Moody's cuts American Airlines three notches

Moody's Investors Service downgraded AMR Corp. and American Airlines including cutting AMR's senior unsecured debt to Caa2 from B2 and American Airlines' senior unsecured debt and industrial revenue bonds to Caa2 from B2. Various equipment trust certificates and enhanced equipment trust certificates were also lowered, mostly by three notches. The ratings remain on review for further downgrade apart from an EETC backed by insurance. The speculative-grade liquidity rate was cut to SGL-4 from SGL-3.

Moody's said the downgrade reflects the continued deterioration in financial strength at AMR and American Airlines due to a prolonged period of negative cash flow and the outlook for continued cash losses absent a significant reduction in the company's cost structure.

While American retains $2.8 billion of balance sheet cash, a pronounced reduction in financial flexibility has occurred, evidenced by an increase in lease adjusted debt, limited access to the capital markets and the erosion of the company's once substantial net worth, Moody's said.

The downgrade in the liquidity rating reflects American's impending need to renegotiate covenants in its bank loan agreement and a reduction of borrowing capacity as the company continues to pledge assets to support borrowings.

However the ratings acknowledge the company's significant position in the North American airline industry, its unrestricted cash and short-term investments, and continued availability, although diminished, of unencumbered assets to support additional secured borrowings, Moody's said.

Moody's said the review continues because it is concerned about the increasing demands on the company's limited financial resources, the limited potential for a near-term recovery in the company's revenues and its continued high costs.

The review is expected to be concluded in a relatively short period of time and will focus on the company's ability to achieve a meaningful reduction in its costs through operating changes including potential labor cost concessions currently being discussed with its unions, Moody's added.

Fitch cuts Goodyear, on watch

Fitch Ratings downgraded the senior unsecured debt ratings of The Goodyear Tire & Rubber Co. to B+ from BB and put it on Rating Watch Negative.

Fitch said the action is based on intermediate-term concerns regarding liquidity and access to capital, most recently reflected in the grant by the lenders of certain covenant waivers in Goodyear's bank credit agreements.

Liquidity concerns center around mounting financial and pension obligations as the company continues efforts at turning around its recent operating performance, Fitch said. While Fitch believes that the bank credit agreements will continue to be a source of available liquidity for Goodyear, significant changes to the terms and conditions are likely to occur.

The downgrade also reflects the risk to the unsecured creditors that the banks are granted a secured position.

Intermediate-term liquidity concerns are augmented by the continuing operating challenges faced by Goodyear, Fitch added. Challenges include reversing an extended history of margin decline resulting from insufficient reductions to its cost structure, market share losses and a competitive price environment. The turnaround will be difficult in the face of increasing health care and pension outlays, recent spikes in raw material prices, collective labor renegotiations in April 2003, a resurgent competitive field and a flat outlook for North American replacement tire market.

At the end of January 2003, Goodyear had approximately $600 million of cash on hand and continued access to $1.1 billion of committed bank lines with the covenant waiver through March 7, 2003, Fitch noted. A $700 million accounts receivable facility was recently extended out to December 2003 with amended rating trigger levels. Goodyear is currently in compliance with these rating trigger levels, but further rating deterioration would violate the compliance and force Goodyear to utilize its liquidity resources to bring these receivables back on the balance sheet. Credit measures have shown steady and significant deterioration.

Moody's cuts Rogers Cable, Rogers Communications

Moody's Investors Service downgraded Rogers Cable Inc. to junk and also lowered Rogers Communications. Rogers Wireless Inc. was confirmed. Ratings lowered are Rogers Cable's senior secured debt, cut to Ba2 from Baa3, and senior subordinated debt, cut to Ba3 from Ba1, and Rogers Communications' senior unsecured debt, cut to B2 from Ba1. Rogers Wireless' ratings are Ba3 for its senior secured debt and B2 for its senior subordinated debt. The actions conclude a review begun last year. The outlook is stable.

Moody's said it lowered Rogers Cable because it expects the company will be able to develop only minimal positive free cash flow even two years from now, compared to debt of more than C$2.5 billion.

While this will be a significant improvement relative to negative free cash flow levels of C$400-450 million in each of the last three years, it does not support continuation of an investment-grade rating, Moody's said.

