S&P puts 11 airlines on watch

Standard & Poor's put 11 airlines on CreditWatch with negative implications. Airlines affected are AirTran Holdings Inc. at B-, Alaska Air Group Inc. at BB, America West Holdings Corp. at B-, ATA Holdings Corp at B-, Atlantic Coast Airlines Holdings Inc. at B-, British Airways plc at BBB-, Continental Airlines Inc. at B+, Delta Air Lines Inc. at BB, Deutsche Lufthansa AG at BBB+, Northwest Airlines Corp. at BB- and Southwest Airlines Co. at A.

S&P said the watch placement is because of the risks relating to an apparently imminent attack by the U.S. and its allies against Iraq.

Airlines, already battered by the effects of the Sept. 11, 2001, terrorist attacks and their aftermath, now face further financial damage from a war, S&P said. The airlines, particularly large U.S. hub-and-spoke airlines, have already been hurt by high fuel prices, an accelerating erosion in bookings on international routes, and, indirectly, by the depressing effect of uncertainty on business activity.

These trends are expected to worsen in the short term, S&P added. Fuel prices could spike higher still in the short term, though the initial change has been a decline. Still, even in the best case, a rapid victory by the U.S. and its allies, the subsequent decline in fuel prices is likely to be less rapid than during and after the Persian Gulf War in 1991.

Travel bookings have already weakened somewhat for large airlines, particularly on trans-Atlantic routes and, to a lesser extent, on trans-Pacific routes. The threat of war will very likely cause a further deterioration, particularly on international routes and for business travel.

The severity of the traffic decline will depend on how long and how difficult for the U.S. and its allies the war proves to be, and on whether the war is accompanied by any further terrorist attacks, S&P said. Even in the most favorable scenario - a rapid victory by the U.S. and its allies, with no significant terrorist attacks - already weak airlines will incur further substantial losses and cash outflow.

S&P puts aerospace companies on watch or revises outlook

Standard & Poor's put 14 aerospace companies on CreditWatch with negative implications and lowered the outlooks on three more.

Companies put on watch are Argo-Tech Corp. at B+, Boeing Co. and Boeing Capital Corp. at A+, Britax Group plc at B+, European Aeronautic Defence and Space Co. NV at A, Dunlop Standard Aerospace Holdings plc at B, Goodrich Corp. at BBB, Hexcel Corp. at B, K & F Industries Inc. at BB-, Sabreliner Corp. at B, Sequa Corp. at BB-, Textron Inc. at A, Textron Financial Corp. at A- and TransDigm Inc. at B+.

The outlooks on Kaman Corp. at BBB and Precision Castparts Corp. at BBB were revised to negative from stable and the outlook on Aerostructures Corp. at BB- was revised to negative from positive.

S&P said the watch placements are in response to the looming war with Iraq, which is likely to have a significant impact on commercial aviation.

The airline industry and its original equipment and aftermarket suppliers already face a very challenging operating environment, especially in the U.S., S&P said. That environment is likely to deteriorate further, at least in the near term, if there is a war with Iraq, due to adverse effects on air travel and the economy.

As a consequence, companies serving the airline sector, including airplane manufactures (such as Boeing Co. and EADS NV through its Airbus SAS subsidiary); suppliers of aircraft systems and components (Goodrich Corp., Argo-Tech Corp., and others); and vendors providing aviation support services (AAR Corp., Sequa Corp., and others) will be adversely affected to various degrees. The market for business jets, which is important to several rated entities, is currently soft, and it could also be negatively affected in times of military action and economic uncertainties, S&P said.

At this time, it is impossible to assess the revenue, profit, and cash flow impact on individual firms. If the war is short and successful, the related lasting impact on the airline industry and its suppliers may not be significant, S&P said. Therefore, ratings on some issuers could be affirmed and removed from CreditWatch.

If the military conflict in Iraq is protracted or accompanied by terrorist attacks, especially if related to the air transportation system, the adverse effect on the airline industry would certainly be more pronounced, with negative consequences for weak major air carriers, including increased likelihood of bankruptcy filings or liquidation, S&P added. This, in turn, would put additional pressure on companies serving commercial aviation.

Issuers that are placed on CreditWatch with negative implications have substantial exposure to civil aviation or have relatively weak financial profiles for the rating. Firms on which outlooks were revised are likely to be less affected in view of their business diversity or above average for the rating credit protection measures, S&P said.

S&P noted AAR Corp. at BBB-, BE Aerospace Inc. at B+, Bombardier Inc. at BBB- and Rolls-Royce plc at A- are already on CreditWatch with negative implications.

