Moody's cuts AutoNation's outlook

Moody's Investors Service lowered its outlook on AutoNation, Inc. to negative from stable and confirmed its ratings including its $200 million revolver due 2003 and $300 million revolver due 2006 at Ba2, $450 million senior unsecured 9% notes due 2008 at Ba2 and speculative grade liquidity rating of SGL-2.

Moody's said the outlook change is in response to AutoNation's announcement of its intention to increase its restricted payment basket by $400 million for near-term share repurchases.

Moody's said it believes there is potential for greater financial volatility and a higher risk profile following what the rating agency is a shift in management's financial policies. A failure to moderate other spending following the share repurchase could lead to increased leverage, and could also result in a lower level of financial flexibility to negotiate a challenging and uncertain business environment

AutoNation's debt protection measures and liquidity will decline modestly as a result of the proposed buyback, but will remain appropriate for its rating category, Moody's said.

The ratings continue to reflect expectations that AutoNation can sustain and continue to improve operating performance; the expectation of a favorable resolution to discussions with the IRS regarding its $680 million deferred tax liability; a reduction in integration risk from prior acquisitions as the company matures; and the expectation of reduced acquisition activity following the stock repurchase, Moody's added.

The ratings also recognize that AutoNation's contingent liabilities could result in material cash outflows in the future, Moody's said. They also reflect the somewhat low performance and productivity measures relative to some smaller megadealers as a result of AutoNation's prior focus on acquiring rather than integrating dealerships.

S&P rates Tucson Electric loan BB+

Standard & Poor's assigned a BB+ rating to the second mortgage bonds securing Tucson Electric Power Co.'s new $400 million bank facility. The outlook is stable.

S&P said the rating is one notch higher than Tucson Electric's corporate credit rating of BB and one notch below its first mortgage bonds at BBB- reflecting the over-collateralization by pledged assets of the maximum amount of second mortgage bonds that could be outstanding under the terms of the bank facilities.

Tucson Electric's ratings reflect an average business profile and a financial profile characterized by very high, long-term debt and weak financial ratios associated with servicing such a large debt burden, despite healthy cash flow at the vertically integrated utility, S&P said.

Serving Tucson and two neighboring counties, the utility is seeing growth in overall customers, particularly residential customers, yet a continued lack of diversity in the industrial base (copper mining, defense, and health care) that accounted for more than 40% of retail sales in 2001, S&P said.

The business profile also reflects a supportive regulatory environment that prohibits the distribution of dividends of more than 75% of the utility's earnings in any single year to UniSource Energy Corp., Tucson Electric Power's unrated parent, S&P added. Dividends paid in 2001 were 67% of earnings and dividends and a similar level is projected in fiscal 2002.

These favorable business profile characteristics are offset by relatively high frozen rates and the absence of a fuel adjustment clause, S&P said. Tucson Electric Power is evaluating the viability of building two additional coal-fired generating facilities, Units 3 and 4 at the Springerville station, for an estimated project cost of over $1.4 billion. Depending on cost, structure, and Tucson Electric Power's role, the 800 MW project could strengthen or weaken the utility's profile. Construction was expected to begin in late 2002, but as of October 2002, no firm agreements have been reached with interested participants.

Despite a healthy cash flow at the utility, leverage is exceptionally high, at slightly under 85%, and is projected to decline only gradually - to about 78% - over the next five years, S&P said. Funds from operations coverage of interest is also quite weak, given the high leverage, at only 2.4 times in fiscal 2001 and projected to be 2.3x in fiscal 2002. Coverage is projected to improve to a level appropriate for the current ratings within a few years, as Tucson Electric Power uses excess cash to pay down debt and buy back capital lease debt on an accelerated schedule.

S&P cuts ONO

Standard & Poor's downgraded Cableuropa SA and its ONO Finance plc subsidiary and assigned a negative outlook. Ratings lowered include ONO's $200 million 14% bonds due 2011, $275 million 13% notes due 2009 €125 million 13% notes due 2009, €150 million 14% exchangeable bonds due 2011 and €200 million 14% notes due 2010, all cut to CCC- from CCC+.

S&P said the downgrade reflects increasing concerns about Cableuropa's ability to achieve the organic growth rates the company requires to adequately service its very high levels of debt in the medium term and to remain compliant with covenant tests providing access to its credit facility, particularly in the second half of 2003.

Cableuropa achieved positive EBITDA of €854,000 in the second quarter of 2002, S&P noted. The company is highly leveraged, however, with debt of €1.2 billion, and incurred heavy negative free cash flow of €333 million in the first half of 2002, due mainly to heavy interest costs and capital expenditures.

Cableuropa needs to increase earnings very quickly in order to be in a position to service its debt adequately and to meet the covenant tests of its credit facility, the headroom of which will become tight in the second half of 2003, S&P said.

Furthermore, the strong earnings growth required needs to be achieved within a challenging competitive and economic environment. Specifically, Cableuropa faces tough competition, depressed consumer demand linked to the general economic slowdown, and very poor capital market conditions, S&P added.

Moody's continues review of Sealy

Moody's Investors Service said Sealy Corp. remains on review for possible downgrade. Ratings affected include Sealy's $100 million senior secured revolving credit facility due 2002, $125 million senior secured term loan A due 2002 and $330 million senior secured AXEL term loans due 2004-2006 at B1 and $250 million 9.875% senior subordinated notes due 2007 and $128 million 10.875% senior subordinated discount notes due 2007 at B3.

