Moody's rates Laidlaw notes B2, loan Ba3

Moody's Investors Service assigned a B2 rating to Laidlaw Inc.'s $350 million senior unsecured notes due 2013 and a Ba3 rating to its $825 million senior secured credit facilities, consisting of a $300 million revolving credit facility due 2008 and a $525 million term loan B due 2009. The outlook is stable.

Moody's said ratings reflect the modest cash flow levels relative to post-restructuring debt, high reinvestment requirements that restrict free cash flow, and Moody's concern regarding the future performance of health care operations, particularly its ambulance and emergency department services.

However, the ratings are supported by the overall reduction in total debt proposed in the restructuring plan, as well as by the strength and stability of the company's core school bus services business, Moody's added.

The stable ratings outlook incorporates Moody's expectations that the company will gradually realize improvement in operating margins and cash flow in the near term, particularly in the health care services sector, while maintaining its leadership position and margins in the school bus sector.

Ratings would be subject to downgrade should operating results not improve, particularly if capital expenditure levels could not be reduced accordingly, impeding debt reduction as planned by the company and damaging credit fundamentals, Moody's said. Conversely, ratings may be upgraded if quality of earnings associated with its health care sector businesses were to substantially improve.

Post restructuring, the debt of Laidlaw's restricted group (i.e. excluding Greyhound US, which did not file bankruptcy along with the company's other subsidiaries, and is largely not included in the restructuring plan), will be reduced from pre-petition claim levels of $4 billion, to pro forma $1 billion. Considering the significant amount of prior debt to be converted to equity, the company's debt will represent a modest 42% of total capital. On a pro forma basis, debt will be 2.6x year-end (August) 2002 EBITDA. However, Moody's noted the high gross capital expenditure levels required by Laidlaw's lines of business, which averaged between $214 million and $316 million since 1999 on an average EBITDA of $348 million. As a consequence, pro forma 2002 free cash flow represents under 10% of total debt, and Moody's believes that it will be unlikely that this level will improve significantly within the next two years without further reductions in working capital.

Moody's cuts Tower Automotive outlook, liquidity rating

Moody's Investors Service lowered Tower Automotive, Inc.'s outlook to negative from stable and cut its speculative-grade liquidity rating to SGL-3 from SGL-2. Other ratings were confirmed including Tower's senior implied rating at Ba3.

Moody's said it cut the liquidity rating because of material deterioration of Tower's near-term liquidity profile driven by several factors. The company expended $60 million in cash during the latter half of 2002 ($42 million during the fourth quarter) to execute stock buybacks. In contrast to Tower's earlier expectation that these purchases would be fully funded through operating cash flow, drawdowns under the revolving credit facility ended up financing a portion of these buybacks.

Moody's said it believes that Tower could potentially violate its leverage covenant during 2003 in the event that North American light vehicle production volumes decline materially below 16 million units.

Based upon the terms of the second amendment to the guaranteed senior unsecured credit agreement, the maximum leverage requirement tightens beginning March 31, 2003. Management has indicated that negligible opportunity remains to further reduce working capital. Therefore, the company's "cash plus effective unused availability" will likely fall below $100 million during certain periods over the next 12 months.

The timing of any production declines that occur and the specific impact on Tower's largest platforms will be critical determinants of whether a violation of the leverage covenant actually occurs, Moody's said. The company notably faces significant 2003 cash investments to support new program launches. While a portion of these up-front investments will ultimately be reimbursed by the respective OEM, Tower must finance even reimbursable costs for extended periods prior to production.

S&P says SBA unchanged

Standard & Poor's said SBA Communications Corp.'s ratings are unchanged including its corporate credit at CCC on CreditWatch with negative implications following the company's agreement to sell its towers in the western U.S.

Under the proposed sale, SBA would sell either 679 towers for $160 million or, at the election of the buyer, 801 towers for $203 million. The company plans to reduce bank debt with most of the proceeds from the transaction and concurrently renegotiate its bank credit agreement. At the end of 2002, SBA had total debt of about $1 billion and debt-to-annualized fourth quarter EBITDA of about 13.3x.

Although the proposed asset sale is a favorable development, S&P said it does not immediately address two significant concerns. First, the company remains at risk of violating a number of bank maintenance covenants. Second, even if SBA is able to amend its bank agreement, the company is unlikely to be able to materially reduce its substantial debt level for many years since flat spending by wireless carrier customers will likely result in lower cash flow growth.