S&P rates Nexstar notes B-

Standard & Poor's assigned a B- rating to Nexstar Finance Holdings LLC's proposed $50 million senior discount notes due 2013 and confirmed its corporate credit rating at B+. The outlook is negative.

On a pro forma basis, the transaction is expected to reduce the company's cash interest burden and increase borrowing availability under its bank lines.

The ratings on Nexstar reflect the financial risk resulting from aggressive debt-financed acquisition activity, potential for future station purchases, and mature revenue growth prospects in the competitive television advertising environment, S&P said. These factors are somewhat offset by the company's cash flow diversity from major network-affiliated television stations in small and midsize markets, the stations' decent positions in most markets, good discretionary cash flow potential of the business, and cash flow improvement achieved at acquired stations.

However, the absence of political and Olympic advertisement dollars is expected to restrain cash flow growth in 2003, S&P added. Although favorable trends in TV advertising are expected to continue, demand could be vulnerable to economic cycles and escalating political tensions overseas. Positive operating momentum will be important for maintaining compliance with financial covenants this year.

Pro forma for acquisitions and refinancings, EBITDA coverage of total interest expense plus preferred dividends was in the mid-1x area in 2002, S&P said. Pro forma cash interest coverage was more than 2x, benefiting from the non-cash interest feature of the senior discount notes. The proposed senior discount notes do not require cash interest payment for five years, and the existing 16% senior discount notes do not turn cash pay until May 2005. Pro forma total debt plus debt-like preferred stock divided by EBITDA was about 7.8x at Dec. 31, 2002. This leverage ratio is expected to rise above 8x in 2003 due to the absence of political and Olympic advertisement dollars.

S&P said the negative outlook reflects its view that deterioration in key credit metrics due to either debt-financed acquisition activity or softening operating performance could pressure financial covenants and ratings.

Moody's lowers Stanadyne outlook

Moody's Investors Service lowered its outlook on Stanadyne Corp. to negative from positive and confirmed its ratings including its $30 million revolving credit facility maturing December 2003, $7.6 million tranche A term loan maturing December 2003 and $17.2 million tranche B term loan maturing December 2004 at B1 and $76 million 10.25% guaranteed senior subordinated notes due 2007 at Caa1.

Moody's said the outlook revision is in response to escalating near-term liquidity pressure and refinancing risk. Moody's additionally believes that Stanadyne's business prospects have weakened due to heightened technology and competitive risks within the company's primary Diesel Group, as well as persistently weak margins within its smaller Precision Engine Group.

In particular, Moody's said the outlook change reflects the upcoming maturities of Stanadyne's revolving credit and term loan A facilities during December 2003 and of its term loan B in December 2004, thereby necessitating a near-term refinancing of the bank credit agreement.

The company is otherwise under significant pressure to meet its scheduled term debt maturities through generation of free operating cash flow after capital expenditures. Stanadyne's liquidity will potentially face further stress due to stepped-up pension funding requirements.

In addition Stanadyne's Diesel Group has not yet had the capability to develop or acquire "common rail" diesel engine systems technology, due to the substantial up-front investment that is required, Moody's said. In conjunction with the automotive industry's stricter emissions standards over the past several years, common rail technology has become the industry standard for on-highway diesel engines. Stanadyne's Diesel Group today therefore retains only minimal automotive business and must focus almost exclusively on the off-highway diesel market (which still largely utilizes traditional "pump line" injector technology). The company's key off-highway agricultural, industrial, and construction end markets are very cyclical, have remained persistently weak, and are concentrated with a limited universe of customers.

Fitch cuts Veritas DGC

Fitch Ratings downgraded Veritas DGC's senior secured debt to BB from BB+. The outlook remains negative.

Fitch said the downgrade is the result of higher than expected leverage and weaker than expected results from Veritas following more than four years of above average commodity prices. Additionally, Fitch believes that the seismic sector will remain weak in 2003 as E&P companies are reluctant to put significant money into exploration projects given the turmoil throughout the world.

The negative outlook reflects the weak outlook for the seismic sector.

Fitch noted Veritas' recently completed a $250 million senior secured bank facility.

Since Fitch's November 2002 review Veritas has increased the amount of debt outstanding to $211 million from $140 million. While the latest transaction provides for additional liquidity, it limits any type of de-levering measures for several years.

