Moody's raises Penn National outlook

Moody's Investors Service raised its outlook on Penn National Gaming, Inc. to positive from stable and confirmed its existing ratings including its $100 million senior secured revolving credit facility due 2007, $40.2 million senior secured term loan A due 2007 and $597.7 million senior secured term loan B due 2007 at B1 and $200 million 11.125% senior subordinated notes due 2008 and $175 million 8.875% senior subordinated notes due 2010 at B3.

Moody's said the revision reflects Penn National's positive free cash flow outlook and expectation that the company's credit ratios could improve over the next 12-month period to a level more consistent with a Ba3 senior implied rating from the current B1.

Penn National's key credit measures are rapidly improving following the company's debt-financed acquisition of Hollywood Casino Corp. in March. The company appears to be on track to lower consolidated debt/EBITDA to about 4.5 times from about 6.0x at June 30, 2003. Excluding the non-recoursee Shreveport subsidiary, debt/EBITDA is expected to be at or near 4.0x. Cash flow after interest, taxes, and capital expenditures for the first half of fiscal 2003 was about $60 million and could reach close to $90 million for the full fiscal year.

Both free cash flow and leverage could experience further improvement given that the company has recently finished its major capital expenditure initiatives. While Moody's expects that Penn National will continue to pursue additional growth opportunities, near-term credit improvement could give Penn National the financial capacity to pursue moderate-sized growth opportunities at a higher rating level.

Moody's upgrades Ameristar, confirms bank debt

Moody's Investors Service upgraded its ratings for Ameristar Casinos, Inc. including raising its $376.2 million 10.75% senior subordinated notes due 2009 to B2 from B3 and confirmed its bank debt including its $75 million senior secured revolving credit facility due 2005, $75 million senior secured revolving term loan facility due 2005, $30 million senior secured term loan A due 2005 and $290.2 million senior secured term loan B due 2006 at Ba3. The outlook is stable.

Moody's said the action reflects the success of Ameristar's St. Charles, Mo. property, the demonstrated stability of the company's Kansas City, Mo. and Council Bluffs, Iowa properties and improvements in the company's free cash flow profile and leverage.

These improvements, combined with Ameristar's current liquidity position, give the company the financial capacity to pursue moderate-sized growth opportunities at the Ba3 senior implied rating level, upgraded from the previous B1.

They also provide an important cushion that helps to mitigate the threat of a possible tax increase in Missouri.

Following an extended period of significant capital expenditure activity and negative free cash flow, Ameristar is expected to generate significant positive cash flow after interest, taxes, and capital expenditures through the remainder of fiscal 2003. In the first six months of fiscal2003, the company already generated about $50 million of free cash flow. During that same six-month period debt/EBITDA dropped to 4.0 times from 4.5x.

Lower capital expenditures so far in fiscal 2003 have also helped the company's liquidity and credit profile. While capital spending will be considerably lower in fiscal 2003 than in fiscal 2002, the company does anticipate that capital expenditures for fiscal 2003 will exceed the $73 million amount currently permitted by the bank credit facility indenture and that it will receive a waiver by the end of fiscal 2003.

Moody's raises Argosy Gaming outlook

Moody's Investors Service raised its outlook on Argosy Gaming Co. to positive from stable and confirmed its existing ratings including its $400 million senior secured revolver due 2006 and $269.5 million senior secured term loan due 2008 at Ba2 and $357.1 million 10.75% senior subordinated notes due 2009 and $200 million 9.0% senior subordinated notes due 2011 at B2.

Moody's said the outlook revision considers that Argosy has maintained its relatively strong credit profile despite another round of tax increases in Illinois and construction disruption and new supply in Kansas City, Mo.

It also takes into account that the company will have the opportunity to improve its financial position once the Riverside expansion is completed later this year.

While debt is expected to increase in the second half of 2003 as a result of the expansion, free cash flow in 2004 could be used to reduce debt and improve debt/EBITDA to near 3.5 times, a level that could support a one-notch rating increase given Argosy's asset profile and conservative management style, Moody's said.