Fitch confirms Broadwing, off watch

Fitch Ratings removed Broadwing, Inc. and Cincinnati Bell Telephone from Rating Watch Negative and confirmed its ratings including Broadwing's senior secured bank facility at BB-, 7.25% senior secured notes due 2023 at BB-, 6.75% convertible subordinated notes due 2009 at B and 6.75% convertible preferred stock at B-. Fitch assigned a B+ rating to Broadwing's $350 million 16% senior subordinated discount notes. Fitch also confirmed Cincinnati Bell Telephone's senior unsecured notes and MTNs at BB+. The outlook is stable. Broadwing Communications, Inc.'s 9.0% senior subordinated notes due 2008 at CC and 12.5% junior exchangeable preferred stock at C remain on Rating Watch Negative.

Fitch said its action follows the company's announcement that it has completed an amendment to its senior secured bank facility and raised additional junior capital in the form of the senior subordinated discount notes.

Fitch said completion of the amendment and additional capital coupled with the announced asset sale related to the company's broadband subsidiary, Broadband Communications, Inc. addresses key overhangs on the company's credit profile. The amendment to the revolver coupled with the proceeds from the junior capital provides the company with enhanced liquidity and financial flexibility.

The amendment to the bank facility provides the company with material amortization relief during 2003 and 2004 timeframe. Prior to the amendment the company's liquidity position would come under pressure as significant amortization of the facility's revolver and term loan A were scheduled to commence later this year, Fitch noted. The revolver maturity date has been extended into 2006 and does not include any reduction until 2005. The amortization of Term Loan A will be accelerated moderately to take advantage of anticipated cash generation.

The stable outlook reflects the strength and stability of Broadwing's remaining local exchange and wireless business and improved financial flexibility of the company, Fitch said. Cincinnati Bell Telephone and Cincinnati Bell wireless are market share leaders. Cincinnati Bell Telephone's access line losses and revenue growth have been impacted by competition from CLECs but not to the extent experienced by the RBOCs.

Stemming in part from the relative lack of competition in the Cincinnati markets, Fitch expects the ILEC to continue to generate EBITDA margins that are higher than the RBOC peer group.

S&P raises SPX to investment grade

Standard & Poor's upgraded SPX Corp. to investment grade, raising its corporate credit rating and bank debt to BBB- from BB+ and notes and convertibles to BB+ from BB-. The ratings were removed from CreditWatch with positive implications. The outlook is stable.

The upgrade reflects a shift to a moderate financial policy, from a previous somewhat aggressive posture, in response to less aggressive growth objectives, S&P said. SPX's growth plan is expected to be largely organic, supplemented with tuck-in acquisitions for some of its 11 platforms.

The ratings on SPX reflect the firm's above-average business profile whose products generally enjoy leading or solid market positions in mature, cyclical markets; satisfactory financial profile; and moderate financial policy, S&P noted.

Balance sheet leverage and cash flow protection are satisfactory, S&P said. Netting excess cash balances against debt (cash in excess of $50 million), and including the present value of operating leases as debt, adjusted debt to EBITDA for 2002 was about 2.7x, and funds from operations to adjusted debt was 31%. Total debt to EBITDA is expected to average about 2.5x, and funds from operations to total debt should be maintained at about 30%, appropriate levels for the ratings.

SPX has ample liquidity, with about $417 million available under its secured $500 million revolver that matures in March 2008 and cash and cash equivalents of $556 million at Dec. 31.

Noting that the 0% convertibles are putable in May with an accreted value of $251 million, S&P said SPX recently restructured its bank debt to extend maturities to a very manageable schedule. In addition, SPX's operations generate strong cash flow with annual free cash flow of about $350 million, and there are assets that could be sold to raise cash if necessary.

Moody's confirms Stater Bros.

Moody's Investors Service confirmed Stater Bros. Holdings Inc. including its $439 million 10.75% senior notes due 2006 at B2. The outlook is stable.

Moody's said the confirmation reflects its belief that Stater Bros.' consistent operating performance and financial results over the previous 3 years will not decline during the intermediate term, favorable opportunities provided by rapid population and economic growth in the company's trade areas, and the company's currently strong liquidity position.

The ratings reflect the company's modest free cash flow margins (defined as EBITDA less fixed costs such as interest expense, cash taxes, and maintenance capital expenditures), limited capacity to absorb price competition because of relatively low operating margins, and reliance on economic conditions in a single region, Moody's said. Stater already competes with the three largest supermarket chains (Kroger, Albertson's, and Safeway) and Wal Mart apparently intends to open many supercenters in Southern California over the next few years.

Moody's also regards as a risk uncertainty related to potential uses of the company's large cash balance ($99 million at the end of December 2002).

However, supporting the ratings are Stater's leading position in one of the fastest growing markets in the country (Riverside, San Bernardino, and adjacent counties of Southern California), the relatively modern condition of the company's store base, and the quality & experience of the management team, Moody's said. In addition, the focus on a single region potentially provides important efficiencies in areas such as distribution, purchasing, and advertising.