Following four years of stronger than average prices for oil and natural gas, Fitch anticipated meaningful improvement in Veritas' credit profile that never materialized. Seismic demand was slow to grow in recent years as geophysicists at E&P companies evaluated seismic data obtained through numerous acquisitions. Secondly, an excess supply of marine seismic vessels has hampered margins and will likely continue to do so until capacity is reduced. Finally, seismic data processing companies have had huge capital requirements for R&D, technology development and maintaining an attractive multi client library. This has resulted in several years of negative free cash flow for Veritas.

Moody's cuts Semco to junk, still on review

Moody's Investors Service downgraded Semco Energy, Inc. to junk and kept it on review for possible downgrade. Ratings lowered include Semco's senior unsecured debt, cut to Ba2 from Baa3, subordinated debt, cut to Ba3 from Ba1, Semco Capital Trust I's trust preferreds, cut to Ba3 from Ba1, and Semco Capital Trust II's Growth Prides, cut to Ba1 from Baa2 and Income Prides, cut to Ba2 from Baa3.

Moody's said the downgrades reflect Semco's very high leverage, weak capitalization, low profitability and cash flow relative to its debt and refinancing risk related to redemption of a large issue of Roars debt securities in July 2003.

Moody's said the review will continue pending the refinancing of the Roars and further monitoring of the results of Semco's construction services business. The Roars represent a significant portion of the company's modest capitalization and will test the company's ability to raise capital.

Construction services, Semco's only non-utility business of a significant size and strategic growth vehicle, has performed poorly in the last few years, and it remains to be seen whether recent restructuring efforts will be sufficient to overcome the weak economic conditions and capital constraints of its customers that continue to challenge the segment, Moody's said.

S&P cuts MasTec

Standard & Poor's downgraded MasTec Inc. including cutting its $125 million bank loan due 2006 to BB+ from BBB and $200 million 7.75% senior subordinated notes due 2008 to B+ from BB+. The outlook is negative.

S&P said the action reflects continued severe weakness within the telecommunications and power markets, MasTec's improving, but still bloated cost structure, and its inability to meaningfully improve working capital management during this period of protracted industry weakness, all of which have eroded the credit profile and its liquidity position.

Furthermore, the FCC's recent decision to give states more authority over local phone leasing may further reduce capital spending plans for some of MasTec's clients, such as Bell South Corp., Verizon Communications Inc., and SBC Communications Inc., S&P added. Although the firm has begun a number of actions under its "Project 2100" initiative to improve its cost structure, it now appears unlikely that MasTec will reach S&P's prior expectations of funds from operations to total debt in the mid-30% area, and total debt to EBITDA of no more than 2x, in the near term.

The financial risk assessment reflects MasTec's aggressive financial profile and only fair financial flexibility, with total debt (including the present value of operating leases) to adjusted EBITDA of about 4.9x at Dec. 31, 2002, S&P said.

The company has taken a number of actions, such as avoiding higher-risk clients, and strengthening collection procedures. Nonetheless, the company took another $15 million in charges to reserve for receivables from customers that are in financial distress, S&P noted. In 2002, approximately 93% of cash flow generated from operations was from tax receipts, as the firm has not been able to reduce its cost structure or strengthen its working capital management quickly enough.

Fitch rates Delta B+

Fitch Ratings initiated coverage of Delta Air Lines, Inc. and assigned a B+ rating to its senior unsecured debt. The outlook is negative.

The B+ rating reflects Delta's limited cash flow generation capacity at a time of great turmoil in the U.S. airline industry, Fitch said. Although Fitch believes that Delta is clearly a survivor among the major network carriers-even in the event of a larger than expected war-related demand and fuel shock, Delta still faces large losses again in 2003 and the prospect of a diminished liquidity position by year-end.

The airline's announcement on March 10 that it does not expect to generate positive cash flow from operations in the first quarter foreshadows a period of great uncertainty over air travel demand and fuel costs tied to the anticipated start of an Iraqi war, Fitch added. Under almost any war scenario, Delta and the other U.S. airlines are facing a period of depressed bookings and high fuel costs that will delay a return to acceptable operating performance and positive operating cash flow.

In spite of the discouraging near-term cash flow outlook, Delta possesses certain critical advantages that should allow it to weather additional demand and fuel shocks, Fitch said. Relative to the other solvent network carriers-particularly American and Continental, Delta has a comfortable liquidity position ($2.0 billion in cash on hand as of December 31, 2002 and $500 million of revolver availability). Fitch believes that this liquidity buffer will ensure Delta's survival and allow the company to undertake a restructuring plan outside of Chapter 11. This is the airline's stated objective, as it manages the company for maximum cash flow in 2003. Delta's goal is to meet 2003 debt maturities and non-aircraft capital spending needs with cash flow from operations.