The confirmation of ratings considers the quality of Argosy's assets, conservative financial policy relative to its peers, and positive free cash flow history. The company generated positive cash flow after interest, taxes and capital expenditures of over $100 million in the past three fiscal years ended Dec. 31. For the first six months of 2003, Argosy generated over $60 million of free cash flow. At the same time, debt/EBITDA has remained below 4.0x, Moody's added.

Fitch keeps Ahold on watch

Fitch Ratings said Koninklijke Ahold NV remains on Rating Watch Negative status including its senior unsecured debt at BB-.

Fitch said the company's news conference on Oct. 2 clarified the group's level of profitability, up until its fiscal 2002 "lost year" but did little to address the issues facing the group and its ratings.

Fitch said its rating on Ahold reflects the view that the company remains a viable operating entity.

However, many of the reasons for Fitch's Rating Watch Negative remain, particularly the amount of recent interim secured funding within the group, together with the control and structural subordination mechanisms this may afford, the reliance on continued support from core banks for available credit facilities, and near-term (including the bulk of 2005's) debt maturities.

It is questionable if the US Foodservice profit margin can increase from fiscal 2002's 1.7% level, Fitch added.

The company has to maximize cash, either from operational cashflow, sale of activities or a rights issue. The company does not expect to report on these issues or the results for the first half of 2003 until mid-October.

S&P says Worldspan unchanged

Standard & Poor's said its ratings and outlook on Worldspan LP including the corporate credit at B+ with a stable outlook are not affected at the present time by the news that Orbitz, a major customer, has threatened to terminate its service agreement at the end of October.

Worldspan, which provides booking processing for Orbitz and other on-line travel sites, has indicated that the loss of Orbitz as a customer would have a "material impact" on its finances, S&P noted.

Orbitz has indicated that the parties are discussing service levels and that "given its long and constructive relationship, it expects to find a mutually agreeable resolution."

S&P cuts Omnova

Standard & Poor's downgraded Omnova Solutions Inc. including cutting its $100 million revolving credit facility due 2006 to BB from BB+ and $165 million 11.25% senior secured notes due 2010 to BB- from BB. The outlook remains negative.

S&P said the downgrade reflects concerns that lower than expected operating results are likely to further delay an improvement in the company's financial profile. Profitability and cash flow have been negatively affected by elevated raw material costs and continued weakness in key end markets due to lackluster economic conditions. The shortfall in cash flow has increased leverage and further weakened the financial profile.

Omnova's ratings reflect the company's fair market positions and decent product diversification, tempered by competitive markets, exposure to volatile raw material costs and an aggressive financial profile, S&P added.

The shortfall in cash flow has contributed to elevated debt levels (adjusted to capitalize operating leases) and increased leverage; debt to EBITDA is approaching 7x, S&P said. Credit protection measures are somewhat weak, with funds from operations to adjusted debt about 10%.

A gradual recovery in business conditions should result in cash generation that is in excess of internal needs, thereby providing funds for modest debt reduction. During the business cycle, funds from operations to debt and debt to EBITDA should average 20% and 3.5x, respectively, S&P added. The ratings reflect the expectation that management will make the restoration of credit quality a priority over growth and share repurchases.

Moody's cuts Timken to junk

Moody's Investors Service downgraded The Timken Co. to junk including cutting its senior unsecured notes due 2010 and senior unsecured revolving credit facility due 2007 to Ba1 from Baa3. The outlook is negative. The actions conclude a review begun on Sept. 19.

Moody's said its ratings reflect concerns that Timken's financial flexibility will be reduced over the intermediate-term from the substantial operational and integration challenges associated with its recent acquisition of Torrington.

Exacerbating these challenges are escalating pressures on the company's cost structure predominantly in its steel and auto segments.

