Moody's puts Saks on upgrade review

Moody's Investors Service put Saks, Inc. on review for possible upgrade affecting $2 billion of debt including its senior unsecured debt at B1.

Saks' sales trends remain negative during this weak retail environment, but have become more closely aligned with its peer group, indicating a stabilization in market share and overall business trends, Moody's said.

Margins have also improved due to better operating leverage on higher sales, as well as efforts to improve gross margins and reduce operating costs. Debt has been reduced from operating cash flow, as well as certain one-time transactions which generated cash, and leverage metrics have improved as a result of lower balances as well as recovery in operating income.

Moody's added that is review will focus on the business and franchise trends within Saks' two retail divisions (Department Store Group and Saks Fifth Avenue); the company's strategies to further improve sales trends and market share; and longer term financial policies, including leverage targets and shareholder policies.

Moody's review will also incorporate the value of Saks' unencumbered assets, which include a significant amount of property, and the company's ability to generate free cash flow for debt reduction or investment for future growth.

S&P rates Alaska Communications notes B-, loan BB-

Standard & Poor's assigned a B- rating to Alaska Communications Systems Holdings Inc.'s new $182 million senior unsecured notes due 2011 and a BB- rating to its proposed $250 million senior secured credit facilities and confirmed the existing ratings including its subordinated debt at B- and existing bank facilities at B+. The outlook is stable.

S&P said Alaska Communications' ratings reflect strong competition in the retail local exchange business that is eroding the retail access line base, dependence on a narrow market with limited growth opportunities, EBITDA losses in the internet and long-distance segments and financial risk from acquisition and capital spending-related debt. These factors are partially mitigated by the company's position as the leading incumbent local exchange carrier in Alaska and second-largest wireless provider in the state, as well as a measure of financial cushion from a roughly $105 million cash balance.

Alaska Communications improved its financial profile by repaying debt with directories business proceeds in May 2003 and will see further improvement in its maturity profile and capital structure following the proposed financing, S&P noted. The company also recently announced an agreement with EchoStar Communications Corp. to market and sell that company's DISH Network satellite television service in Alaska, which should improve Alaska Communications' competitive position in consumer markets.

However, S&P said it believes these factors only partially temper the competitive challenges the company faces within the slow-growing Alaska market.

Alaska Communications' primary EBITDA generator is its incumbent local exchange business. This segment has suffered a shift in its access line base from retail lines to those sold at substantially discounted, unbundled network element loop (UNE-L) rates to competitive providers - principally incumbent cable operator GCI Inc. This shift results in a loss of network access revenue from long-distance carriers, which accounts for about 45% of Alaska Communications' local telephone revenue.

Pro forma for financing and the directories sale, EBITDA to interest is roughly 2x, and debt to EBITDA is approximately 5.2x, or about 4.2x on a net debt basis, S&P said.

S&P puts Winn-Dixie on watch

Standard & Poor's put Winn-Dixie Stores Inc. on CreditWatch negative including its $100 million 364-day revolving credit facility due 2004 and $200 million revolving credit facility due 2006 at BBB- and $300 million 8.875% senior unsecured notes due 2008 at BB+.

S&P said the watch placement is in response to substantially lower expectations for earnings and the potential for violation of covenants for the first quarter ending September 2003.

The company will need to invest substantially in better pricing in 2003, which will likely reduce the operating margin, already below the industry average, S&P noted. Based on the company's current projections of operating results for the first quarter of fiscal 2004, it will not be in compliance with certain bank covenants. The company is working with its banks and expects to obtain an amendment before the end of the first quarter.

The company expects only $6 million of EBIT in the first quarter compared with $70 million in the prior year period, but anticipates that its strategy of lowering prices will result in sales gains and expense leveraging in the final three quarters of the year.

The company had $336 million in funded debt as of June 25, 2003. Winn-Dixie's $2.5 billion in operating lease equivalents are very substantial, resulting in total debt to EBITDA of about 4.0x at the end of fiscal 2003, an increase over 2002's 3.7x level. EBITDA covered interest expense by 2.5x for fiscal 2003, S&P said.

S&P confirms Le Nature's, off watch

Standard & Poor's confirmed Le Nature's Inc.'s ratings including its $100 million revolving credit facility due 2008 at B+ and $150 million 9% senior subordinated notes due 2013 at B- and removed it from CreditWatch negative. The outlook is stable.

The ratings were put on watch on June 18 following the company's disclosure that it was in a commercial dispute over a contract with one of its key bottle suppliers.

