Moody's lowers Panavision's loan, confirms notes

Moody's Investors Service lowered Panavision Inc.'s $290 million secured credit facilities to Caa1 from B3. The company's approximately $140 million of 9 5/8% senior subordinated discount notes were confirmed at Ca. The outlook remains negative.

The credit facilities are guaranteed by the domestic subsidiaries and 65% of foreign subsidiaries. Asset value is considered uncertain due to the highly specialized nature of the equipment and limited number of buyers, Moody's said. In addition, 13% of total assets are housed in foreign, non-guarantor subsidiaries, increasing difficulty of recovery.

The downgrade and negative outlook reflect "heightened concerns" over the potential of a near-term liquidity shortfall, partly because the previously proposed recapitalization plan, which included new bank loans and senior secured notes, was never executed, Moody's said.

"Panavision continues to have an unsustainably high level of leverage, cash flow constraints, performance below management projections, the potential for bank covenant violations, and thus serious liquidity pressure by the end of 2002," Moody's explained. "In addition, Moody's is not aware of any steps being taken by management to allow greater flexibility within its existing bank agreement."

Another concern is Panavision's value due to the opposition by some shareholders of the acquisition of the company, Moody's added.

On the plus side, Panavision maintains a dominant position in the North America feature films, television and commercial markets. Furthermore, strong relationships and limited competition help preserve the company's market position.

Moody's cuts PG&E National Energy

Moody's Investors Service downgraded PG&E National Energy Group, Inc. and some of its subsidiaries and kept them on review for possible downgrade, affecting $3.6 billion of debt. Ratings lowered include PG&E National Energy's senior unsecured debt and syndicated bank credit facility to B3 from B1, PG&E Gas Transmission Northwest's senior unsecured debt to Ba1 from Baa3, USGen New England, Inc.'s passthrough certificates and syndicated bank credit facility to B2 from Ba3 and Attala Generating Co., LLC's senior secured debt to B2 from Ba3.

Moody's said the action and review for downgrade reflects National Energy Group's weak operating performance, low operating cash flow relative to its debt, and tight liquidity.

National Energy Group's revolving credit facility expires on Oct. 21 and the company is working with its banks to seek an interim extension, Moody's noted. Additionally, National Energy Group disclosed in a SEC filing that it had notified the lenders under its construction revolver that it does not intend to make further equity contributions. National Energy Group is in negotiations with these lenders over provisions to fund completion of these projects.

S&P rates AES' new loan, notes BB

Standard & Poor's assigned a BB rating to AES Corp.'s proposed $1.62 billion senior secured bank facility and $350 million senior secured exchange notes. The existing ratings including its B+ corporate credit rating remain on CreditWatch with negative implications.

S&P said it views the default risk of the bank facility and exchange notes as B+ but rates them two notches higher because it has a high degree of confidence that the collateral package provides enough value for lenders to realize 100% recovery in a likely default or stress scenario.

The collateral package consists of 100% of AES' equity interests in its domestic businesses and 65% of the equity in its foreign businesses, S&P noted. The analysis assumes a bankruptcy court would accord priority to the senior lienholders in a bankruptcy. In addition to the liens granted, 50% of the proceeds of the Cilcorp sale, which are not included in the collateral calculation, are to be used to pay down the bank facility.

The successful execution of this transaction would give AES much needed flexibility by eliminating the immediate liquidity pressure and pushing out any substantial maturities until 2005, S&P said.

However, reliance on bank financing could present risks as banks could exert increasing control over AES' financing and operations should AES be unable to reduce its debt burden to a more manageable level by selling assets, the rating agency added.

If the transaction is successful, AES' corporate credit rating would remain B+, reflecting the company's cash flow profile relative to its debt burden, and the outlook would likely be negative, reflecting the continued need to sell assets and pay down debt, S&P said.

As asset sales are announced and executed and debt is paid down, the rating would change, reflecting the changing cash flow profile and debt burden.

When the transaction is executed, S&P said it will rate all unsecured debt at B-, reflecting its disadvantaged position in a bankruptcy. Standard & Poor's will not differentiate between senior and subordinate issues in this regard. All subordinate unsecured debt will also be rated B-, not CCC+ as previously reported. Trust preferred securities would be rated CCC+, and not CCC as previously reported.

S&P takes Gray Television off watch

Standard & Poor's confirmed Gray Television Inc., removed the company from CreditWatch with negative implications and assigned a stable outlook. Ratings affected include Gray Television's $50 million revolver due 2006, $200 million term loan B due 2006, proposed $75 million senior secured revolving credit facility due 2009 and proposed $375 million term loan B due 2010 at B+ and its $280 million 9.25% subordinated notes due 2011 at B-.

S&P said the action follows Gray Television's sale of $247.5 million in common stock. The ratings had been put on CreditWatch on April 4 due to concerns about how the company might fund its planned purchase of Stations Holdings Co., Inc., the parent company of Benedek Broadcasting Corp.

Proceeds from the stock offering and the proposed bank loan will fund the Benedek purchase, which is expected to close around Oct. 22, S&P said.

