S&P cuts Broadwing, still on watch

Standard & Poor's downgraded Broadwing Inc. and kept it on CreditWatch with negative implications. Ratings lowered include Broadwing's $900 million five-year revolving credit facility, $750 million five-year term loan A, $450 million term loan B, $200 million senior secured tranche C revolving credit facility due 2007 and $50 million 7.25% secured notes due 2023, cut to B- from BB, Broadwing's $400 million 6.75% convertible subordinated notes due 2009 and Broadwing Communications' $450 million 9% senior subordinated notes due 2008, cut to CCC from B+ and $135 million 6.75% cumulative convertible preferred stock, cut to CCC- from B, and Cincinnati Bell Telephone Co.'s $120 million 7.2% medium-term notes due 2023 and $150 million 6.3% guaranteed debentures due 2028, cut to B- from BB.

S&P said the downgrade reflects a potential liquidity shortfall starting in the second half of 2003 and the increased risk of bank covenant violation if the company's long-haul data subsidiary, Broadwing Communications Inc., continues to perform below expectations in the absence of an amendment to Broadwing's bank credit agreement.

Broadwing may not be able to meet significant bank debt amortization starting in the second half of 2003. S&P said that based on its projection of about $200 million of liquidity at the beginning of 2003 and moderate free cash flow, Broadwing may not be able to meet about $200 million of bank debt amortization in the second half of 2003 and still have the financial flexibility to deal with execution risks.

Broadwing has already disclosed that it currently would not be able to meet about $1 billion of bank debt amortization in 2004. A material extension of the bank amortization schedule and/or new capital would be required for Broadwing to address a potential liquidity crisis in 2003 and beyond, S&P said.

Aside from the amortization issue, Broadwing faces increased risk of violating bank maintenance covenants if financial performance of Broadwing Communications, which accounts for about 50% of consolidated revenues and 30% of consolidated EBITDA, does not improve in the near term, S&P added. Due to the weak economy, glut of data transport capacity, and customers having financial problems, Broadwing Communications has experienced much weaker-than-anticipated revenues and EBITDA in the last two quarters.

S&P upgrades Lukoil

Standard & Poor's upgraded Lukoil OAO. The outlook is now stable. Ratings affected include LukInter Finance BV's recently issued $350 million convertibles bonds, upgraded to BB- from B+,

S&P said the upgrade reflects general improvement in the operating environment for Russian oil companies and reflects Lukoil's standing as the Russian Federation's largest oil company in terms of crude reserves, production and exports, tempered by its moderate cost structure and leveraged financial profile.

Also helping the rating is management's recent measures to improve the company's overall cost structure, as well as Lukoil's relatively prudent debt maturity profile and historically sound cash flow generation, S&P said.

Liquidity has also been strengthened by Lukoil's widened access to international capital markets; in November 2002, it successfully placed a $350 million 5-year convertible bond, S&P noted.

S&P raises Gazprom outlook

Standard & Poor's raised OAO Gazprom's outlook to positive from stable and confirmed its ratings including its B+ long-term corporate credit rating.

S&P said the positive outlook reflects its expectations that Gazprom will withstand pressures to divest parts of either its production or transmission operations and that its debt - currently standing at nearly $15 billion - will stabilize despite sustained capital spending.

The outlook also takes into account the fact that, in an improving fiscal and economic environment (partly reflected by the recent upgrade of the Russian Federation), increases in domestic prices for natural gas should be easier to accommodate, S&P said.

Any future ratings upgrade will depend on improvements in domestic price conditions and the company's efforts to spread out debt maturities and reduce its short-term financial obligations, S&P added.

S&P puts TNK on positive watch

Standard & Poor's put TNK International Ltd. on CreditWatch with positive implications including its long-term corporate credit rating at B+. TNK is the holding company for Tyumen Oil Co. OAO.

S&P said the positive watch reflects the general improvement in the operating environment for Russian oil companies, including their somewhat more stable fiscal regimes and widened access to international capital markets.

TNK, for example, successfully placed a 5-year $400 million eurobond in November 2002, S&P noted.

S&P said it expects TNK will bid to acquire part or all of the 74.95% stake in Slavneft that the Russian Federation plans to put on sale in December 2002, which prevents a straight upgrade of the company's ratings given the heavy cash outflows that such an acquisition might entail.

Slavneft is a vertically integrated oil company with 2001 EBITDA of $500 million, crude oil production of 13.5 million metric tons, mostly in western Siberia, and refining capacity of 17.6 million metric tons at three large refineries in Russia and Belarus. However, Slavneft also had more than $600 million of debt at year-end 2001.

S&P said it would most likely upgrade TNK to BB- with a stable outlook if the company does not take part in the Slavneft acquisition.

