Moody’s puts Grant Prideco on review

Moody’s Investors Service put Grant Prideco on review for downgrade including its $200 million 9.625% seven-year senior unsecured notes at Ba3.

Moody’s said it began the review in response to Grant Prideco’s announcement of a $350 million acquisition of Reed-Hycalog’s assets from Schlumberger.

The ratings may be confirmed or downgraded by one notch before or upon the closing, depending on ongoing trends in sector drilling activity, the emergence in late 2002 of oil and gas producers’ 2003 drilling capital spending budgets, expected subsequent pro-forma impact on Grant Prideco performance, and further assessment of Reed’s market share and stand-alone trends, Moody’s said.

Moody’s said the note rating was already one notch below the Ba2 senior implied rating, partly in anticipation of a leveraged acquisition but not necessarily one of Reed’s scale during sector weakness.

Grant Prideco is paying 6.6x Reed’s reported EBITDA (12 months June 30, 2002) or 7x after added G&A costs needed when the new owner takes over, Moody’s said.

Debt/capital would increase to roughly 45% and debt/tangible capital would rise to roughly 72% to 78%, Moody’s said. At a pro-forma third quarter 2002 annualized EBITDA of roughly $128 million, pro-forma debt/EBITDA would be in the range of 3.9x and a modest recovery case debt/EBITDA in the range of 2.8x.

S&P puts Charter on negative watch

Standard & Poor’s changed the CreditWatch on Charter Communications Inc. to negative from developing, including its corporate credit rating at B+ and senior unsecured debt at B-.

S&P said the revision follows the company’s release of preliminary third quarter revenue and operating cash flow results that have fallen short of earlier guidance.

The ratings were placed on CreditWatch with developing implications on Aug. 20, 2002, based on uncertainties associated with a federal grand jury subpoena, S&P noted. At that time, the rating agency said that if no material negative impact resulted from the investigation, the ratings could be raised.

The revision of the CreditWatch implications to negative based on the company’s weak operating performance means that the ratings will not be raised in the near term.

Charter’s revenue and operating cash flow for the third quarter grew by 12.6% and 8.7%, respectively, on a year-over-year basis. However, this represented a slight cash flow decline on a sequential basis, S&P said. The company also lost 85,000 basic subscribers, or about 1.25% of its total subscriber base during the quarter. As a result, credit measures have weakened since the end of the second quarter.

Charter is currently in compliance with its bank covenants. However, S&P said it believes the company’s cushion for poor operating performance could diminish in 2003.

In the event of covenant compliance problems, Charter’s access to external liquidity could be strained before it completes planned plant upgrades and begins generating positive discretionary cash flow.

S&P cuts Horizon PCS

Standard & Poor’s downgraded Horizon PCS Inc. and removed it from CreditWatch with negative implications. The outlook is negative. Ratings lowered include Horizon PCS’ $225 million senior secured credit facility bank loan due, cut to CCC+ from B-, and $125 million 14% senior discount notes due 2010 and $750 million 13.75% senior unsecured notes due 2011, cut to CCC- from CCC.

S&P said the downgrade reflects concerns over Horizon PCS’ limited headroom against execution risks under recently revised bank maintenance covenants and, separately, weak liquidity.

S&P said it believes that Horizon’s recently amended maximum EBITDA loss and minimum revenue covenants under its bank credit facility provide little margin of safety against execution risks, especially since these tests become more restrictive on a successive quarterly basis.

Given the weak economy, competition, and problems with sub-prime customers under the ClearPay program that have not yet been fully resolved, the company could find it challenging to meet these covenants. S&P added that it is particularly concerned about the maximum EBITDA loss test since it greatly tightens allowable loss from $22.6 million in fourth quarter 2002 to a loss of $9.2 million in first quarter 2003. To avoid covenant violation, the company has to profitably add a significant number of quality subscribers and resolve all ClearPay-related problems in the very near term.

Horizon has weak accessible liquidity. S&P said it estimates that Horizon had only about $32 million in accessible liquidity at the end of third quarter 2002 after excluding $168 million that the company could not use due to a minimum liquidity covenant newly placed in the revised bank credit agreement.

S&P cuts Globopar

Standard & Poor’s downgraded Globopar SA (Globo Comuniçações e Participações SA) and TV Globo Ltda. and put them on CreditWatch with negative implications. Ratings affected include Globopar’s $250 million 10.5% notes due 2006 and $500 million 10.625% notes due 2008, both cut to CC from B.

