S&P cuts Dynegy

Standard & Poor's downgraded Dynegy Inc. and kept it on CreditWatch with negative implications. Ratings lowered include Dynegy's senior unsecured debt, cut to B- from B+; Dynegy Holdings Inc.'s senior unsecured debt, cut to B- from B+, and preferred stock, cut to CCC+ from B; Illinova Corp.'s senior unsecured debt, cut to B- from B+; Illinois Power Co.'s senior secured debt, cut to B+ from BB, and preferred stock, cut to CCC+ from B; and Northern Natural Gas Co.'s senior unsecured debt, cut to B+ from BBB-.

S&P said it cut Dynegy because its analysis indicates that the company's "cash flow deterioration continues unabated."

Cash flow from Dynegy's core merchant energy business is now expected to decline even further because it is likely industry counterparties are engaging in only low-margin spot gas transactions, a trend that is expected to continue, S&P said.

In addition, Dynegy has been unable to execute on asset divestitures, including the expected partial monetization of Northern Natural Gas, which further exacerbates credit difficulties, S&P said.

The downgrade of Northern Natural reflects S&P's view that the sale is uncertain and therefore Northern Natural's creditworthiness is commensurate with the consolidated credit rating of Dynegy, the rating agency said.

Dynegy's available sources of liquidity have diminished slightly recently as some cash collateral calls have been demanded, S&P said.

As evidenced by its inability to quickly sell assets or access capital markets, Dynegy's liquidity position is tenuous.

S&P said it estimated that the firm's liquidity position has eroded from the $800 million that Dynegy disclosed earlier this week. The sources of these funds are cash on hand, unused bank facilities, and commodity (natural gas) in storage.

Also, Dynegy has several near-term obligations on the horizon, with about $750 million in debt and bank facilities ($300 million at Dynegy and $450 million at Northern Natural) due to mature or expire by November 2002, and a $1.5 billion preferred stock right held by Dynegy's largest shareholder, ChevronTexaco Corp., which is redeemable in November 2003, S&P said.

S&P cuts Genuity's loan to CCC-

Standard & Poor's lowered Genuity Inc.'s corporate credit rating and its senior unsecured bank loan to CCC- from BB following the announcement that Verizon Communications Inc. will not reintegrate Genuity, causing a default under the company's credit facility and its credit facility with Verizon. The ratings remain on CreditWatch with negative implications.

Verizon's action significantly weakens Genuity's liquidity position, S&P said.

Because Genuity's financial condition was already fragile due to overcapacity in the telecom industry and the weak economy, S&P said it is concerned that Verizon's action could impact Genuity's viability as a going concern.

Genuity has given notice to its bank group that it would draw down the remaining $850 million available under its $2 billion credit facility. Of the $850 million, $723 million has been funded providing the company with a total cash balance of $1.3 billion, S&P added.

Currently, Genuity is in discussions with banks. S&P said it "will monitor the development of discussions."

Moody's cuts Genuity to Ca

Moody's Investors Service downgraded Genuity Inc.'s senior unsecured rating and the rating of its $2 billion revolving credit facility due September 2005 to Ca from Ba1.

Moody's said the action reflects Verizon Communication's decision to cancel its option to reintegrate Genuity and the subsequent default under change of control provisions in the company's credit facilities. The outlook is negative.

The significant slowdown in IT spending and order rates caused Genuity's revenues to fall below expectations and led Genuity to substantially reduce its growth prospects, Moody's said.

Genuity's former Ba1 rating was substantially higher than what its pure stand-alone rating would have been, which suggested a material probability of reconsolidation with Verizon, Moody's explained. Verizon's decision to forego reintegration by converting its Class B shares to Class A shares, results in Moody's analyzing Genuity on a stand-alone basis.

Additionally, the Class B to Class A share conversion by Verizon caused an event of default under the company's $2 billion bank credit facility and their $2 billion credit facility with Verizon.

Moody's noted that on July 22, prior to the default, Genuity requested that the lender group fund the remaining $850 million of availability under the $2 billion bank facility. To date, $723 million has been funded, representing 8 of the 9 bank group lenders' commitments.

Deutsche Bank has yet to fund and Genuity has indicated that it has taken legal action to require Deutsche to satisfy its obligation. With the $723 million, the company has stated that its current cash position is $1.3 billion, Moody's said.