S&P puts Marconi on watch

Standard & Poor's put Marconi Corp. plc on CreditWatch with negative implications including its $900 million 7.75% bonds due 2010 and $900 million 8.375% bonds due 2030, €1 billion 6.375% notes due 2010 and €500 million 5.625% notes due 2005 at C.

S&P said the watch placement follows Marconi's announcement that it has filed proposed Schemes of Arrangement under the Companies Act 1985 with the English High Court.

The filing is an important step in Marconi's financial restructuring and affects about $3 billion of bond debt.

The CreditWatch placement reflects the high probability of an imminent debt restructuring through the proposed Schemes of Arrangement, S&P said.

Although Marconi may avert bankruptcy through the scheme, S&P said it would view completion of the scheme as tantamount to default given that the value of the proposed offer is materially less than the originally contracted amount and that, according to Marconi, there is no practical alternative to the scheme, other than to start insolvency proceedings, which would result in a lower return for creditors.

S&P rates Denbury notes B

Standard & Poor's assigned a B rating to Denbury Resources Inc.'s new $225 million senior subordinated notes due 2013 and confirmed its existing ratings including it senior secured debt at BB.

Proceeds from the notes will be used to refinance the company's outstanding $200 million principal amount of 9% senior subordinated notes due 2008.

Denbury's financial profile will benefit from the reduction of interest expense (as the new note coupon is 7.5%) and the extension of its debt maturities, S&P said.

The ratings on Denbury reflect the company's midsize reserve base, a worse-than-average cost structure, and an aggressive growth strategy, S&P added. These weaknesses are tempered by the company's high percentage of company-operated properties that require modest future development expenses and have a fairly long reserve life, which provides the company with meaningful operational and financial flexibility. Denbury has a highly leveraged capital structure, but reduces operating cash flow risk by hedging more than 50% of its production.

Although Denbury has high operating costs, regional concentration enables Denbury to manage its asset base using a minimal number of employees, resulting in a fairly competitive general and administrative cost of about $1.00 per boe, S&P said.

Denbury's financial policies are aggressive, S&P said. As of Dec. 31, 2002, total debt-to-total capital was about 49%. While debt as a percentage of total capital increased slightly as a result of the Coho Energy Inc. acquisition in August 2002, barring significant acquisitions, S&P said it Poor's expects Denbury to continue to use proceeds from internally generated cash flow and modest property sales ($27 million in asset sales closed in February 2003) to lower its debt leverage to less than 45% during 2003.

Moody's rates Swift notes B2

Moody's Investors Service assigned a B2 rating to Swift & Co.'s senior subordinated notes due 2010 and confirmed its existing ratings including its $350 million senior secured revolving credit maturing 2007 and $200 million term loan maturing 2008 at Ba2 and $268 million 10.125% senior unsecured notes due 2009 at B1. The outlook is stable.

The notes originally were issued in connection with Swift's purchase of the beef, pork and lamb processing business from ConAgra Foods, Inc in September 2002. The notes initially were held by ConAgra, and now are being remarketed to third party investors.

Moody's said Swift's ratings are limited by the company's high financial leverage relative to its low margin commodity processing business, the seasonality and cyclicality inherent in protein products, as well as weather, livestock disease and product contamination risks, and government agricultural regulations and trade policies.

Additionally, the ongoing consolidation in retail and foodservice markets has maintained pricing pressure on processors, constraining processor margins, while underlying demand growth is low, Moody's said.

The ratings are supported by Swift's scale and position as the third largest producer of fresh beef and pork in the U.S. and the largest beef producer in Australia. Swift has a diverse customer base and distribution reach through all major channels, a well established business platform, and benefits from a management team that has operated the business over the past few years as part of ConAgra, Moody's said.

The stable ratings outlook assumes some ability of major meat processors to pass through increases in input costs (which are subject to commodity cycles), and incorporates the potential for lags in pass-through pressuring margins for a period of time. The stable outlook could be pressured should changes in market dynamics significantly decrease cash flow for a sustained period. Ratings upside is limited until leverage is reduced, Moody's said.

S&P keeps Jackson on watch

Standard & Poor's said Jackson Products Inc. remains on CreditWatch with negative implications including its corporate credit rating at CCC. The ratings were put on watch on Jan. 13.