S&P said the action follows Globopar’s announcement that it will not service amortization or interest payments on any of its financial obligations within the next 90 days as part of a broad debt restructuring.

The CreditWatch reflects the imminent risk of default on coming maturities, S&P added. The listing will be resolved within the next few days, as Globopar is expected to default on a $10 million bank agreement on Oct. 31. At the time of the default, the ratings will be lowered further to D and removed from CreditWatch.

The default on the bank agreement will trigger the acceleration of virtually all of TV Globo’s and Globopar’s debt obligations, which the companies will not be able to meet given their current financial distress, S&P added.

Globopar’s own debt, not including contingent debt at certain subsidiaries, is $1.2 billion and is mostly guaranteed by TV Globo. Contingent debt at subsidiaries, guaranteed only by Globopar, amount to another $410 million. Debt maturities and interest payments coming due this year are estimated at about $130 million, including a $22 million put option on eurobonds in December.

S&P cuts Petroleum Geo-Services

Standard & Poor’s downgraded Petroleum Geo-Services ASA and removed it from CreditWatch with developing implications. The outlook is negative. Ratings lowered include Petroleum Geo-Services’ $200 million 6.625% senior notes due 2008, $200 million 8.15% senior notes due 2029, $250 million 6.25% senior notes due 2003, $360 million 7.5% notes due 2007 and $450 million 7.125% senior notes due 2028, all cut to B- from B+, and preferred stock, cut to CCC from B-.

S&P said it lowered Petroleum Geo-Services because of concerns about the effects of seismic market conditions, the difficulties of Petroleum Geo-Services operating as a distressed firm, and the company’s need to repay about $1 billion of maturing debt in 2003 during a period of potentially weak seismic industry conditions.

The negative outlook points to the possibility for further ratings downgrades as the company’s debt maturities approach, S&P added.

A reversal of the company’s credit ratings downgrades would be conditioned on Petroleum Geo-Services successfully executing a plan that positions it to comfortably meet its 2003 debt maturities and provide it with sufficient financial resources to cushion it against further possible deterioration in industry conditions, S&P said.

Petroleum Geo-Services is aggressively leveraged, with total debt to projected 2002 EBITDA of about 5.4 times and projected EBITDA interest coverage of about 3.0x, S&P said. Complicating Petroleum Geo-Services’ financial position is material refinancing risk in 2003, when a $250 million bank loan (June), $430 million revolving credit facility (September), and $250 million note offering (November) come due.

S&P confirms Aurora Foods

Standard & Poor’s confirmed Aurora Foods Inc. and removed it from CreditWatch with negative implications. The outlook is negative. Ratings affected include Aurora’s $100 million 9.875% senior subordinated notes due 2007 and $200 million 8.75% senior subordinated notes due 2008 at CCC and $175 million revolving credit facility due 2005 and $225 million term loan due 2005 at B-.

S&P said the confirmation and removal from watch indicates that it expects Aurora’s liquidity position will remain appropriate for its low speculative grade rating.

Aurora’s liquidity is tight, with only $31 million available under its $175 million revolving credit facility as of Aug. 6, 2002, S&P noted. In June 2002, Aurora obtained $62.6 million of new secured financing from related entities and its banks. Proceeds from this financing, along with an amendment to its credit facility, has provided the firm with needed liquidity to fund its operations.

On June 27, 2002, the company received an amendment to its senior secured debt agreement; Aurora Foods is currently meeting its new financial covenants (minimum interest coverage, maximum leverage ratio, and minimum EBITDA). However, within the intermediate term, the company must divest assets to meet its debt repayment schedule, S&P said.

Moody’s assigns Trump AC SGL-3 liquidity rating

Moody’s Investors Service assigned an SGL-3 speculative-grade liquidity rating to Trump Atlantic City Associates.

The SGL-3 rating indicates adequate liquidity for the next 12 months, Moody’s said, adding that it expects internally generated cash flow combined with existing cash balances will be sufficient to meet the company’s debt service requirements over the next 12-month period.

The SGL-3 rating also acknowledges that Trump AC’s assets are fully encumbered, and the ability to borrow funds for liquidity will continue to be restricted by covenants in the company’s first mortgage indenture, Moody’s added. Trump AC’s first mortgage notes contain a 2.5 times interest coverage test for taking on additional debt. The company’s annual interest coverage is currently 1.6x.