These acquisitions will add 16 small-to medium-market television stations to Gray's 13 existing TV stations and four newspapers and will improve the company's network-affiliation, geographic, and cash flow diversity, S&P said. The stations will reach 5.3% of U.S. households and are affiliated with the three major broadcast networks.

Gray's key credit ratios will improve modestly as a result of the Benedek acquisition and equity offering, although its financial profile will remain aggressive and it is expected to remain acquisitive, S&P said. Pro forma leverage and EBITDA coverage of interest were 6.8 times and 1.8x, respectively, at June 30, 2002, compared with 7.2x and 1.5x for Gray on a historical basis. These ratios should improve by year-end due to improving TV advertising conditions and an expected boost from political spending in the second half of the year. The lack of political or Olympic advertising will weigh on EBITDA in 2003, as may continued economic weakness.

Heavy capital spending for required digital TV conversions has hurt discretionary cash flow over the past year, but improving profitability and a moderation in capital expenditures should aid discretionary cash flow in the near term, S&P added.

S&P cuts AT&T Canada

Standard & Poor's downgraded AT&T Canada Inc. including its $250 million 12% notes due 2007, $170 million 10.75% senior discount notes due 2007, $225 million 10.625% notes due 2008 and $971 million 9.95% senior discount notes due 2008, all cut to D from C. The CC rating on its C$600 million bank facility is withdrawn.

S&P says International Shipholding unchanged

Standard & Poor's said its ratings on International Shipholding Corp. are unchanged with the corporate credit rating at BB- with a negative outlook.

S&P said its announcement follows International Shipholding's report of a $1.1 million loss in the third quarter of 2002 versus a loss of $0.2 million in the same period a year earlier. For the first three quarters of 2002, the company reported a loss of $0.9 million versus a loss of $62.9 million for the first three quarters of 2001, which included a $79.0 million impairment charge for the discontinuation of certain combination shipping/barge assets service.

The ratings on International Shipholding reflect stable, intermediate- to long-term ship charter agreements, with credit quality constrained by significant debt leverage on a modest capital base, S&P said.

If the company's financial profile fails to improve during the next few years, ratings could be lowered, S&P added.

Moody's rates Level 3 liquidity SGL-1

Moody's Investors Service assigned an SGL-1 Speculative Grade Liquidity Rating to Level 3 Communications.

The SGL-1 rating reflects the strength of Level 3's short-term liquidity position that comprised restricted and unrestricted pro-forma cash equivalents of $1.5 billion at the end of June 2002 plus $50 million immediately available for letters of credit under its recently amended and reduced revolving bank credit facility, Moody's said.

Level 3 recently turned EBITDA positive and management expects to generate $400 million in adjusted cash flow during 2002. Now that construction of its fiber-optic network is complete, capital spending has been substantially cut to $142 million in the first half of 2002 from $1.9 billion in the first half of 2001. Moreover, the company's debt repurchase program has helped lower interest expense to $260 million in the first half of 2002 versus $312 million in the prior year period, Moody's added. Based upon this reduced spending pattern, we estimate that Level 3 will end the first half of 2003 with approximately $1 billion in unrestricted cash plus $525 of restricted cash.

Moody's considers that Level 3's cash and expected cash flow will be more than sufficient to support its funding requirements over the next 12 months. Accordingly, the rating agency does not expect there will be any need to tap alternative liquidity sources, including the stock of Commonwealth Telephone Company with a current market value of approximately $225 million, plus $50 million of bank revolver availability.

S&P cuts A&P

Standard & Poor's downgraded The Great Atlantic & Pacific Tea Co. Inc. Ratings lowered include A&P's $200 million 7.7% senior notes due 2004, $300 million 7.75% notes due 2007, $200 million 9.375% senior unsecured notes due 2039 and $275 million 9.125% senior notes due 2011, cut to BB- from BB, and its $425 million senior secured revolving credit facility due 2003, cut to BB from BB+. The outlook is negative.

S&P said A&P's ratings reflect weak earnings and cash flow protection, which are somewhat mitigated by A&P's satisfactory market shares in its major operating areas.

Most of A&P's markets are experiencing increased promotional activity from both traditional supermarkets and nontraditional channels of distribution, as operators struggle for market share in a soft consumer spending climate, S&P said. Trading down to lower-margin products by consumers and deflation in certain product categories are compounding the difficulties in the sector.

A&P's operating profitability over the past two years has been uneven, and current trends are poor, the rating agency added. Although same-store sales rose 0.5% in the second quarter, EBITDA fell to $59 million from $74 million in the prior year. This follows a rise in operating profit for fiscal 2001 (ended Feb. 23, 2002). The inconsistent performance reflects a high cost structure and mixed results from restructurings, which included store closings and a program to improve the supply chain and information technology infrastructure.

The negative outlook indicates that if current trends do not reverse cash flow protection measures could weaken further, and the rating could be lowered, S&P said.