Moody's expectations for these continued challenges, both internal and exogenous, combined with its significant and ongoing pension benefit expenses and voluntary contributions to its defined benefit pension fund, extend the time horizon over which Timken's historical levels of financial performance will be restored and acquisition-related debt will be reduced.

Operationally, underabsorbed fixed overhead from a reduction in build rates of passenger cars by domestic automakers, potential market share erosion of domestic automakers and rising variable input costs for scrap and natural gas have impacted results, Moody's said. In addition, lower than expected sell-through of Torrington's products to several of its major customers delayed the realization of full benefits of Torrington's higher margin product portfolio for Timken.

The negative outlook on Timken's ratings reflects Moody's concerns that Timken's debt reduction for 2003 could fall short of its objectives.

Moody's rates Reddy Ice loan B1

Moody's Investors Service assigned a B1 rating to Reddy Ice Group, Inc.'s planned $45 million incremental term loan and confirmed its existing ratings including its bank debt at B1 and $152 million 8 7/8% senior subordinated notes due 2011 at B3. The outlook is stable.

Proceeds from the new loan along with $10 million of equity from the sponsors and management will finance the proposed acquisitions of Triangle Ice Co., Inc. and Service Ice Co.

Confirmation of the ratings acknowledges Reddy Ice's acquisitive growth, high financial leverage and maintenance of adequate liquidity pro forma for the proposed transactions, Moody's said.

The ratings continue to be constrained by the absence of solid financial cushion to absorb any material operating shortfalls as evidenced by no tangible equity, low free cash flow relative to its sizable pro forma debt (including preferred stock at the holding company), which exceeds pro forma combined revenue.

The stable ratings outlook remains unchanged reflecting the company's maintenance of adequate credit statistics pro forma for the proposed transactions. In Moody's opinion, the intended acquisitions are consistent with Reddy Ice's core business of manufacturing and retailing ice. The proposed acquisitions will fill in Reddy Ice's southeastern footprint. Successful integration is critical to the stability of the outlook and the ratings.

Moody's rates Norcraft notes B3, loan B1

Moody's Investors Service assigned a B3 rating to Norcraft Cos., LP's planned $150 million senior subordinated notes due 2011 and a B1 to its planned $70 million of senior secured credit facilities. The outlook is stable.

Moody's said the ratings reflect Norcraft's short operating history in its current configuration, relatively small size compared to the industry leaders, narrow product line tied to residential new construction and remodeling markets, negative tangible net worth and uncertainty surrounding the non-compete agreement between Norcraft's president-designate and the latter's former employer.

At the same time, the ratings consider Norcraft's strong free cash flow generating ability, satisfactory balance sheet leverage together with healthy margins and returns and its comprehensive product offerings within cabinetry.

Although a predecessor company commenced operations in 1966, Norcraft did not begin to take on its current configuration until 2000, when it purchased UltraCraft Cos. (providing it with an entry into the semi-custom frameless cabinet segment), and again in 2002, when it purchased the Fieldstone and StarMark brands (providing it with an entry into the semi-custom framed cabinet segment).

Given Norcraft's limited history as a company with national coverage and a broad product line within cabinetry, the efficacy of its acquisition strategy may not be fully proven, Moody's said. The company is still in a transitional phase, which will necessarily include integration challenges.

In addition, the company will be recapitalized with new owners and a new president. If Norcraft under its new ownership and leadership seeks additional companies to acquire, financial and integration risks may continue to increase.

While pro forma total debt/adjusted EBITDA is a satisfactory 4.5x for the 12 months ended Aug. 31, 2003, margins and return on assets are strong for the ratings. Gross margins of 30.5%, operating margins of 13.5%, and EBITDA margins of 15.6% in 2002, which are expected to improve for full year 2003, compare favorably with other B1 rated building products companies, while the 26.6% return on assets (EBIT/Total Assets) was a standout figure, Moody's said.

S&P rates Norcraft notes B-, loan BB-

Standard & Poor's assigned a B- to Norcraft Cos. LLC's planned $150 million senior subordinated notes due 2011 and a BB- to its planned $70 million senior secured credit facility.