While Trump AC’s interest burden is significant, upcoming scheduled principal debt maturities are small, only $7.3 million in fiscal-year 2002 and about $10.0 million in fiscal-year 2003, Moody’s noted. The rating agency expects that the company will generate in excess of $50 million of cash flow after interest and capital expenditures in fiscal-year 2002.

Moody’s assigns Trump Hotels, Castle SGL-4 liquidity rating

Moody’s Investors Service assigned an SGL-4 speculative grade liquidity rating to Trump Hotels & Casino Resorts Holdings, LP and Trump’s Castle Funding, Inc.

Trump’s Castle’s SGL-4 rating reflects the risk related to the November 2003 maturities associated with its $242 million 11.75% mortgage notes, Moody’s said.

Trump Holdings’ SGL-4 rating acknowledges the interest burden of its 15.5% senior secured notes due 2005 relative to its operating cash flow. The company’s annual debt service burden, approximately $24 million, is about equal to its latest 12-month reported EBITDA. Trump Holdings does receive distributions from Trump AC for administrative services provided. If the high coupon debt at Trump Holdings and the near-term scheduled debt maturities at Trump’s Castle are eliminated through a successful restructuring, the SGL rating assigned to the surviving operating entity could be higher than the SGL-4 currently assigned to Trump Holdings and Trump’s Castle.

Fitch rates Dex Media notes B, B-

Fitch Ratings assigned a B rating to Dex Media East, LLC’s proposed offering of $450 million seven-year senior unsecured notes and a B- rating to its proposed $525 million of 10-year senior subordinated notes. The outlook is stable. Proceeds will help fund the acquisition of Dex Media East, LLC.

Fitch said its assessment reflects the company’s strong market position as the incumbent directory publisher within its service territory, the stability and consistency of its revenue stream, strong operating margins and anticipated free cash flow generation.

In Fitch’s view, revenue generated by yellow page publishers is not as sensitive to economic conditions as other forms of advertising. This is evident as aggregate advertising spending has declined since 2000, while yellow page advertising revenue has experienced modest growth.

Fitch’s ratings are further supported by the geographic and customer diversity of its revenue stream and the anticipation of low ongoing capital expenditures to support its business. A final benefit is the company’s high advertiser retention rate and the revenue visibility the company enjoys due to advertising contract timing.

Negatives are the high degree of leverage used to finance the acquisition, the amount of senior secured debt relative to the anticipated capital structure, and execution risks centered around operating as a stand-alone entity, Fitch said.

S&P cuts Trenwick

Standard & Poor’s downgraded Trenwick America Corp. and its subsidiaries and kept them on CreditWatch with negative implications.

Ratings lowered include Trenwick America’s $75 million 6.7% notes due 2003, cut to B from BB, Trenwick Capital Trust I’s $110 million 8.82% subordinated capital income securities (SKIS), cut to CCC from B, Chartwell Re Corp.’s $75 million 10.25% senior notes due 2004, cut to B from BB, and LaSalle Re Holdings Ltd.’s $75 million perpetual preferred shares series A, cut to CCC from B.

Moody’s downgrades NDCHealth, rates loan Ba3, notes B2

Moody’s Investors Service downgraded NDCHealth Corp. and assigned a Ba3 rating to its proposed $200 million senior secured credit facilities and a B2 rating to its proposed $175 million senior subordinated notes. Ratings lowered include NDCHealth’s convertible subordinated notes, cut to B2 from Ba3. The outlook is negative.

Moody’s said the downgrades are in response to NDCHealth’s increased financial leverage, as measured by debt-to-EBITDA and free cash flow to debt, following NDC’s recent acquisitions of TechRx

and Scriptline, and execution risk associated with the company’s launch of T-Rex One software, including the potential cost overruns and delays for the customized applications of T-Rex One.

Moody’s said it expects the second step of the TechRx acquisition, which is payable in May 2003 and will range from $100 to $200 million depending on achievement of certain milestones, will be financed with debt.

The negative outlook reflects execution risk surrounding the company’s launch of T-Rex One software, including the potential for cost overruns and delays for the customized applications of T-Rex One, which may increase NDC’s capital expenditure and limit its free cash flow (cash flow from operations less dividends less capital expenditure) for at least the near term.