The confirmation follows Le Nature's successful resolution of the commercial dispute with its bottle supplier and completion of its transition to in-house plastic bottle production at its Latrobe facility, S&P said. The existing bottle supply contract in dispute has been terminated. Under the agreement between the company and its bottle supplier, Le Nature's has agreed to purchase plastic blow-molding equipment (used to produce plastic bottles) from the supplier at a fair market value. The company plans to use the new equipment in its planned West Coast facility.

Le Nature's is now able to satisfy its own plastic bottle needs internally after successfully launching its own in-house production facility, S&P noted. The company has also secured an arrangement with a third-party to be a backup supplier of plastic bottles.

The company has experienced rapid organic growth during the past few years with sales and EBITDA growing at a compound annual growth rate of more than 71% and 75%, respectively, from 1999 to 2002, S&P said. In the same period, the company sustained EBITDA margins of more than 30%, topping 37% in 2002. Strong performance has been aided by continued volume and price increases for bottled water, despite some price reductions in teas and juices and reduced sales of tea concentrate.

However, EBITDA margins are expected to soften somewhat due to increased costs related to the West Coast expansion and higher sales and marketing expense.

Pro forma for the recent refinancing, Le Nature's will be moderately leveraged. Lease-adjusted debt and preferred stock increased from about $162.5 million at year-end 2002 to about $214 million at closing, which is a significant burden for a company of Le Nature's size, S&P said.

Moody's rates B&G loan B1

Moody's Investors Service assigned a B1 rating to B&G Foods Inc.'s new $200 million senior secured credit facilities and confirmed its existing ratings including its $220 million senior subordinated notes at B3. The outlook is stable.

Moody's said the actions follow B&G's announced debt-financed acquisition of the Ortega food brand business from Nestle.

B&G's ratings reflect the company's high leverage and weak balance sheet, acquisition-oriented growth and Moody's expectation that the consolidation of B&G's customer base is likely to sustain pressures on margins. The ratings gain support from B&G's diverse portfolio of niche and specialty brands, which produce relatively stable overall earnings and cash flow.

The acquisition of the Ortega business will add scale and diversity to B&G's platform (pro forma for the acquisition, the Ortega brand will be the largest single contributor to B&G's sales, at 20%, and EBITDA, at 27%). Ortega enjoys high brand awareness and participates in a sizable retail market segment ($1.5 billion category sales for shelf-stable Mexican food) that has had higher growth than many other food segments. In addition, Ortega has had relatively stable margins that have been somewhat higher than B&G's existing business.

However, Ortega does not enjoy a commanding market share and competes directly with major U.S. branded packaged food companies with much greater resources and market presence than B&G.

B&G's ratings are constrained by the company's high leverage and weak balance sheet; the challenge of sustaining a portfolio of mostly small, mature brands, some with declining sales and margins; and the company's relatively small size (pro forma revenues of about $370 million) and limited resources relative to other branded packaged food companies, Moody's said.

The ratings gain support from the diversity of B&G's portfolio (16 brand lines, including Ortega, in various shelf-stable product categories), which has tended to balance overall performance, mitigated weakness in any one product, and enabled B&G to maintain relatively stable EBITDA.

S&P says Superior Energy unchanged

Standard & Poor's said Superior Energy Service Inc.'s ratings are unchanged including its corporate credit at BB with a stable outlook in response to the company's recently announced $31.5 million acquisition of Premier Services Ltd.

S&P said it believes Superior Energy has adequate financial flexibility to absorb the acquisition without compromising its financial profile.

The acquisition of U.K.-based Premier Services furthers Superior's international expansion initiatives. Premier rents tubular handling equipment, drill pipe, tubing, downhole tools, and other products to oilfield customers in the North Sea, northern Africa, the Middle East and other European market areas.

Moody's cuts Kinetics Group

Moody's Investors Service downgraded The Kinetics Group, Inc. including lowering its $85 million guaranteed senior secured revolving credit facility due 2006 and $63 million guaranteed senior secured term loan facility due 2006 to B3 from Ba1. The outlook is negative.

Moody's said the downgrade is in response to the severity of the decline in semiconductor capital equipment spending and its impact on the company's revenues and cash flow.

Although the company has sought and been granted successive covenant amendments under its guaranteed senior secured bank credit facilities, in conjunction with incremental equity contributions from its equity sponsors, its cash position and overall liquidity has been impaired.

Moody's believes that Kinetics' guaranteed senior secured bank facilities continue to be adequately collateralized by means of projecting a somewhat conservative recovery scenario of receivables, inventory and "costs in excess of billings," which would eventually become receivables, supplemented by the prospective monetization of discrete business lines.

However, the company's overall prospects have been thrust into question by the unusually protracted nature of the downturn in high technology spending and the impact on the downturn on semiconductor product sales.