But Moody's noted that a successful and appropriate refinancing of Sealy's revolving credit facility would likely lead to a conclusion of the review with a confirmation of the existing ratings.

Moody's originally placed Sealy's ratings on review in August 2002 following the company's increase in bad debt reserves related to affiliated retailers and its announcement of potential further investments in affiliates. Additional concerns related to the approaching maturities on Sealy's credit lines.

Since the initial review action, Moody's said it believes that Sealy is positively addressing concerns related to affiliates. It is expected that these retailers will no longer be affiliates, thereby removing potential conflicts of interest regarding sales, investments and trade support. One affiliate, Mattress Firm, was sold this week to an independent private equity firm, Sun Capital Partners, with experience in mattress and furniture retail.

Based on Sealy's third quarter 10-Q filing and the press release announcing the sale, this transaction appears to have come with minimal further investment by Sealy while allowing for a continuation of the supply agreement, Moody's said.

The other affiliate, Mattress Discounters, which filed for bankruptcy protection this week, is seeking court approval for a new supply agreement that would add $3 million of credit to Sealy's existing credit and secured exposure of around $22 million. Mattress Discounters is also seeking approval for the sale of California locations to Sleep Train, an independent existing customer of Sealy's, and is in negotiations with independent parties for its other core locations (primarily in the northeastern U.S.).

Despite the slight further credit exposure and the possibility of lost sales from store closures or lost selling space, Moody's said it views these developments favorably as Sealy is more likely to secure profitable supply agreements, pursue additional sales in these markets, and manage its retail relationships for the benefit of its own stakeholders.

Moody's added that its review is now primarily focused on the upcoming maturity of Sealy's $100 million revolving credit facility and the company's plans to maintain adequate liquidity. Given the scope of Sealy's business, its approaching debt service obligations, and the transitioning of a significant portion of its business away from affiliated retailers, a successful revolver refinancing is viewed as critical to support Sealy's ratings.

S&P rates Sinclair notes B

Standard & Poor's assigned a B rating to Sinclair Broadcast Group Inc.'s planned $125 million 8% senior subordinated notes due 2012 and confirmed the company's existing ratings including its bank debt at BB, subordinated debt at B and preferred stock and trust preferreds at B-.

The ratings on Sinclair continue to reflect the company's large television audience reach, cash flow diversity, and strong margin and discretionary cash flow potential, S&P said.

Offsetting factors include the company's high financial risk from aggressive, debt-financed TV station acquisitions, and mature long-term growth prospects for TV advertising, S&P added. About one-third of Sinclair's total revenue is derived from generally lower-ranked stations affiliated with the still-developing WB and UPN TV networks.

Sinclair is enjoying good year-over-year revenue and EBITDA growth from stronger overall advertising, bolstered by political spending, S&P noted. The company has indicated that preliminary third quarter results will include a healthy 10.3% revenue increase and a 24.2% rise in EBITDA before corporate expense. Despite these gains, the economic outlook remains soft and the advertising climate beyond the immediate term is uncertain. Without a base from political and Olympic advertising in 2003, TV operators will be more dependent on general advertising.

S&P said it is also concerned that Sinclair's generally lower ranked stations could be harder hit by any advertising weakness in the still-competitive environment.

Stronger revenue has helped lift Sinclair's EBITDA margin to roughly 34%, about 2 percentage points higher than at the end of 2001, S&P said. Nevertheless, profitability is still below the above 40% level achieved in 2000. EBITDA to interest and debt-like preferred dividends in the upper-1 times is still somewhat modest weak for the rating. EBITDA to interest is almost 2x, compared to a 1.6x bank covenant. This covenant tightens to 1.7x in 2003, decreasing the cushion for softer revenue performance. Debt plus debt-like preferred stock divided by EBITDA is high, at about 7x. Debt to EBITDA is roughly 6x, compared with the covenant, which remains at 7x through 2003.

Moody's rates Bell ActiMedia's loan Ba3; notes B3

Moody's Investors Service rated Bell ActiMedia Inc.'s C$1.64 billion senior secured credit facility at Ba3 and its C$600 million senior subordinated notes at B3. The outlook is stable.

The senior secured credit facility consists of a C$100 million six year revolving line of credit, a C$400 million six year amortizing term A and a C$1.14 billion eight year term B. The borrower of the facility is Fin Co, an intermediate holding company. Security for the loan is all assets of the borrower and its existing proposed subsidiaries.

Fin Co is also issuing the C$600 million 10-year notes.

The ratings reflect the high pro-forma financial leverage and low coverage of interest expense relative to the ratings category, Moody's said. Total pro forma debt well exceeds revenue, adjusted EBITDA less capital expenditures covers pro-forma interest expense less than two times and free cash flow is less than 10% of total debt.

Ratings recognize the company's incumbency with Bell Canada, its solid penetration rates at over 40% of local Canadian businesses, its exclusive ownership of the Yellow Pages trademark in Canada and its continued use of Bell Canada for transitional and long-term operating services, Moody's explained. Ratings also reflect the historical stability of revenues.

The stable outlook reflects the expectation of stable margins and returns throughout the intermediate term allowing for flexibility during the transition into a stand-alone entity.

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