The confirmation of Rogers Wireless reflects a similar expectation: slightly positive free cash flow in two years, against debt of approximately C$2.4B. Moody's believes however that the competitive environment for wireless is more challenging, placing a higher risk on delivery of free cash flow.

Moody's cut Rogers Communications because of the structural subordination of its C$1.6 billion in debt (including preferred securities of C$600 million) to nearly C$6 billion in liabilities (including debt, payables and other liabilities) at the operating companies.

Moody's said it believes Rogers Communications alone will experience negative free cash flow, using $550 million of intercompany funds currently owed to Rogers Communications.

Since no capital distributions are expected from Rogers Cable or Rogers Wireless, Rogers Communications' accreted convertible debt due in November 2005, estimated to be C$360 million (equivalent) at the time, will need to be refinanced with new capital or asset sales, Moody's said.

Moody's raises D.R. Horton outlook

Moody's Investors Service raised its outlook on D.R. Horton, Inc. to stable from negative and confirmed its ratings including its senior notes at Ba1, senior subordinated notes at B2 and speculative-grade liquidity rating at SGL-2. A total of $2.1 billion of debt is affected.

Moody's said the outlook change reflects Horton's progress in meeting its conservative capital structure projections, with the debt/capitalization ratio of 52.3% at fiscal year-end 2002 representing the lowest level in many years. Also positive is the successful integration to date of Schuler Homes.

The ratings incorporate the company's enviable operating performance (101 consecutive quarters of year-over-year earnings growth), success at integrating prior acquisitions, strong equity base, geographic diversity, and tight cost controls, Moody's added.

However, the ratings also continue to reflect Horton's higher-than-average business risk profile given its appetite for acquisitions, greater debt leverage than that of its peers, capacity under its credit agreement that could lead to substantial additional debt, and the cyclical nature of the homebuilding industry, Moody's added.

Moody's noted it changed Horton's outlook to negative in March 2002, reflecting the company's aggressive use of debt leverage despite previous indications that capital structure discipline would be maintained. Since that time, the company has worked hard to bring its debt leverage down and continues to project further improvement in this metric, Moody's said. At fiscal year-end Sept. 30, 2002, debt/capitalization was reduced to 52.3% from 57.6% at the end of the prior fiscal year. Projections call for this ratio to be further reduced, to below 50% by fiscal year-end 2003.

S&P raises MDC outlook

Standard & Poor's raised its outlook on MDC Holdings Inc. to positive from stable and confirmed its ratings including its corporate credit at BB+.

S&P said the action acknowledges MDC's solid overall financial profile, including strong cash flow protection measures and modest leverage, and meaningful efforts to improve geographic diversity.

These strengths are tempered by an ongoing concentration in soft markets (primarily Colorado) and a lack of operating history in its recently expanded markets, S&P added.

MDC, the largest homebuilder in Colorado, has recently been focusing on expanding into new markets, such as Utah and Dallas-Fort Worth, and bolstering other existing markets such as Nevada, Arizona, and northern Virginia.

This expansion was aided through the acquisition of substantially all of the homebuilding operations of John Laing Homes in Las Vegas, Salt Lake City, and northern Virginia during 2002, S&P said.

However, the company's future growth is expected to come primarily from organic growth both in its existing (Nevada and northern Virginia) and newer markets (Utah and Texas) as MDC intends to leverage existing operations and overhead while improving geographic diversity.

To date, the company still remains geographically concentrated. Colorado and Arizona represent a significant 58% of deliveries (down from 62% at year-ended 2001). However, by early 2004, the contribution from other markets is expected to strengthen MDC's diversification and reduce its reliance on the Colorado and Arizona markets.

MDC Holding's financial profile is very strong for its rating, and is not expected to change materially as the company grows. Leverage (not considering cash balances) remains in the mid-30% area as of September 2002, S&P said.

S&P keeps El Paso Energy on watch

Standard & Poor's said El Paso Energy Partners LP remains on CreditWatch with negative implications including its bank debt at BB+ and subordinated debt at BB-.

S&P said its comments follow the downgrade of the corporate credit rating of El Paso Energy's general partner El Paso Corp. to B+.

S&P said it continues to evaluate the relationship between El Paso Energy and its general partner and until that review is completed the CreditWatch listing for El Paso Energy will remain in effect.