The senior secured credit facility is rated one notch above the corporate credit rating, reflecting the strong prospects for full recovery in a default or bankruptcy scenario, S&P said.

The ratings reflect Norcraft's limited product diversity within a cyclical industry, modest sales base, aggressive leverage and thin cash flow protection measures, S&P said. Partly offsetting these negative factors are the company's good cost position and experienced management.

However, while housing construction and remodeling markets are cyclical, S&P expects cabinet demand to remain strong over the next couple of years because of strong existing home sale and favorable demographic trends. Recent strong existing home sales bode well for remodeling expenditures, which typically lag existing home sales by 12 months to 18 months. Furthermore, immigration patterns over the past several years should be favorable for home sales for the next several years, as this group has historically had high home ownership rates.

Pro forma leverage for the proposed new capital structure is aggressive with debt to last 12-month EBITDA projected to be about 4.5x and debt to capital of 60% at Sept. 30, 2003, S&P said. Pro forma projected funds from operations (FFO) to debt for 2003 is a weak 11%. S&P said it expects improvement in credit measures over the next two years with debt to last 12-month EBITDA falling below 3.5x, debt to capital below 55%, EBITDA to interest approaching 3.0x, and FFO to debt approaching 15%.

S&P puts GrafTech on positive watch

Standard & Poor's put GrafTech International Ltd. on CreditWatch Positive including its senior unsecured debt at B.

S&P said the action followed the company's announcement that it has increased the size and fixed the price of its public offering of stock to 22 million shares from 16 million shares. The offering is expected to raise approximately $176 million in gross proceeds and be applied to debt reduction. In addition, the underwriters have an option to purchase 3 million shares. Should this option be exercised, the company would receive approximately $26 million in additional gross proceeds.

S&P puts American Achievement on watch

Standard & Poor's put American Achievement Corp. on CreditWatch negative including its $177 million 11.625% notes due 2007 at B+ and $40 million revolving credit facility due 2006 at BB- and Commemorative Brands Inc.'s subordinated debt at B-.

S&P said CreditWatch placement follows American Achievement's recent announcement that it has engaged investment banking advisors to assist in the possible sale or recapitalization of the company.

S&P said it believes that the company will likely continue to be highly leveraged and that a potential sale or recapitalization transaction could result in a weaker financial profile for the company.

Moody's cuts Stone Energy outlook

Moody's Investors Service lowered its outlook on Stone Energy Corp. to stable from positive and confirmed the existing ratings including its 8.25% $200 million senior subordinated notes due 2011 at B2.

Moody's said the change accommodates: lagging production trends (currently flat with first quarter 2001 in spite of over $1.0 billion of capital spent since year-end 2000); a high proportion of cash flow needed for reserve replacement due to very high reserve replacement costs; and a high $6.32/boe of combined debt and total required future development capital divided by total proved reserves.

The stable outlook may firm or weaken depending on whether: year-end 2003 results reflect significantly improving reserve replacement costs versus prior years; adequate reserve replacement at competitive reserve replacement costs and achieved with a suitable balance between proved developed (PD) reserves and proved undeveloped (PUD) reserves; resumed production growth; and stable-to-improving leverage as measured by debt plus future development capex to proved reserves.

Stone's ratings reflect lagging productivity of capital; a high concentration of (90% +) reserves in the short-lived Gulf Coast and Gulf of Mexico regions, which compounds the challenges of growing reserves and production; high full cycle costs (principally due to very high reserve replacement costs) which would not be covered in mid-cycle prices; and over $400 million of cash flow needed to convert non-producing reserves to the producing stage, Moody's said.

The ratings are supported by Stone's seasoned, highly skilled management; improving leverage on PD reserves; a very high percentage of operated properties; sound balance sheet leverage and ample liquidity; financial discipline of not doing leveraged acquisitions for growth; and recent drilling success which will add production, though it remains uncertain if this will translate into sequential quarterly production growth.

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