S&P cuts OM Group, on watch

Standard & Poor's downgraded OM Group Inc. and kept it on CreditWatch with negative implications. Ratings lowered include OM Group's $325 million senior secured revolving facility and $600 million term C bank loan due 2007, cut to B+ from BB-, and $400 million 9.25% senior subordinated notes due 2011, cut to B- from B.

S&P said the downgrade reflects OM Group's expected diminished business profile following management's announcement that it is exploring strategic alternatives for its precious metals operations.

While likely strategic alternatives will lead to a reduction of the company's debt load, the outcome is expected to result in a meaningful weakening of OM Group's business position, which has benefited from a focus on value-added applications serving highly diverse end markets, S&P said.

The precious metals businesses, acquired less than 18 months ago, were the foundation for S&P's earlier assessment of OM Group's business profile and a key underpinning of the previous ratings.

The ratings remain on CreditWatch negative as a result of major uncertainties regarding OM Group's near-term liquidity, its ability to accomplish the strategic restructuring of its business mix in a timely manner, and its obligations under current precious metal leases - especially if these financing arrangements cannot be extended, S&P said. All of these risks are against the backdrop of difficult market conditions, including low cobalt prices, which are hurting the company's ability to make money refining cobalt.

Moody's cuts Tesoro notes

Moody's Investors Service downgraded Tesoro Petroleum Corp.'s senior subordinated notes to B2 from B3 and senior implied ratings to B1 from Ba3 and confirmed its senior secured credit facilities at Ba3.

The outlook is stable, although Moody's said it incorporates a view that Tesoro's banks will be amenable to a year-end 2002 waiver of the asset sales covenant if Tesoro is unable to meet its year-end asset sales deadline in a fashion acceptable to the banks.

Moody's said it lowered the notes because of Tesoro's high leverage relative to Moody's estimates of trough and mid-cycle market earnings power and refining capacity; the cumulative impact on financial flexibility of four quarters of extremely weak refining market conditions; Moody's opinion that under a realistic range of weak-to-average refining market scenarios going forward, Tesoro's cash flow generation would not enable material near-term reduction of its very high $2.5 billion total effective lease adjusted debt burden ($2.135 billion total debt, including $150 million of junior subordinated seller notes); and Moody's concern that deleveraging to a level compatible with a Ba3 rating could take time.

Moody's said it confirmed Tesoro's senior secured ratings because it believes asset values would sufficiently cover senior secured debt in a distressed scenario and because of the benefit of control exercised by senior secured creditors to prioritize repayment of senior secured debt.

Fitch cuts Aquila to junk, on watch

Fitch Ratings downgraded Aquila Inc. to junk, cutting its senior unsecured debt to BB from BBB- and the debt of Aquila Asia Pacific and Aquila Canada Finance to BB from BBB-, affecting $3.6 billion of debt. All ratings were put on Rating Watch Negative pending a comprehensive review of the outlook for the remaining core business and the refinancing of credit facilities now set to come due on April 12, 2003.

Aquila's U.K. operations remain on Rating Watch Evolving pending their sale, including Avon Energy Partners Holding ( senior unsecured at BBB-), Midlands Electricity plc (senior unsecured at BBB-), and Aquila Power Networks (senior unsecured at BBB+).

Fitch said it lowered Aquila in response to lower than expected operating cash flows as the company exits the wholesale energy market.

Specifically, Aquila's capacity services segment will continue to be negatively impacted by lower power prices and spark spreads, and higher capacity payments for tolling arrangements and synthetic leases, Fitch said.

Operating cash flow has also been depressed by higher-than-anticipated restructuring charges and slow progress in reducing staff count and operating expenses, the rating agency added.

While management predicts a turn-around of cash from continuing operations into the black early in 2003, the residual debt after applying the proceeds of asset sales remains very high relative to recurring operating income from Aquila's U.S. and Canadian network utilities less expected losses of the unregulated power generation business, Fitch added.

Default of a financial covenant will trigger the need to refinance, renegotiate or repay Aquila's credit facility in April 2003, Fitch said. Aquila's reported income for the 12 months ended Sept. 30 is not in compliance with interest coverage requirements in its $650 million credit facility, as well as guarantees relating to three synthetic leases. Aquila is not forecasted to be in compliance with its interest coverage test until Dec. 31, 2003 at the earliest, a factor that eliminates the possibility for Aquila to exercise the one-year term-out option that would have been available for the $325 million 364-day tranche.