S&P cuts Williams Cos. three notches

Standard & Poor's downgraded The Williams Cos. Inc. and its subsidiaries by three notches and kept the ratings on CreditWatch with negative implications. Ratings lowered include Williams' senior unsecured debt to B from BB and preferred stock to CCC+ from B+, the senior unsecured debt of Northwest Pipeline Corp., Texas Gas Transmission Corp., Transcontinental Gas Pipe Line Corp. and Williams Gas Pipelines Central Inc. to B+ from BB+, Transco Energy Co.'s senior unsecured debt to B from BB and WCG Note Trust's senior unsecured debt to B from BB.

S&P said the action is in response to rating triggers associated with the AES Ironwood, AES Red Oak, Georgia EMC, and Tenaska tolling agreements, which may require Williams to provide letters of credit to each entity.

AES stated in a conference call that the amount requested by them was about $900 million, although Williams believes the amount is much lower.

S&P said the requirements create "significant uncertainty in Williams' financial position," meriting a single B rating.

The triggers also add risk to Williams' ability to close on a potential $1.6 billion secured line of credit in the near term or to execute other options to meet liquidity needs, S&P said.

S&P confirms Smurfit-Stone

Standard & Poor's confirmed the ratings of Smurfit-Stone Container Corp. including its preferred stock at CCC+, Jefferson Smurfit Corp. (U.S.)'s senior secured debt at B+ and senior unsecured debt at B, Stone Container Corp.'s senior secured debt at B+ and senior unsecured debt at B, Stone Container Finance Co. of Canada's senior unsecured debt at B and Smurfit Newsprint Corp.'s senior unsecured debt at B.

S&P said the confirmation follows Smurfit-Stone's announcement it will buy MeadWestvaco Corp.'s Stevenson, Ala. corrugated medium mill and associated operations for $350 million in cash plus an additional $25 million over the next 12 months related to financing arrangements.

The Stevenson mill is a large (830,000 tons of annual capacity), low-cost producer of corrugated medium, S&P said. This acquisition should enable Smurfit-Stone, the world's largest containerboard producer, to continue the progress it has made during the past few years in optimizing its manufacturing base and improving its cost structure.

Management expects at least $40 million in synergies from the transaction, S&P noted.

The announcement of this transaction closely follows news that Smurfit-Stone has agreed to sell its industrial packaging operations to Caraustar Industries Inc. for about $80 million in cash, retaining about $12 million in receivables. Smurfit-Stone did not have a leadership position in this business, the manufacturing of tubes, cores, and partitions.

Pro forma for these two transactions, credit measures will weaken slightly from current levels, with debt to EBITDA rising to the low-to-mid-5 times area from about 5x currently and EBITDA interest coverage declining to the mid-2x area from the upper 2x area, S&P said.

However, containerboard and box markets are showing signs of gradual strengthening from cyclical lows. This should lead to credit strengthening over the intermediate term, S&P said.

S&P rates MetoKote's loan B+

Standard & Poor's rated MetoKote Corp.'s proposed $168.4 million senior secured credit facilities due Nov. 2, 2005 at B+ and its corporate credit rating at B+. The outlook is stable.

The loan consists of a $30 million revolver, a $50 million tranche A-2 term loan and an $88.4 million tranche B term loan. Security is substantially all assets. Proceeds from the loan will be used to refinance all of the company's existing revolver and all, or a portion, of the existing $36.5 million term loan A, both of which are scheduled to mature Nov. 2, 2003.

The corporate credit rating on MetoKote reflects the company's well below-average business profile and its aggressive financial position, S&P said.

Supporting the ratings is the company's favorable business position in the industry, broad product line and integrated business model, S&P said. This is offset by the cyclical and competitive nature of the sector, concentrated customer base and modest geographic diversity.

The company is expected to average total debt to EBITDA of no more than 4.0 times during the next two years and EBITDA interest coverage of around 2.5 times.

Moody's rates Jostens loan B1, raises outlook

Moody's Investors Service rated Jostens, Inc.'s new $150 million senior secured revolving credit facility due 2006, $108 million senior secured term loan A due 2006 and $330 million senior secured term loan C due 2009 at B1. Moody's also confirmed its existing debt including its $225 million 12.75% senior subordinated notes due 2010 at B3 and $60 million 14% PIK preferred stock due 2011 at Caa1 and raised the outlook to positive from stable.