S&P keeps EchoStar, Hughes, PanAmSat on watch

Standard & Poor's said EchoStar Communications Corp., Hughes Electronics Corp. and PanAmSat Corp. all remain on CreditWatch. S&P gives EchoStar a B+ corporate credit rating with a positive CreditWatch and Hughes and PanAmSat a BB- corporate credit rating with a negative CreditWatch.

S&P said the companies continue on CreditWatch pending receipt of further clarity on business combination transactions involving the three companies.

The FCC recently decided not to approve the proposed merger between EchoStar and Hughes and designated the merger application for administrative hearing, S&P noted. Although the likelihood of a merger is diminished, the companies still have the opportunity to continue working towards gaining merger approval.

EchoStar and Hughes are expected to propose structural remedies to the deal, possibly including the transfer of satellite orbital slots and spectrum to a third-party competitor in order to receive government approval, S&P said.

However, given the FCC's unanimous vote declining to approve the original transaction, the companies could face long odds in obtaining approval, even with concessions.

Under existing deal terms, EchoStar could be required to purchase PanAmSat, for about $3.4 billion plus about $2.55 billion of existing PanAmSat debt, whether or not the EchoStar and Hughes merger is completed, S&P noted. EchoStar may also be obligated to pay a $600 million breakup fee to Hughes if the merger is terminated.

S&P added that it believes that the corporate credit rating of a combined EchoStar and PanAmSat could be higher than B+, based on the improving business and credit profile of EchoStar, and PanAmSat's strong business position and comparatively lower leverage.

Moody's puts TXU on review

Moody's Investors Service put TXU Corp. and its U.S. subsidiaries on review for possible downgrade to junk, affecting $20 billion of securities. Ratings affected by the action include TXU at Baa3, TXU Energy at Baa2, Oncor Electric Delivery with a senior secured rating of A3 and TXU Gas at Baa2.

Moody's said its action follows developments in the past week that saw a rapid deterioration in the credit profile of TXU Europe (Ca senior unsecured). The deterioration resulted from TXU's decision to insulate its U.S. businesses from the problems in Europe and to shore up its liquidity and financial flexibility. These steps included the decision not to make additional investments in Europe, to significantly reduce the common stock dividend and capital spending budget, and to amend the parent's working capital facility to carve out Europe from cross-default provisions and financial covenants.

Moody's said it is concerned about the potential write-downs or write-offs that could stem from TXU Europe's difficulties as well as any financial impact of legal actions against the company.

S&P cuts Outsourcing Solutions

Standard & Poor's downgraded Outsourcing Solutions Inc. and kept it on CreditWatch with negative implications. Ratings affected include Outsourcing Solutions' $100 million 11% senior subordinated notes due 2006, cut to C from CCC+.

S&P said the downgrade is in response to Outsourcing Solutions' continued weakened financial performance, which has restricted its capacity to meet its subordinated debt obligations.

Although revenues for the first six months ending June 30, 2002 of $317.5 million were 5.2% higher than for the same period in 2001, EBITDA fell by about 8% to $53.8 million as compared to the same period last year, S&P noted.

Moody's cuts Atlas Air, still on review

Moody's Investors Service downgraded Atlas Air, Inc. and kept it on review for possible downgrade, affecting $1.6 billion of debt. Ratings lowered include Atlas Air's $152.9 million 9¼% senior unsecured notes due 2008, $147.0 million 9 3/8% senior unsecured notes due 2006 and $137.5 million 10¾% senior unsecured notes due 2005, cut to Caa1 from B2, $51.0 million secured aircraft revolver/term loan due 2005, cut to B3 from Ba2, $172.6 million Series 2000-1 EETC class A cut to Baa2 from A2, class B cut to Ba1 from Baa2 and class C cut to Ba3 from Ba2, $457.3 million Series 1999-1 EETC class A cut to Baa2 from A2, class B cut to Ba2 from Baa2 and class C cut to B1 from Ba2 and $467.4 million Series 1998-1 EETCs class A cut to Baa3 from A2, class B cut to Ba2 from Baa2 and class C cut to B1 from Ba2.

Moody's said it cut Atlas Air because of the increased financial risks facing the company in light of the continued depressed economic conditions limiting air cargo demand and the company's announcement that if will undergo a re-audit of financial statements for fiscal 2000 and 2001, and the significant restatement of book equity likely to ensue.

Moody's said its concerns have increased about Atlas' ability to avoid violations of covenants related to its senior secured credit facilities.

The company had been successful in obtaining amendments on covenant restrictions through December 2002, allowing Atlas to operate through 2002 in compliance with eased covenant levels, Moody's noted. However, considering the projected reduction in book equity caused by the restatement of the previous two years' earnings ($60-65 million estimated effect on equity), only partially offset by assumed benefits from re-statements in 2002, the company has become more likely to breach the minimum net worth covenants as currently stipulated by the terms of their senior secured credit facility.

The downgrade of all of Atlas' EETC ratings reflects both the lowered senior implied rating as well as the deterioration of freighter aircraft market values, Moody's said.

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