In exchange for waivers obtained from the banks effective until April 12, 2003, Aquila has paid down $158.6 million to those lenders and agreed that 50% of any net cash proceeds under $1 billion, and 100% of net cash proceeds above $1 billion, received prior to April 12, 2003, from domestic asset sales will be used to pay off the lenders.

Fitch cuts Focal, on watch

Fitch Ratings downgraded Focal Communications' senior unsecured debt to C from CCC- and senior secured debt to C from CCC+ and put the company on Rating Watch Negative.

Fitch said the action is in response to Focal's disclosure that the company has defaulted on both its senior secured credit facility and its senior secured equipment term loan as a result of third quarter revenue and EBITDA being below its minimum covenant levels.

The company has indicated that it continues to negotiate with its banks and other senior lenders in an effort to reach a resolution of the default and amend the covenants, but it is unclear as to the timing of such a resolution, Fitch said.

At the end of the third quarter of 2002, Focal had approximately $65 million in cash on its balance sheet, Fitch noted. In light of the default, the company has no other liquidity resources. Given that $93 million is outstanding on the credit facility, Fitch believes that the company will not be able to meet its obligations should the banks and/or other senior lenders require immediate repayment.

Moody's confirms Huntsman International, outlook still negative

Moody's Investors Service confirmed Huntsman International LLC and Huntsman International Holdings LLC and maintained the negative outlook. Ratings affected include Huntsman International LLC's $400 million senior secured guaranteed revolving credit facility maturing 2005, $110 million senior secured guaranteed term loan A maturing 2005 and $130 million senior secured guaranteed euro term loan A maturing 2005, $526 million senior secured guaranteed term loan B maturing 2007 and $526 million senior secured guaranteed term loan C maturing 2008, all at B2; $300 million 9.9% senior guaranteed notes due 2009 at B3 and $1.0 billion 10.1% senior subordinated notes due 2009 at Caa1; and Huntsman International Holdings LLC's $370 million accreted value senior discount notes due 2009 at Caa2.

Moody's said the ratings and outlook continue to reflect significant uncertainties related to the timing and degree of a cyclical recovery in market demand for, and prices of, the company's key products.

Such demand is critical to sufficient improvement in earnings and cash flow to support the company's heavy debt burden, Moody's said. Creditor protection measurements are weak for the rating category and improved financial performance depends upon a sustained economic recovery.

Pending such a recovery, Huntsman International relies on its revolving credit facility for liquidity, which could be constrained if the company fails to meet leverage and coverage tests by increasing EBITDA over the next 12 months, Moody's added.

Moody's cuts Iusacell

Moody's Investors Service downgraded Grupo Iusacell's senior unsecured debt to C from Caa2 and Grupo Iusacell Celular's senior unsecured debt to Ca from B3.

Moody's said the downgrade reflects the recent announcement that Iusacell intends to restructure its debt; Moody's belief that additional financial support from Verizon or Vodafone is highly unlikely; Moody's concerns about the continuous deterioration in financial flexibility in the third quarter of 2002; further weakening of the debt protection measures over the same period; and a continuing inability to reverse the market share loss to Telcel and other competitors.

The new rating levels also reflects Moody's view that default risk is high as well as the view that bondholders, particularly at the Grupo Iusacell level, could experience significant loss.

Moody's noted financial resources are extremely tight given that cash on hand is running out, the company has no alternative liquidity lines - outside of nominal vendor financing, and Iusacell continues to be free cash flow negative.

Moody's believes much of the value in a recovery situation would accrue to the senior secured lenders (roughly US$265 million in bank debt at Grupo Iusacell Celular), though there may be a very limited pool of potential buyers for the company's assets.

Moody's rates Wackenhut Corrections' loan Ba3

Moody's Investors Service rated Wackenhut Corrections Corp.'s $175 million senior secured credit facility at Ba3. The outlook is stable.

All assets of the company and its domestic subsidiaries and a pledge of the stock of its subsidiaries secure the facility.

Ratings reflect the company's solid historical performance, good growth potential, strong management team, high occupancy rate, diversified contracts and business model that has more emphasis on managing properties than owning properties, Moody's said.

Offsetting these factors is "the inherent risks in the private correction facility services business including reliance on government appropriations for payment of awarded contracts, contract renewal risk, facility lease liability, legislative risks, high employee turnover and potential legal liability," Moody's added. Further negative factors include the company's modest level of insurance coverage and uncertainties regarding the parent company and Premier Custodial Group.