Should the refinancing be successful and the TechRx implementation proceed well, Moody’s would strongly consider revising the outlook to stable.

S&P cuts Titanium Metals

Standard & Poor’s downgraded Titanium Metals Corp.’s $150 million 6.625% beneficial unsecured convertible securities (BUCS) due 2026 to C from CCC-. The corporate credit rating was confirmed at B-. The outlook remains negative.

S&P said the downgrade follows Titanium Metals’ announcement that it plans to defer future dividend payments on its preferred stock. The stock will be cut to D after TIMET defers the dividend payment on Dec. 31, 2002.

S&P cuts National Equipment

Standard & Poor’s downgraded National Equipment Services, Inc. Ratings lowered include National Equipment’s $275 million 10% senior subordinated notes due 2004, cut to CCC from B, and its $480 million revolving credit facility due 2003 and $70 million term A loan due 2003, cut to B- from BB-. The outlook is negative.

S&P said the downgrades reflect deteriorating construction market conditions and National Equipment Services’ near-term refinancing risk.

Operating performance has been affected by the sluggish economy. In addition, the company is confronted with significant maturities and liquidity issues that have required non-core asset sales, headcount reductions, and other cost reductions, S&P said.

The expected broad-based economic recovery in the second half of 2002 has failed to materialize to any great extent, and any meaningful recovery in the key nonresidential construction markets is not likely to occur until at least mid 2003, S&P said. Profitability has weakened as a result of a 20% decline in nonresidential construction spending and industry overcapacity. While utilization of equipment is higher, pricing is down by 5%-10%, affecting sales significantly.

The company has had to approach its banks for covenant relief, S&P added. The company is considering additional sales of non-core businesses and a reduction in headcount. In addition, to conserve capital National Equipment Services is holding down capital spending, which is expected to be about $38 million for 2002 and $57 million in gross capital expenditures in 2003. Meanwhile, in granting the amendments, the banks have reduced the facility to $550 million and placed other restrictions on the company, limiting its financial flexibility. Moreover, the company needs to extend or refinance its credit facility that is due in July 2003 and $275 million in notes due in November 2004.

S&P lowers United Rentals’ senior debt to BB; subordinated debt to B+

Standard & Poor’s lowered the ratings on United Rentals Inc., including the senior secured debt to BB from BB+, senior unsecured notes to BB- from BB and subordinated debt to B+ from BB-. The downgrade followed the company’s weaker-than-expected operating performance due to soft construction and industrial markets and excess industry capacity. All ratings were removed from CreditWatch and the outlook is stable.

“The ratings reflect the company’s position as the largest provider of equipment rentals in the U.S.; its good geographic, product, and customer diversity; exposure to cyclical construction end markets; and its moderately aggressive financial policy,” S&P said.

Due to the weaker operating numbers, the company had to amend its fixed charge coverage ratio on its credit facility. The company plans to exit certain markets, reduce headcount and close 35-45 locations. Expectations are for $300 million in gross rental capital expenditures in 2003, down from about $485 million estimated in 2002. Offsetting equipment sales of $150 million-$175 million should put free cash flow at about $300 million in 2003. Debt leverage is expected to average 3.0 times EBITDA, and funds from operations to total debt (adjusted for operating leases) is expected to range between 20%-25% over the intermediate term.

Moody’s assigns AmerisourceBergen SGL-3 liquidity rating

Moody’s Investors Service assigned an SGL-3 speculative-grade liquidity rating to AmerisourceBergen Corp.

The rating incorporates AmerisourceBergen’s need to rely on external sources of liquidity and the presence of a material adverse change clause in an existing accounts receivable agreement, balanced by solid near-term covenant compliance cushion and adequate cash flow, Moody’s said.

One of AmerisourceBergen’s accounts receivables programs contains a material adverse change (MAC) clause which, if triggered, would result in termination of the program, Moody’s noted. If a termination were to occur, a cross-default might be triggered under the bank agreement as well as under indentures of long-term debt. We believe the termination feature of this MAC clause provides additional vulnerability to the company’s liquidity position.

AmerisourceBergen has $150 million of senior notes coming due in January 2003 and $60 million of bank term debt amortizing during 2003, Moody’s noted. The company is presently considering its refinancing options which may include the issuance of public debt.

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