El Paso Energy management has indicated a willingness to take steps to insulate itself from El Paso Corp., and in fact has already acted to strengthen its corporate governance.

The deterioration of El Paso Corp.'s credit quality pressures El Paso Energy's rating irrespective of the partnership's stand-alone credit quality, S&P added.

S&P puts Gala Group on watch

Standard & Poor's put Gala Group Holdings plc on CreditWatch with negative implications including its senior unsecured debt at B.

S&P said the action follows Gala's announcement that Cinven Ltd. and Candover Investments plc have agreed to buy Gala for £1.24 billion.

Although the balance-sheet structure of the acquiring entity is unknown, Gala is expected to increase its leverage, based on recent similar transactions in the U.K. gaming industry, S&P said.

The negative CreditWatch status indicates that the ratings on Gala could be lowered once the capital structure becomes clear, S&P said, adding that it confirmed the bonds because holders have the right to put their bonds to Gala in the event of a change of control.

Moody's puts Gala Group on review

Moody's Investors Service put Gala Group Holdings plc on review for possible downgrade including its £155 million senior unsecured notes at B2 and Gala Group Ltd.'s £320 million senior secured bank facilities at Ba3.

Moody's said the review is in response to the announced acquisition of Gala by Candover Investments plc and Cinven Ltd. for approximately £1.24 billion.

Moody's said it began the review because it expects Gala's debt levels may materially increase given the significant equity element of the acquisition that would be required to maintain or reduce the company's existing debt levels.

Moody's said its review will focus on the likely business and financial strategies of Gala going forward, including the proposed debt leverage profile and relative ranking of the company's different creditors following the company's expected re-capitalization.

Moody's added that it believes that there is a strong possibility that the acquisition would result in a refinancing of the company's existing debt. Importantly, Moody's notes that the company's senior unsecured note holders as well as the creditors under the £320 million credit facility benefit from a put option based on the protective clauses included in the documentation regarding a change of control. If the bondholders exercised the put option or the bonds were tendered above par as part of a refinancing, Moody's would expect to confirm and withdraw the rating for the bonds. Similarly, a refinancing of the rated bank loans would also result in a confirmation and rating withdrawal for the credit facilities.

S&P puts Standard Motor on watch

Standard & Poor's put Standard Motor Products Inc. on CreditWatch with negative implications including its corporate credit rating at BB- and $90 million 6.75% convertible subordinated notes due 2009 at B.

S&P said the watch placement is in response to Standard Motor's announcement that it has signed a definitive agreement to acquire the assets of Dana Corp.'s engine management division for $120 million.

The acquisition will result in an immediate increase in Standard Motor's debt load and weaker cash flow generation, S&P noted. Consideration for the purchase will be in the form of cash, a seller note, and Standard Motor common stock. The cash portion will be financed with an expansion of the company's existing revolving credit facility (additional $46 million borrowed), increasing its debt service obligations, and the proceeds of a public equity offering ($59 million).

The company expects to realize significant cost savings once the integration of the acquisition is complete, which management expects to take up to 18 months, S&P noted. During the transition period, however, financial risk will be high as weaker cash flow generation results from integration costs, which will total $30 million-$40 million over the next three years, and the currently weak operating performance of the acquired business, which generates an EBITDA loss of $1 million per month.

Standard Motor's currently weak credit protection measures, with total debt (adjusted for operating leases) to EBITDA of about 4x and EBITDA interest coverage of 3x, will further weaken in the next year if the acquisition is completed, S&P said.

The successful integration of the acquisition would result in a stronger business and financial profile over time, S&P added.

S&P raises Great Lakes Carbon outlook

Standard & Poor's raised its outlook on Great Lakes Carbon Corp. to stable from negative and confirmed its ratings including its senior secured debt at B+ and senior unsecured debt at B- and Great Lakes Acquisition Corp.'s senior unsecured debt at B-.

S&P said it revised the outlook after its expectation of meaningful margin contraction failed to materialize.

Idled aluminum production, new calcined petroleum coke capacity, displaced production, and higher oil prices all pointed to margin pressure at the company. However, the company has been largely successful in mitigating these negative events and managing their margins, S&P said.

Although the company experienced a reduction in sales volumes in the fourth quarter of 2001 and first quarter of 2002, S&P said margins held up better than it had expected due to flat prices and cost reductions, specifically, a reduction in raw material costs and reduced sales commission expenses.