Therefore, Moody's is foregoing the upward notching of the rating on the company's bank facilities, which had previously reflected the assessment of available collateral, due to the uncertainties that may accompany various scenarios going forward.

S&P rates Jarden loan B+

Standard & Poor's assigned a B+ rating to Jarden Corp.'s proposed $215 million term loan B due 2008 and confirmed its existing ratings including its senior secured debt at B+ and subordinated debt at B-. The outlook is stable.

S&P said the bank loan is rated the same as the corporate credit rating because in a stressed scenario it believes that senior lenders could expect meaningful but less than full recovery of principal.

Jarden's ratings reflect a highly competitive and challenging operating environment in housewares, limited growth potential in several of the firm's product lines, a product portfolio with little brand equity, an acquisition orientation and high debt leverage, S&P said. These concerns are somewhat mitigated by Jarden's leading position in its niche-oriented portfolio of houseware products and other businesses.

S&P said it assigns a high degree of business risk to the housewares industry because retailers are concentrated, competition is intense and companies can increase prices generally only by adding new features to existing products. Although the company has few competitors in the home canning business, the market is mature and seasonal.

Jarden has grown mostly through acquisitions in the past two years. In April 2002, the company purchased Tilia, owner of the FoodSaver product line, for $160 million. In February 2003, the company purchased Diamond Brands for $90 million. In August 2003, Jarden announced that it had agreed to acquire Lehigh Consumer Products Corp., the largest supplier of rope and twine in the U.S., as well as a marketer of security doors and storage products, for $155 million.

Sales and profitability growth at Jarden have chiefly come from such acquisitions, S&P noted. The company's FoodSaver line of small appliances has shown continuing volume increases and has benefited from higher sales of bags needed for the FoodSaver product. The company has doubled profit margins since 2001 by acquiring this line, as well as by selling its underperforming plastics businesses.

With growth in profitability, credit statistics have improved. Pro forma for the company's recently announced acquisition of Lehigh, operating lease-adjusted EBITDA coverage of interest expense is expected to be about 5x, appropriate given Jarden's business risk profile. Pro forma total lease-adjusted debt to EBITDA, adjusted for operating leases, is expected to be about 3.2x, S&P said.

S&P puts Precision Castparts on watch

Standard & Poor's put Precision Castparts Corp. on CreditWatch negative including its senior unsecured debt at BBB-.

S&P said the watch placement follows the company's announcement that it is acquiring SPS Technologies Inc. for $575 million plus assumed debt.

The CreditWatch placement reflects the weaker financial profile of Precision Castparts due to the increased debt from the acquisition and general integration risks, S&P said. The $575 million consideration for SPS Technologies' equity will be approximately half cash and half Precision Castparts stock. The cash portion, fees, and the possible repayment of SPS Technologies' debt will be financed by an additional $200 million bank term loan (in addition to $240 million of existing loans) and $300 million of senior notes.

The significant amount of debt taken on will weaken Precision Castparts' financial ratios, which are currently above average for the rating, S&P noted.

S&P rates Allied Waste loan BB

Standard & Poor's assigned a BB rating to Allied Waste North America Inc.'s $250 million term loan C due Jan. 15, 2010 guaranteed by its parent Allied Waste Industries Inc. and confirmed Allied Waste's ratings including its corporate credit at BB. The outlook is stable.

The term loan C proceeds are intended to fund refinancings of senior subordinated indebtedness. The term loan C is being added through an amendment to the existing senior secured credit facilities under the same terms and conditions.

S&P said Allied Waste's ratings reflect a relatively weak, albeit improving, financial profile, which outweighs the company's strong competitive business position.

A national network of facilities creates opportunities for modest growth through internal development, supplemented by tuck-in acquisitions, focusing on the vertical integration business model, S&P said. The company's market position is enhanced by a low cost structure, very good collection route density, and a relatively high rate of waste internalization.

Allied Waste's weak financial profile stems mainly from high debt levels incurred in the 1999 acquisition of Browning-Ferris Industries Inc., S&P noted. Debt reduction was accelerated in 2003 (goal is $1 billion) from the issuance of $400 million of common equity and preferred stock, the proceeds from divestitures and free cash flow.

A recent agreement with the holders of Allied Waste's $1 billion preferred stock to convert into common stock improves the capital structure and saves more than $500 million in cash by eliminating future dividend payments, S&P said. In the intermediate term, debt to EBITDA should be in the 4.0x-4.5x range, EBITDA and EBIT interest coverages approximately 2.5x and 1.75x, respectively, and debt to capital in the 70%-75% range; additional strengthening is expected longer term.

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