If TNK participates in the acquisition, any rating change would be less immediate and would depend on several factors such as final purchase price, terms and conditions of the financing, quality of the assets acquired, release of pro forma accounts, and TNK's relations with other possible co-owners, S&P said.

S&P rates Hollywood Entertainment notes B-, loan BB-

Standard & Poor's assigned a B- rating to Hollywood Entertainment Corp.'s 's proposed $200 million senior subordinated notes due 2011 and a BB- rating to its $250 million credit facility maturing in 2008. S&P also confirmed the company's B+ corporate credit rating. The outlook is stable.

The new credit facility, along with proceeds from the note offering, will be used to repay amounts outstanding under the company's existing credit facilities, redeem the balance of the company's existing 10.625% senior subordinated notes due 2004, and for general corporate purposes.

Hollywood Entertainment's $250 million senior secured credit facility is rated one-notch higher than the corporate credit rating. S&P said it believes the security interest in the collateral offers reasonable prospects for full recovery of principal if a payment default were to occur.

Hollywood Entertainment's ratings reflect the company's participation in the highly competitive and mature home entertainment industry, its dependence on its own domestic video business and decisions made by movie studios, and its leveraged balance sheet, S&P said. These risks are partially mitigated by the company's good position in the video rental industry and the positive effects of revenue-sharing agreements with movie studios.

Hollywood Entertainment's operating performance has been improving since the third quarter of 2001 as a result of management's initiatives to improve merchandising, customer service, and marketing, S&P added. The company had encountered operating difficulties from 1999 through the first half of 2001 due to poor execution of a rapid growth strategy.

In response to limited financial flexibility brought on by the company's poor operating results, management reduced labor and made inadequate investments in new releases, DVDs, and games. This resulted in a decline in customer traffic and a drop in margins to 22% in 2000 (excluding Reel.com) from 35% in 1998, S&P noted. The company generated a 22.9% EBITDA margin for the full year of 2001. In the first nine months of 2002, the company generated a 23.6% EBITDA margin versus 22.6% in the same period of 2001. The improvement is primarily the result of changes in merchandise mix and sales leverage. Standard & Poor's expects EBITDA margins to improve over the next few years due to better store execution and the maturation of the store base.

Hollywood Entertainment is highly leveraged, with total debt to EBITDA of 5.0 times, S&P said. Credit protection measures are adequate for the rating category with EBITDA coverage of interest of 1.9x.

Moody's cuts Cable & Wireless to junk

Moody's Investors Service downgraded Cable & Wireless plc to junk, including cutting its £200 million 8.75 % eurobonds due 2012, $400 million 6.5% eurobonds due 2003, $1.504 billion zero-coupon exchangeable bonds due 2003 and Cable & Wireless International Finance BV's £200 million 8.625% guaranteed eurobonds due 2019, all cut to Ba1 from Baa2. The outlook is negative. The downgrade concludes a review begun on Nov. 15.

Moody's noted it began the review because of concerns about the cost of restructuring the poorly performing Cable & Wireless Global operations.

The downgrade reflects uncertainties over the timing and size of potential additional unexpected costs and/or liabilities at Cable & Wireless plc, Moody's said.

Incorporated in the revised ratings is Moody's expectation that management will be able to move Cable & Wireless Global to a free cash-flow breakeven position within Cable & Wireless' operating year to March 2004.

The negative outlook reflects potential for further rating deterioration if this does not occur, Moody's added.

S&P upgrades Amscan, rates loan BB-

Standard & Poor's upgraded Amscan Holdings Inc. and removed it from CreditWatch with positive implications. The outlook is stable. Ratings raised include Amscan's $110 million 9.875% senior subordinated notes due 2007, upgraded to B from B-. S&P also assigned a BB- rating to Amscan's $170 million senior secured term loan due 2007 and $30 million senior revolving credit facility due 2007.

The ratings upgrade and CreditWatch resolution reflect the company's improving operational and financial performance as well as S&P's expectation that credit protection measures will continue to strengthen in the intermediate term, the rating agency said. In addition, Amscan recently announced that, because of market conditions, it will withdraw plans for an IPO. Instead, the company will refinance its existing credit facilities.

S&P said bank lenders are unlikely to realize full recovery in the event of a bankruptcy; however, meaningful recovery of about 75% of principal is likely.

The ratings reflect Amscan's participation in the fragmented, highly competitive party goods industry as well as the company's leveraged financial profile, S&P said. These factors are partially offset by solid industry growth and a diversified product mix.

Pro forma for the refinancing, Amscan will remain highly leveraged, yet credit measures are appropriate for the revised rating, S&P said. EBITDA coverage of interest is expected to be about 2.9 times and total debt to EBITDA is expected to be about 4.3x for 2002 on a pro forma basis. Operating margins (before D&A) have remained strong in the 17% to 18% range and are expected to improve slightly. This is because of increased efficiency from the consolidation of distribution activities and the integration of M&D Balloons into the company's Anagram operations.