S&P cuts SpectraSite Holdings to D, Communications on positive watch

Standard & Poor's downgraded SpectraSite Holdings Inc. and put its SpectraSite Communications Inc. unit on CreditWatch with positive implications. Ratings affected include SpectraSite Holdings' $200 million 12.5% notes due 2010, $200 million 12.5% senior unsecured notes due 2010, $200 million 6.75% senior convertible notes due 2010, $225 million 12% senior discount notes due 2008, $559.8 million floating-rate senior discount notes due 2010 and $587 million 11.25% senior discount notes due 2009, all cut to D from C, and SpectraSite Communications' $350 million revolver due 2007, $450 million term loan B due 2007 and $500 million term loan A due 2007, all at CC.

S&P said it lowered SpectraSite Holdings following the company's filing of a Chapter 11 bankruptcy petition.

Following the company's emergence from bankruptcy, SpectraSite Communications' bank loan will be re-evaluated in light of the new capital structure of the parent and could be upgraded if the new corporate credit rating for SpectraSite Holdings is higher than CC.

S&P cuts American Restaurant

Standard & Poor's downgraded American Restaurant Group Inc. including cutting its $165 million 11.5% senior secured notes due 2006, cut to B- from B. The outlook is negative.

S&P said it cut American Restaurant based on the company's declining operating performance, very weak credit protection measures, and limited liquidity.

Operating performance continued to weaken in 2002. Same-store sales declined 3% in the first nine of 2002 after falling 4.2% in all of 2001, S&P said. Moreover, the company's operating margin in the first nine months of 2002 decreased to 8.2% from 10% in 2001. The decline was due to a lower average check, which resulted from a change in menu mix designed to increase customer traffic, and higher labor costs.

As a result, cash flow protection measures have deteriorated with EBITDA covering interest under 1.0 time, S&P said. Liquidity is limited, as the company had $10.1 million in cash and $7.3 million available on a $15 million revolving credit facility as of Sept. 30, 2002, and made a $9.4 million interest payment in November 2002.

Moreover, capital expenditures in the fourth quarter of 2002 are expected to be about $1.3 million, and the company has a $3.4 million maturity in February 2003. The company amended its covenants on its revolving credit facility after it was in violation of the minimum EBITDA requirement for the third quarter of 2002, S&P said.

S&P said the negative outlook reflects its concern that American Restaurant Group will be challenged to improve its operating performance and liquidity position in the current economic environment.

S&P lowers Penhall outlook

Standard & Poor's lowered its outlook on Penhall International Corp. to negative from stable. Ratings affected include Penhall's senior secured debt at BB- and senior unsecured debt at B.

S&P said the action is in response to Penhall's continued weak operating performance as a result of the decline in construction spending.

The ratings reflect Penhall's modest positions in small and fragmented niche equipment rental markets and an aggressive financial profile, S&P added.

About 45% of the company's sales come from projects in California, with the majority of work linked either to publicly financed, highway-related projects or to commercial construction. Spending in California for highway renovation and commercial construction is down considerably, S&P noted. As a result, Penhall's sales and operating performance has been weaker than expected, with no material improvement in prospects expected in the near term.

Penhall's exposure to the highly cyclical construction industry resulted in a sales decline of about 8% and an EBITDA decline of 28% in fiscal 2002, compared with the previous year. In its first fiscal quarter ended Sept. 30, 2002, revenues were off by 5% and EBITDA off by 27%, S&P said. The lower sales and weaker operating performance are primarily due to the soft economy, increased competition, and decrease in equipment utilization. Funding levels provided under the federal Transportation Equity Act (TEA-21) and Aviation Investment Reform Act (AIR-21) should continue to provide a source of business.

Penhall's credit measures have weakened due to the cyclical downturn, with EBITDA interest coverage of 2.1 times and total debt to EBITDA of 5.2x as of Sept. 30, 2002, weak for the ratings, S&P said. Although the company is currently in compliance with financial covenants on its bank agreement, there is limited cushion should further erosion occur.

S&P rates Vitamin Shoppe loan B+

Standard & Poor's assigned a B+ rating to Vitamin Shoppe Industries Inc.'s proposed $110 million term loan and $15 million revolving credit facility. The outlook is negative.

S&P said the ratings reflect Vitamin Shoppe's small size in the highly competitive and fragmented retail vitamin industry, the risks associated with its rapid store expansion, a narrow product focus, and limited liquidity.

These risks are partially offset by the company's broad product offering and multi-channel distribution, S&P added.

The company competes with specialty retailers GNC, Vitamin World, and local health food stores, who also target the sophisticated VMS user, as well as drug stores, supermarkets, mass merchants, direct sales companies, and catalog and Internet companies, S&P noted. Although Vitamin Shoppe has only 118 stores, compared with GNC with over 5,000 stores and Vitamin World with over 500 stores, the company is able to compete because of its broad product offering and multi-channel distribution.