Moody's said it raised the outlook because it expects Jostens' operating results will continue to improve and that management will remain focused on debt reduction.

Given the fundamentally stable demand and market shares in the school-affinity industry, Jostens' sales are likely to grow in the low single digit range, while Jostens' product development and cost containment efforts should offset any margin pressures that arise from challenging economic trends or increased raw material prices, Moody's said.

Moody's said it does not anticipate that Jostens will engage in any significant acquisition transactions, and that it will use free cash flow primarily to repay debt or preferred stock. Jostens increased year-over-year EBITDA for the 12 months ended June 2002 to $159.6 million from $150.7 million and reduced long-term debt by nearly $40 million. Due in large part to disciplined cost control and operational efficiency, Jostens' EBITDA margins improved to 21.1% from 20.7%, Moody's said.

S&P takes Sun World off watch

Standard & Poor's confirmed Sun World International Inc.'s ratings and removed it from CreditWatch. The outlook is negative. Ratings affected include Sun World's senior secured debt at B.

S&P said the confirmation follows Sun World's announcement that Sun World and Kingdom Agricultural Development Co., a private Egyptian firm, have mutually agreed not to complete the combination of their two companies at this time. However, the two companies will continue to work together under a project management agreement established in 1999.

The ratings for Sun World reflect the company's highly levered financial profile, the commodity nature of its products, and potential earnings and cash flow volatility, S&P said. The refinancing risk and investment strategy of the company's parent, Cadiz Inc., is another rating consideration.

S&P said it analyzes Sun World's financials on a consolidated basis with Cadiz. EBITDA to interest is very weak, at less than 1.0 times for the last 12 months ended March 31, 2002. The decline in Sun World's EBITDA coverage in the past two years has been due to difficult agriculture industry conditions, which resulted in the oversupply of certain crops and put pressure on prices, S&P said. While the company has taken steps to improve operating performance, it is too early to determine the effect on fiscal 2002 operating and financial performance because earnings are highly seasonal (one half of EBITDA occurs in July).

S&P takes Berry Plastics off watch, outlook positive

Standard & Poor's confirmed Berry Plastics Corp.'s ratings, removed them from CreditWatch and gave them a positive outlook. Ratings confirmed include Berry Plastics' senior secured debt at B+ and subordinated debt at B-.

S&P said the action follows completion of Berry Plastics' acquisition by an investor group led by GS Capital Partners 2000 LP.

The ratings reflect a below-average business risk profile and very aggressive debt leverage, S&P said.

Berry's business position reflects large market shares in its niche segments, strong customer relationships, and sole-supplier arrangements, advantages that provide some barriers to entry, the rating agency added. The bulk of the company's output is sold to dairy, food, and other consumer goods producers, a relatively recession-resistant customer base. The continuing conversion to plastic containers from paper and other materials in the company's end markets is an important growth driver.

Steady volume growth and attractive operating margins should continue to support Berry's modest free cash generation, S&P said.

While the company remains very aggressively leveraged, earnings growth is expected to support a modest delevering in the intermediate term, with total debt (adjusted for capitalized operating leases) to EBITDA ranging between 4.5 times to 5x, benchmark levels for the rating, S&P added.

S&P says United Defense ratings not affected by Q2 earnings

Standard & Poor's said that United Defense Industries Inc.'s (BB-/Stable) ratings or outlook are not impacted by the company's second quarter earnings statement.

United Defense reported net income of $27.3 million for the quarter, compared with $15.7 million in the same period in 2001 and revenues declined 8% in the quarter. Over $270 million of new orders was reported, enabling the company to maintain its approximately $2 billion backlog.

The impact on sales and profits from the almost certain cancellation of the Crusader program is expected to be mostly offset by the incremental revenues and earnings from the company's recent acquisition of United States Marine Repair and likely follow-on contracts to transition Crusader technology to the Army's Future Combat System program, S&P said.

Fitch cuts Broadwing preferred, lowers all outlooks

Fitch Ratings downgraded Broadwing Communications, Inc.'s 12.5% series B junior exchangeable preferred stock to C from B and changed the outlook for parent Broadwing, Inc.'s ratings to negative from stable.

Fitch said the action follows Broadwing's announcement it will defer the cash payment of the quarterly dividend due on Aug. 15.