The stable rating outlook anticipates that the company will maintain stable operating margins and market share in spite of the potentially higher level of competition in its trade area. Ratings would be negatively impacted if current performance levels declined or market share shifted to other grocery retailers.

S&P cuts Agricore United

Standard & Poor's downgraded Agricore United including cutting its C$23 million secured notes series B due 2020 and C$77 million secured notes series A due 2010 to BB from BB+. S&P assigned a B+ rating to its C$100 million 9% convertible subordinated debentures due 2007 and a BB rating to its C$109 million 9.67% notes due 2016, C$150 million bank loan due 2007 and C$350 million 365-day revolver due 2004. The outlook is negative.

S&P said the lowered ratings reflect the impact on Agricore's operating performance of two consecutive years of record drought, weakened credit protection measures and leverage that remains high after the 2001 merger with Agricore, none of which is expected to improve materially until fiscal 2004.

These factors are offset by Agricore United's leading market positions in grain handling and crop production services, historically conservative financial management, and a cost structure that has improved after the integration of Agricore.

There is no notching upward on the company's bank debt given the very high proportion of aggregate debt in the company's capital structure that is secured. Nevertheless, the company's subordinated debt, namely its convertible debentures, is lowered two notches given the high level of priority debt as a percentage of total assets.

The two recent drought years have caused Western Canadian grain production to fall 45% below average levels in 2002, after having declined 23% in 2001, S&P said. Crop inputs, whose sales are closely related to grain volumes, also have been affected.

These adverse conditions resulted in an 18% decline in fiscal 2002 grain handling sales versus 2001 to C$3.2 billion and a 34% decline in unadjusted EBITDA to C$63.6 million. Meanwhile, crop production services recorded a fiscal 2002 sales decline of 18% to C$701.9 million and a 51% decline in related unadjusted EBITDA to C$38.8 million, S&P said.

These weak results have translated to very poor credit protection measures. For instance, fiscal 2002 lease-adjusted EBIT interest coverage of 0.6x and EBITDA interest coverage of 2.1x are weak for the rating category.

Moody's puts Japan Airlines, Nippon Airlines on review

Moody's Investors Service put Japan Airlines Co., Ltd.'s senior unsecured debt at Ba1 and All Nippon Airways Co., Ltd.'s senior unsecured debt at Ba1 on review for downgrade.

Moody's said it began the review because of its growing concern that the Japanese airline companies' profitability and financial profile could be under significant pressure over the intermediate term due to the war in Iraq and the weak business environment in Japan.

An increasingly hostile market environment may further deteriorate the profitability of both JAL and ANA. Moody's said it is concerned that high fuel cost and a decline in traffic volume may last for a while, depending on the impact and the length of the war. Moody's is also concerned that the downward industry cycle could prove to be deeper and longer in an already weak operating environment.

S&P cuts Quezon Power

Standard & Poor's downgraded Quezon Power (Philippines) Ltd. Co. including cutting its $215 million senior secured bonds due 2017 to B from B+. The ratings were removed from CreditWatch with negative implications. The outlook is negative.

S&P said the action follows a downgrade to Manila Electric Co. (Meralco) because of growing liquidity pressures. Meralco is an offtaker for Quezon Power's electricity under a long-term power purchase agreement (PPA).

S&P said it is concerned that the liquidity pressures on Meralco may eventually result in reduced payments to Quezon Power, especially under the current power oversupply situation in the Philippines.

Moody's raises KazTransOil

Moody's Investors Service upgraded KazTransOil's $150 million 8.5% senior notes due 2006 to Ba1 from Ba2. The outlook is stable.

Moody's said the upgrade reflects the increasing strategic importance of KazTransOil to the long-term development of the Kazakh oil industry and overall economy, the strengthening of the Kazakh economy that resulted in an upgrade of the sovereign rating last year to Baa3, KazTransOil's growing throughput (millions of ton kilometers) and revenues as oil production in Kazakhstan rises, and Moody's expectation that the Kazakh Government would give support to KazTransOil in case of need, although there is no formal state guarantee.

The stable outlook takes into account the increasing competition facing KazTransOil and its substantial investment plan to upgrade the oil pipeline infrastructure of Kazakhstan, Moody's added.

Oil production in Kazakhstan is growing rapidly with the development of new fields, generating economic improvement within the country on the back, above all, of rising oil exports. Increasing crude production requires the development of both an integrated domestic infrastructure and, in particular, additional export capacity. While state-owned KazTransOil is facing competition from new pipelines, above all the CPC pipeline which came on stream in 2001, it is seeking to expand its capacity to meet this demand. Moody's expects that KazTransOil's throughput, revenues and cash flows will continue to grow over the medium term.

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