Debt leverage is aggressive with debt to last 12 months EBITDA at 4.7x at the end of the 2002 third quarter, S&P said. Debt to capital stood at 70%.

S&P keeps Sotheby's on watch

Standard & Poor's said Sotheby's Holdings Inc. remains on CreditWatch with developing implications including its senior unsecured debt at B+.

S&P said the continuing watch reflects the uncertain status of the company's future ownership.

However, S&P noted that more immediate concerns about Sotheby's liquidity have been resolved after the company finalized a major sale/leaseback transaction and refinanced its bank facility in early February 2003.

Fitch cuts Resource America

Fitch Ratings downgraded Resource America Inc.'s senior unsecured debt to B- from B. The outlook is stable.

Fitch said the downgrade reflects the increase in net debt over the last couple of years as well as the increase of secured debt as a percentage of total debt in the company's capital structure. As of the company's fiscal year-end on Sept. 30, 2002, approximately 60% of the company's debt outstanding was secured versus lower levels in prior years.

Over the last two years, Resource America has been free cash flow negative after dividends and distributions which has partially contributed to the build in net debt. A part of the 2002 negative free cash flow was attributed to increase in capex throughout the year in an effort to build natural gas reserves. Historically, the company has increased its proved resource base to nearly 135MMcfe in 2002 from 118MMcfe in 1999.

Fitch cuts AES Gener

Fitch Ratings downgraded AES Gener SA including cutting its senior unsecured local and foreign currency ratings to B+ from BB-. The outlook is negative.

Fitch said the action reflects a continued delay in selling assets, near-term liquidity constraints and longer-term refinancing concerns.

The company's negotiations regarding the sale of certain Central American investments have been delayed. An agreement may no longer be reached in time to mitigate liquidity concerns for the second half of 2003, Fitch said. The company has been analyzing other alternatives to generate cash.

The recent refinancings plus semiannual interest payments on the $503 million convertible bond and $200 million Yankee bond have resulted in total required debt service payments in 2003 of approximately $134 million (at Gener, TermoAndes/InterAndes and Energy Trade and Finance Corp.), excluding any debt reduction related to asset sales.

The company ended 2002 with a cash balance of approximately US$14 million.

Sources of near-term cash include operating cash flow as well as dividends from its Chilean subsidiaries based on 2002 results. Through September 2002, the most recent financial information available, Gener reported EBITDA-to-interest of 2.2 times with total consolidated leverage, as measured by debt-to-EBITDA, of 6.1x, an improvement from 1.8x and 7.0x, respectively, as of year-end 2001, Fitch said.

In addition to the restructured bank debt, Gener has bullet maturities of approximately $503 million of convertible bonds due March 2005 and $200 million of Yankee bonds due January 2006. The company is currently pursuing refinancing alternatives since operating cash flow alone is insufficient to fully repay this debt at maturity.

S&P confirms Doane Pet Care, new notes at B-, other ratings still on watch

Standard & Poor's confirmed Doane Pet Care Co.'s ratings including the planned $200 million senior unsecured notes due 2010 at B-. Also confirmed is the senior secured debt at B+ and subordinated debt at B-. The ratings - apart from the new notes - remain on CreditWatch with negative implications.

S&P said it continues to be concerned about Doane's limited cushion under its bank loan financial covenants in light of weaker than expected credit protection measures. The company's 2001 financial performance was affected by its inability to pass along higher raw material costs as well as softer volumes in the highly competitive sector.

The rating on the proposed notes continues to be two notches below the company's corporate credit rating, reflecting the unsecured notes' junior position relative to the firm's secured debt, S&P said. Net proceeds of the offering will be used to repay a portion of the outstanding indebtedness under Doane's senior credit facility and to repay its sponsor's facility in full. The proposed transaction is also expected to reduce the company's annual debt amortization requirements during the next few years and provide relief under tight bank covenants.

Upon closing of the proposed transaction, based on current terms and conditions, S&P said it will remove the ratings on Doane from CreditWatch and affirm the B+ corporate credit and senior secured bank loan ratings, in addition to the B- subordinated debt and senior unsecured debt ratings. This would reflect the company's improved liquidity position and expectations that Doane's improved financial performance will be sustainable.

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