The negative outlook reflects the company's limited financial flexibility in terms of available liquidity resources and continued compliance with the financial covenants contained within the company's senior secured credit facility, Fitch said.

The rating agency estimates that the company has approximately $200 million of additional availability under its senior secured credit facility. However, the liquidity available under the revolver amortizes to approximately $140 million by year-end 2002 and will provide very limited availability during the first half of 2003.

The company's liquidity position will be further pressured in 2003 as the term loans under the company's bank facility begin to amortize during the second quarter of 2003.

Fitch said it acknowledges the steps the company has taken to maximize and preserve cash flow including reductions to capital spending, operating cost controls and the suspension of the dividend on the exchangeable preferred stock.

While the company has made significant progress towards being free cash flow positive in the fourth quarter 2002, Fitch said it expects that the company will need to access capital markets to solidify its liquidity position entering 2003.

Fitch cuts Dynegy

Fitch Ratings downgraded Dynegy Inc. including lowering its senior unsecured debt along with the senior unsecured debt of Dynegy Holdings Inc., Illinova Corp. and Illinois Power Corp. to B from BB-. Fitch also cut Dynegy Capital Trust I's trust preferreds to CC from B- and Illinois Power's senior secured debt and pollution control bonds to BB- from BB and preferred stock and trust preferred to CCC from B-.

Fitch said the downgrade is in response to a continued weakening in Dynegy's credit profile.

Cash flow projections for year 2002 disclosed by Dynegy on Tuesday were materially weaker than prior estimates, Fitch noted. In addition, the company announced that it had terminated its pending $325 million bond financing at Illinois Power.

Cash from operations after changes in working capital are now expected to range between $600-700 million. Prior estimates were closer to $1 billion. Based on new estimates, consolidated cash flow from operations for the remainder of 2002 has been cut approximately in half, Fitch said.

The company has stated that the revisions have resulted from a downturn in marketing and trading activities, partially the result of industry conditions, and lower-than-expected prices for power, natural gas and natural gas liquids. Based on available information, Fitch said it is unable to have a high level of confidence in estimates of sustainable cash from operations, other than from the regulated electric and gas pipeline operations.

Dynegy is in the process of executing a restructuring plan designed to reduce consolidated debt and improve liquidity, Fitch said. But capital market conditions continue to worsen and the negative over-hang from the SEC's investigation of accounting and trading issues, ongoing FERC inquiries, and potential litigation exposure have not abated. Therefore, Dynegy's ability to successfully execute its restucturing plan has become less assured.

S&P says Ball could reach high grade

Standard & Poor's said Ball Corp. could be raised to investment grade if management continues its commitment to preserving its strengthened financial profile. S&P currently assigns Ball a BB+ corporate credit rating with a positive outlook.

S&P made its comments after Ball announced continued strong earnings and free cash flows for the second quarter although S&P added that the results do not have an impact on Ball's ratings or outlook.

Although higher earnings from cost reduction initiatives and higher volumes, and reduced debt levels have improved Ball's credit measures to levels in line with a BBB- rating, S&P said it is not clear that management is committed to maintaining these levels as it announced that it is exploring strategic opportunities.

Moody's rates Otis Spunkmeyer's loan B1

Moody's Investors Service rated Otis Spunkmeyer Inc.'s $20 million senior secured revolver due 2008 at B1, $120 million term loan B due 2009 at B1, senior implied at B2 and senior unsecured issuer rating at B3. The outlook is stable.

Proceeds from the term loan, combined with notes and equity, will help fund the purchase of Otis by Code, Hennessy & Simmons from First Atlantic Capital LLC for $275 million.

Ratings are limited by the company's narrow product line and limited revenue base, high enterprise leverage and weak balance sheet and competition and fragmentation of the market, Moody's said.

Ratings are supported by the company's leading market share, scale in product niche, established distribution system, management's track record of increasing sales and earnings, well-diversified customer base, relatively longstanding relationships with top customers, apparent customer preference for frozen cookie dough, perceived quality, brand recognition and investment in customer service, Moody's said.

Pro forma Enterprise Debt/TTM EBITDA (before management adjustments) is 5.5 times, and Debt/Capitalization is 65%. At the OpCo level, pro forma debt represents 4.7 times TTM EBITDA (before management adjustments) and 56% of capitalization. Pro forma TTM EBIT interest coverage is 1.0 time on total interest, 1.5 times on cash interest.

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