S&P lowers CGG outlook

Standard & Poor's lowered its outlook on Compagnie Generale de Geophysique to negative from stable and confirmed its ratings including its corporate credit at BB.

S&P said it reduced CGG's outlook because of concerns over the company's ability to generate free cash flow and reduce debt on a recurring basis.

At the end of September, CGG reported a €60 million discretionary cash flow shortfall, versus a surplus of €16 million in 2001. Net debt at September-end 2002 amounted to €275 million, compared with €229 million at year-end 2001.

At the current rating level, the company has little flexibility left to undertake further debt increases, especially given the highly volatile and competitive nature of the seismic industry, CGG's vulnerability to changes in crude oil prices and the U.S. dollar-euro exchange rate, and the company's already leveraged financial profile, S&P said.

CGG's credit-protection measures have benefited somewhat from an upturn in profitability over the past two and a half years, although this improvement has been partially offset by the increase in debt in 2002.

The company's main credit protection measures remain adequate for the rating, with the ratio of lease-adjusted funds from operations (FFO) to net debt improving to 56% (33% after deducting investments in multi-client surveys) and net debt to capitalization decreasing to 42% at year-end 2001, S&P said. However, EBIT coverage of interest expenses, at 1.2x after adjustments for operating leases, remains relatively weak.

Fitch cuts Atlas Air, on watch

Fitch Ratings downgraded Atlas Air, Inc. and put it on Rating Watch Negative. Ratings lowered include Atlas' unsecured debt, cut to CCC from B and its secured bank debt, cut to CCC+ from B+.

Fitch said the action follows Atlas' disclosure that a technical default has occurred in connection with two of its secured debt instruments.

The downgrade reflects heightened concerns over the fact that Atlas' bank group now effectively controls the company's ability to avoid a future liquidity crisis that would ensue if debt repayments on the secured facilities are accelerated, Fitch said. The banks have the right to accelerate as much as $246 million in repayments on Atlas' Aircraft Credit Facility and AFL III secured term loan facility.

The defaults on these agreements have resulted from Atlas' failure to issue financial statements for the Sept. 30 quarter. The company's auditors, Ernst & Young, are currently conducting a re-audit of Atlas' financial results following the Oct. 16 disclosure that a restatement of results for fiscal years 2000, 2001 and the first half of 2002 will be necessary following discovery of accounting-related misstatements of earnings. The company expects the re-audit to be completed in early 2003, and it has noted that the re-statement is not expected to have any cash flow implications.

It appears unlikely that the banks would be interested in accelerating repayment - an outcome that could push Atlas into a near-term liquidity crisis. The collateral for the two facilities - older Boeing 747-200 freighter aircraft and accompanying engines - would be difficult to re-market in the current soft global air cargo environment. It therefore seems likely that a waiver will be negotiated, Fitch said.

Irrespective of the waiver and the banks' willingness to provide additional covenant relief (a minimum liquidity requirement of $200 million may be in jeopardy at the end of the March 2003 quarter), Atlas continues to face a challenging international air cargo demand environment, Fitch added. While the fourth quarter is seasonally strong and the company expects to see good operating cash flow through December, the outlook for ACMI cargo service is highly dependent upon a solid recovery in the global economy. On the positive side, freighter charter demand has been very strong in recent months as the need for military-related cargo movements grows. Military charter flying in the third quarter, combined with commercial charter activity resulting from the shutdown of West Coast ports, offset much of the weakness in Atlas' traditional ACMI contract business.

S&P upgrades TransWestern Publishing

Standard & Poor's upgraded TransWestern Publishing Co. LLC including raising its $200 million term B loan due 2008, $35 million term A loan due 2007 and $65 million revolving credit facility due 2007 to BB- from B+, $215 million total 9.625% senior subordinated notes due 2007 to B from B- and TransWestern Holdings LP and TWP Capital Corp.'s $58.2 million 11.875% senior discount notes due 2008 to B from B-.

S&P said the upgrade reflects TransWestern's improving financial profile and the expectation for further strengthening in the intermediate term.

The ratings are based on the consolidated credit quality of TransWestern Holdings and reflect the company's still significant debt levels, with pro forma debt to EBITDA in the low-5 times area, S&P said. In addition, TransWestern faces very competitive business conditions against the incumbent telephone directories.

These factors are tempered by TransWestern's stable revenue and cash flow throughout the advertising revenue cycle, geographic diversity, a large and diversified customer base of small- to medium-size businesses, and favorable growth prospects, S&P said. Cash flow is benefiting from operating margins in the high-20% area, high renewal and account retention rates, significant levels of advance payments by customers, and minimal capital expenditures.