Vitamin Shoppe provides the consumer with more choice than many of its competitors. VMS industry growth has slowed significantly to about 4% over the past three years. The industry is expected to grow at a similar pace over the next several years, S&P said.

Operating performance improved in the first nine months of 2002 and all of 2001, after two years of large declines in profitability, S&P said. The declines were primarily related to heavy marketing expenses incurred to promote its Vitamin Shoppe.com business, which it launched in 1998. In addition, the company's rapid growth, which included new stores and infrastructure investments also negatively affected profitability in previous years.

Pro forma for the LBO transaction, the company is highly leveraged with lease adjusted total debt to EBITDA of about 5.0 times, S&P said. Pro forma cash flow protection measures are weak with lease adjusted EBITDA coverage of interest of less than 2.5x and FFO to total debt of 13.5%.

Moody's puts National Dairy on review

Moody's Investors Service put National Dairy Holdings, LP on review for downgrade including its $125 million senior secured revolving credit, $125 million senior secured term loan A and $175 million senior secured term loan B at Ba2.

Moody's said it began the review following National Dairy's announcement that it has signed a letter of intent with HP Hood Inc. to combine the businesses of the two companies.

The rating review is prompted by the possibility that National Dairy's capital structure could change materially following the merger and the likelihood that the combination will result in higher leverage, Moody's said.

It also reflects the possibility that Dairy Farmers of America (Baa1), which currently holds an 86% equity interest in National Dairy, could reduce its investment in and management influence upon the company.

Moody's review will focus on the credit profile of the combined organization, as well as the post-merger capital structure. It will also assess the opportunities and challenges that the combination creates, including the scope for potential cost synergies and the plan for integrating the two businesses.

Moody's rates Vitamin Shoppe's loan B1

Moody's Investors Service assigned a B1 rating to Vitamin Shoppe Industries, Inc.'s planned $125 million secured bank facility. The outlook is stable.

The ratings recognize the intense competition within the fragmented vitamin, mineral, & nutritional supplement retailing industry, the unproven ability to find quality people and real estate during an extended period of accelerated growth, and the need for management systems appropriate to a high-growth company, Moody's said.

Challenges in minimizing cannibalization of mail-order customers by additional retail stores, weak results reported for the relatively recent past (fiscal 1999 and 2000), and LBO consideration significantly greater than book value also constrain ratings at the current level, Moody's added.

However, the ratings also reflect potential scale advantages from the company's status as one of the largest VMS retailers, the diversity in revenue from key VMS categories and significant mail-order operations, and the history of new retail locations quickly becoming cash flow positive, Moody's said. The frequency of retail and mail-order purchases by a core of enthusiast customers, the positive contribution to corporate overhead from virtually all stores, and the significant cash equity contribution from the ownership group reduce the potential risks to the company's business plan.

Pro-forma for the transaction, lease adjusted debt will equal about 4.7 times EBITDAR and EBITDA will cover interest expense and capital expenditures about 2.0 times, both reasonable ratios for the assigned ratings, Moody's said. Going forward, the rating agency expects that leverage and cash flow coverage will modestly improve as the new stores mature, but anticipates that leases on the new stores will constrain improvements in adjusted leverage.

Moody's lowers WRC Media outlook

Moody's Investors Service lowered its outlook on WRC Media, Inc. to negative from stable. Ratings affected include WRC's $158.5 million secured credit facility at B1 and $152 million 12.75% senior subordinated notes due 2009 at B3.

Moody's said the revision is in response to prolonged challenges throughout the supplemental education market.

These challenges include delays in federal and state funding, likely reduced growth in 2003 budget allocations, and, to a lesser extent, continued softness in the advertising market affecting corporate sponsorships, Moody's said.

In Moody's opinion, the company's liquidity is weak and run-rate credit statistics provide modest flexibility to absorb further adversity in the markets served or to withstand any operational and/or strategic setbacks.

Moody's view the liquidity is weak is based primarily on the absence of cushion under existing financial covenants and minimal cash on hand.

Required debt amortization of approximately $6 million is aggressive relative to free cash flow, the rating agency added.

There appears to be no committed secondary sources of liquidity, and the company's assets are encumbered, Moody's noted. Effective availability under the $30 million revolver is limited to approximately $20 million given relatively close proximity to the leverage covenant.

Moody's acknowledges that the company has historically operated at this level of modest cushion under covenants. However, given the current and expected adversity throughout WRC's markets, the company's financial profile is stressed, putting downward pressure on the ratings.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.