S&P said Jackson faces significant near-term liquidity challenges, with approximately $2.5 million in bank debt amortization due March 31, 2003 and a $5.5 million interest payment on its subordinated debt on April 15, 2003.

As of Sept. 30, 2002, Jackson Products had about $2.5 million in bank credit facility availability and around $200,000 in cash.

Potentially further straining liquidity is that Jackson Product's first two quarters usually require an investment in working capital. As a result, it is highly likely that without a restructuring of the company's debt or an equity infusion, the company will not be able to meet its debt obligations, S&P said.

As a result of operating results that were below the firm's expectations, Jackson Products was in violation of its bank covenants at the end of the third quarter of 2002 at Sept. 30, 2002. The company received a forbearance agreement from its senior lenders and is currently in the forbearance period.

S&P cuts Brown Jordan

Standard & Poor's downgraded Brown Jordan International Inc. including cutting its subordinated debt to D from CCC+ and senior secured bank loan to CC from B.

S&P said the downgrade is in response to Brown Jordan's default on its subordinated debt interest payment due Feb. 15 on notes that mature 2007.

For its fiscal year ended Dec. 31, 2002, Brown Jordan breached certain of its covenants on its bank debt. As a result, its bank group prevented the company from making its subordinated debt interest payment, S&P said. Brown Jordan is currently in discussions with its bank group to amend its senior credit facility.

S&P keeps Tyco on watch

Standard & Poor's said Tyco International Ltd. and its subsidiaries remain on CreditWatch with negative implications including its senior unsecured debt at BBB- and subordinated debt at BB+.

S&P said Tyco's recent announcement that it will take pretax charges of $265 million to $325 million and lower earnings guidance will not cause a ratings change or alter its intention to confirm the ratings with a stable outlook if structural subordination concerns are successfully addressed.

The charges stem from accounting issues identified primarily in the Fire & Security Services business and relate to cleaning up bad debt, inventory reserves, and inappropriate use of purchase accounting reserves. Senior management of the Fire & Security division has been replaced, and a number of formerly independent units were recently reorganized under a single management team. Tyco is implementing a process of intensified internal audits, detailed controls and in-depth operating reviews to identify and eliminate accounting inconsistencies and has indicated that additional charges are possible, S&P noted.

However, S&P said it does not expect current or potential future charges related to accounting practices to have a material cash impact or affect the future viability of Tyco's businesses.

Management has lowered its earnings guidance for the current fiscal year to $1.30 to $1.40 per share (including 9 cents to 11 cents per share for the charges), down from previous guidance of $1.50 to $1.75 per share, S&P added. Other than the charges, the decline is primarily attributable to weaker economic conditions and declining margins in the Fire & Security business. Commercial and industrial construction is soft, and the company continues to experience fairly high attrition rates as a result of past acquisitions and contract expirations. Higher credit standards for new customers, and intensified efforts to sell security contracts to new owners of homes in which systems have already been installed should help reduce attrition rates.

The company has put together a comprehensive plan for joint and several guarantees that would provide holding company creditors with access to at least two-thirds of the company's total tangible assets. S&P said it believes that this is a sufficient mitigant against structural subordination pending receipt of legal opinions regarding these arrangements.

If these opinions are acceptable, the ratings will be affirmed. If not, the corporate credit ratings would likely still be affirmed, but holding company debt-level ratings would each be lowered one notch, S&P added.

Moody's lowers GXS notes

Moody's Investors Service lowered Global eXchange Services' $105 million senior secured second lien floating rate notes to B2 from B1 and confirmed its senior implied rating at B1. The outlook remains stable.

Moody's said the floaters were lowered because of the higher amount of senior secured first lien debt in the company's capital structure relative to the value of the collateral securing it.

Other ratings were confirmed because Moody's considers that the decline in the company's Other Transaction Management Solutions business segment is partially offset by continued growth in the company's electronic data interchange business.

S&P cuts J.B. Poindexter, on watch

Standard & Poor's downgraded J.B. Poindexter & Co. Inc. and put it on CreditWatch with negative implications including cutting its $100 million 12.5% senior notes due 2004 to C from B-.

S&P said the action follows the company's announcement that it has initiated discussions with its bondholders on restructuring its 12.5% senior unsecured notes due May 2004.

S&P said that although holders of the outstanding notes have the option of exchanging them at a slight premium for new notes that mature in May 2007, it views the exchange, when consummated, as tantamount to a default because the maturity is extended beyond the original maturity date and because the company can pay interest in either cash or payment in kind.

Barring acceptance by bondholders of the exchange, they may suffer significant loss of principal.

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