The company is starting to generate more meaningful levels of free operating cash flow in 2002, reflecting larger revenues from new customer additions, price increases and greater amounts of advertising by existing customers, as well as improved operating efficiencies. S&P said it expects TransWestern to use these funds primarily for debt reduction in coming periods. In November, about half, or $29 million principal amount, of the holding company notes were redeemed with cash on hand.

Moody's confirms Sealy

Moody's Investors Service confirmed Sealy Mattress Co., concluding a review for downgrade begun in August 2002. The outlook is stable. Ratings affected include Sealy's $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. Moody's does not rate Sealy's new $50 million revolving credit facility and has withdrawn ratings on its refinanced revolver and term loan A.

Moody's said the confirmation follows Sealy's refinancing of its revolving credit facility.

Moody's said it considers that Sealy is adequately addressing issues that prompted the review, including liquidity concerns related to Sealy's revolving credit facility, and earnings quality and conflict of interest questions related to affiliated retailers, two mattress retailers controlled by Sealy's majority owner, Bain Capital, which represent around 15% of Sealy's sales.

Although half the size of its old facility, Sealy's new revolver provides sufficient liquidity (when combined with estimated cash balances) and covenant flexibility for the company to operate its business and meet near-term debt requirements. Importantly, the credit agreement limits affiliate investments to $20 million, but does not otherwise restrict the company's ability to aggressively extend trade terms.

Moody's believes that Sealy is positively addressing concerns related to affiliates. One such affiliate has been sold to a non-Bain entity, with minimal further investment by Sealy and a continuation of the supply agreement, while the other is attempting to negotiate similar transactions from its current position in bankruptcy.

It is expected that both retailers will no longer be affiliates, thereby removing potential conflicts of interest regarding sales, investments and trade support. Despite the possibility for slight further credit exposure and 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.

S&P lowers Veritas DGC outlook

Standard & Poor's lowered its outlook on Veritas DGC Inc. to negative from stable and confirmed its ratings including its senior unsecured debt at BB+.

S&P said it reduced its outlook on Veritas DGC because of its negative short- to medium-term view of the seismic services industry. Standard & Poor's believes that seismic operators face challenging market conditions because of overcapacity in the geophysical data acquisition and services market, uncertainty related to oilfield spending levels in 2003 and potential negative effects of financially distressed Petroleum Geo-Services ASA on the seismic industry's pricing power and competitive landscape.

As a result, S&P said it believes that Veritas' ability to generate sustainable free cash flow from its seismic activities may be diminished.

Veritas compensates for its participation in a difficult industry by maintaining moderate financial leverage, with total debt to total capital expected to remain below 30% and total debt to EBITDA adjusted for multi-client amortization likely to remain below 2.0x, S&P said. While the company historically has outspent its operating cash flow due to hefty investment in its multi-client library, management has publicly stated that it is targeting free operating cash flow in fiscal 2003. EBITDA less multi-client amortization to interest should remain about 8.0x.

S&P says Avista unchanged

Standard & Poor's said Avista Corp.'s ratings are unchanged at BB+ for the corporate credit rating with a negative outlook on news that the company will make a $12 million contribution to its underfunded pension plan this year and another $12 million next year.

Although Avista's pension plan is currently underfunded, S&P said it believes that the cash outlay necessary to bridge the gap will not make a material difference to Avista's cash flows. The minimum contribution for 2002 under ERISA would be $7.2 million.

S&P confirms Texas Petrochemicals

Standard & Poor's confirmed Texas Petrochemicals Corp. including its subordinated debt at CCC+ and removed it from CreditWatch with negative implications. The outlook is negative.

S&P said the confirmation follows the announcement that Texas Petrochemicals has completed the refinancing of its bank credit facility, which was previously scheduled to mature on Dec. 31, 2002.

The refinancing extends the maturity of the revolving facility and the term loan to late 2005 and provides approximately $40 million in additional liquidity, subject to borrowing base limitations and compliance with financial covenants.

Still, S&P said the company's credit profile has deteriorated because of the continuation of disappointing operating results and a sizable debt burden.

The financial profile remains very aggressive as the ratio of total debt (including holding company discount notes and the capitalization of operating leases) to EBITDA is more than 6 times, S&P said. Profitability and cash flow have been negatively affected by higher raw material costs and weaker pricing in key product lines, and several recent operational disruptions at the company's sole manufacturing facility in Houston.

The shortfall in earnings, reflected by funds from operations to adjusted debt of less than 5% and EBITDA interest coverage near 1.5x, will make it more difficult for the company to strengthen credit protection measures in the near term, S&P said. These key credit ratios should improve somewhat over the next one to two years, aided by a gradual recovery in business conditions and operational performance. Funds from operations to adjusted total debt should be in the 10% to 15% range, while EBITDA interest coverage should average in the 2.0x to 2.5x range over the business cycle.

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