Fitch raises Gap outlook

Fitch Ratings raised its outlook on The Gap, Inc. to stable from negative and confirmed its senior unsecured debt at BB-.

The outlook revision acknowledges Gap's turnaround in its comparable store sales performance over the last 11 months, Fitch said. Since October 2002, the total company's monthly same store sales have been positive, ranging from 4-20%. This improvement, coupled with increased profitability, has helped strengthen the company's credit metrics.

From May 2000 through September 2002, Gap reported negative comparable store sales every month as a result of a troubled merchandising strategy. Some senior management changes, together with a significant slowdown in store expansion plans (which allowed the company to focus on its existing store base) and return to a more traditional, basic merchandise selection, has led to an improvement in Gap's sales trends.

Fitch's ongoing concern centers on Gap's ability to sustain strong same store sales results as comparisons become more difficult. Beginning with October 2003 sales, Gap will be measured against positive prior year results. To the extent Gap's sales trends remain strong in the second half of 2003, the ratings could improve, Fitch added.

Profitability has improved as Gap has better executed its merchandising strategy and minimized markdowns. Despite this improvement, Gap maintains a heavy debt burden, with total adjusted debt (includes 8 times rent expense) of about $10.8 billion, Fitch said. At Aug. 2, 2003 leverage, (total adjusted debt /EBITDAR) was 3.3x and EBITDAR coverage of interest and rents was 2.6x.

S&P raises AirTran outlook

Standard & Poor's raised its outlook on AirTran Holdings Inc. to positive from stable and confirmed its ratings including its corporate credit at B-.

The positive outlook is due to the company's sale of $132 million of common stock, with a portion of the proceeds used to redeem $35 million of 11.27% senior notes, which will aid its liquidity and balance sheet, S&P said. The equity offering has more than doubled the company's equity base, but a substantial and increasing lease burden, as AirTran continues to take delivery of new aircraft, will constrain improvement in its financial profile.

AirTran's ratings reflect the company's modest competitive position within the U.S. airline industry and a relatively weak, though improving, financial profile, S&P said.

Since 1999, AirTran has been upgrading its fleet, adding new Boeing 717 aircraft, which has aided its operating costs and reduced the average age of its fleet to around three years from 25. AirTran's already relatively low unit costs of around 8.6 cents are expected to benefit as it continues to take delivery of 717's. In addition, the company placed a major aircraft order on July 2003 for larger Boeing 737-700 and 800 series, to be delivered beginning in June 2004, which will enable it to fly more long-haul routes and also aid its costs, S&P said. Airtran has been one of only a few U.S. airlines to have achieved profitability since 2002.

Despite its profitability, AirTran's credit ratios are still relatively weak, due to substantial operating leases used to finance most aircraft deliveries, S&P noted. AirTran's credit ratios are expected to improve modestly along with its earnings. However, any significant improvement will be constrained by a growing operating lease burden as the company continues to add to its fleet. AirTran's liquidity has improved, due to the receipt of proceeds from a $125 million convertible note offering and a $38 million refund from the U.S. government, both in May 2003, as well as $132 million of proceeds from a common equity offering in September 2003.

Moody's rates WCI notes Ba3

Moody's Investors Service assigned a Ba3 rating to WCI Communities, Inc.'s offering of $125 million senior subordinated notes and confirmed the company's other ratings including its $350 million 10.625% senior subordinated notes due 2011, $200 million 9.125% senior subordinated notes due 2012 and $125 million 4% contingent convertible senior subordinated notes due 2023 at Ba3. The outlook remains stable.

Moody's said the stable outlook reflects its expectation that the company will continue to maintain capital structure discipline despite the flat earnings and notwithstanding its professed desire for geographic expansion.

The ratings acknowledge the company's valuable land holdings in coastal areas of Florida that have market values exceeding current book values, steady amenities revenues and fee income from related service businesses, above-average industry margins, strong brand name recognition, seasoned management team, favorable demographic trends, stable balance sheet leverage coupled with a growing equity base and the 57-year history through various cycles.

At the same time, the ratings consider the company's strategy of building master planned communities that creates a need for a long land supply, its geographic concentration in coastal areas of Florida (although it does conduct extensive out-of-state marketing), the rising number of competitors in its markets, the larger-than-industry-average spec building due to its tower construction segment, its reliance on the luxury end of the market which (for WCI) has experienced more weakness than other market niches, and the cyclicality of the homebuilding industry, Moody's added.

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