Moody's lowers WorldCom to junk

Moody's Investors Service downgraded WorldCom Inc. and its subsidiaries and kept the long-term ratings on review for possible further downgrade. Lowered ratings include WorldCom's senior unsecured long-term debt to Ba2 from Baa2, preferred stock to B2 from Ba1 and commercial paper to Not Prime from P-2; Intermedia Communications Inc.'s senior unsecured long-term to B1 from Ba1 and redeemable preferred to B3 from Ba3; MCI Communications Corp. senior unsecured long-term debt to Ba2 from Baa2; MCI Capital I's backed preferred stock to B1 from Baa3; and MCI WorldCom Synergies Management Co. Inc.'s preferred stock to B3 to from Ba1.

The downgrades reflect the company's decline in operating performance, expectations for continued weakness, substantial debt load that includes maturities within the next two years and its need to restructure its maturing credit facility and accounts receivable securitization program, Moody's said. WorldCom's adjusted gross debt increased to $33.5 billion in April 2002 from $26.6 billion at the end of 2000. Adjusted gross debt to EBIDTA will reach and possibly exceed 4 times in 2002, compared to just over 2.1x for 2000. Capex is expected to decline to less than $5 billion on a consolidated basis in 2002.

The continuing review for further downgrade will focus on the company's ability to renegotiate its $2.65 billion credit facility and receivable securitization facilities. Also, the review will look into WorldCom's ability to reduce its debt burden and developments in the SEC investigation of its accounting practices.

Moody's said the Ba2 rating reflects its expectation WorldCom will be successful in its negotiations to extend its $2.65 billion 364-day credit facility which matures on June 7 and that the company will be able to arrange access to a receivable sales program in the near term, although on terms less favorable than the existing structures.

Moody's said it anticipates WorldCom may have to provide security to its bank creditors in connection with the renegotiation of its 364-day facility. Should collateral be provided, the public debt would be effectively subordinated to future outstanding bank debt.

"While the public indentures contain negative pledge clauses, Moody's believes the company has sufficient flexibility of provide collateral in its bank restructuring without tripping the most restrictive negative pledge covenant. If the company is unable to successfully restructure these facilities, a further, significant downgrade is likely," Moody's added.

Fitch cuts WorldCom to junk

Fitch Ratings downgraded WorldCom Inc.'s senior unsecured debt rating to BB from BBB-. Ratings on its preferred securities and quarterly income preferred securities were lowered to B+ from BB+ and the commercial paper rating was lowered to B from F3. In addition, Intermedia Communications' senior unsecured debt was lowered to BB- from BB+. The outlook is negative.

Fitch said the downgrade reflects the company's triggering of its accounts receivable program, "which will stress the company's ability to amend this program, and complete a renewal of its bank revolver in a credit neutral manner. The company still may be successful in amending its program and removing the rating triggers, but this will require greater structural enhancements. Anticipated structural enhancements are expected to reduce the size of the accounts receivable program and increase pressure on the company's liquidity absent an offsetting event."

The negative outlook reflects expected weak operating performance in 2002, uncertain recovery timing for data and internet products and voice long-distance business, ability to generate consistent meaningful free cash flow, ability to amend credit facilities and accounts receivable securitization program and significant debt requirements in 2003 and 2004, Fitch said.

WorldCom is expected to generate $1 billion of free cash flow in 2002. In 2003, the company has about $3.2 billion in debt maturities. Fitch anticipates that the company will rely on its credit facilities, if they are amended, and improvements in cash flow from operations to meet these debt obligations.

S&P lowers Gap outlook

Standard & Poor's lowered its outlook on The Gap Inc. to negative from stable. The company's corporate credit rating is BB+.

The outlook revision reflects continuing negative sales trends in the Old Navy and Gap divisions, S&P said.

Gap's same-store sales declined 17% in the first quarter. S&P said it had expected Gap's comp sales to be negative in the quarter, but not to that magnitude.

The ratings reflect management's challenge to improve business fundamentals in an industry that will continue to experience intense competition and to improve its weakened credit protection measures.

Those factors are partially offset by the company's strong business position in casual apparel, its geographic diversity, and strong cash flow before capital expenditures.

Gap's credit protection measures have weakened substantially due to poor operating results and increased leverage since 1997.

EBITDA coverage of interest declined to 3.0 times in 2001, from 5.2 times in 2000 and 7.3 times in 1999, S&P noted.

The Gap should generate greater cash flow in 2002 through its substantial planned reduction of capital expenditures, S&P said.

Moody's raises Finlay's outlook

Moody's Investors Service confirmed Finlay Enterprises and its subsidiaries and raised the outlook to positive from stable. Confirmed ratings include Finaly's senior implied at B1, $75 million senior unsecured notes due 2008 at B3 and senior unsecured issuer rating at B3 and Finlay Fine Jewelry's $275 million senior secured revolver due 2003 at Ba3 and $150 million senior unsecured notes due 2008 at B1.

Moody's said it changed the outlook to positive following stronger than expected performance and financial condition in recent key holiday periods, and the potential for a ratings upgrade if the company returns to prior performance levels.

"Ratings could respond positively if Finlay is able to restore operating profitability and continue to generate cash for purposes to reduce leverage," Moody's said. "Ratings could respond negatively if Finlay engages in re-leveraging activities or loses one of its major host-store relationships."

Negative factors influencing the ratings are the company's high leverage, dependence on department stores for organic growth, discretionary and promotional nature of the sector and market competition, Moody's said.

Positive factors reflected in the ratings include the company's commanding presence in the sector, financial flexibility due to variable rents and consignment inventory, low investment to open new departments and host stores carrying consumers' financing risk, Moody's said.

Moody's lowers Bell Canada International

Moody's Investors Service downgraded Bell Canada International, affecting C$160 million of debt, including its senior unsecured debt, cut to Ca from B2. The outlook is negative.

Moody's said it lowered BCI because it is "highly uncertain" the company will be able to renew its bank facility maturing in March 2003 and make a significant guarantee payment the following month.

In addition, before those dates BCI's debt might suffer a cross-default from short-term debt of its 42% subsidiary in Brazil, Telecom Americas Ltd. and because BCI's assets are likely worth less than its debt and guarantee obligations, Moody's said.

S&P lowers Grant Geophysical

Standard & Poor's downgraded Grant Geophysical, Inc. and put the company on CreditWatch with developing implications. Ratings lowered include Grant Geophysical's $100 million 9.75% senior notes due 2008, cut to CC from CCC+.

S&P said the cut follows Grant Geophysical's announcement it is currently in default of certain nonfinancial covenants in its credit facility with Foothill Capital Corp. and Elliott Associates LP.

While Foothill has not taken any steps to accelerate the maturity amounts outstanding under the facility, it could do so at any time, S&P said. In addition, if Foothill were to accelerate amounts due under the facility, the trustee under the indenture for the company's 9¾% senior notes due 2008 could take the steps necessary to cause that debt to become immediately due and payable.

If the company's maturity on any of Grant's debt were accelerated, it is unlikely that the company would be able to continue its operations without seeking protection from its creditors under the federal bankruptcy code, S&P added.

Should Grant receive relief from its creditors for these covenant violations and receive an injection of new capital, which is possible, although not likely, S&P said it will re-evaluate its ratings.

Moody's rates new Cole National notes B2

Moody's Investors Service assigned a B2 rating to Cole National Group's proposed $150 million senior subordinated notes due 2012 and confirmed its existing ratings including its $75 million senior secured revolving credit facility at Ba2 and $125 million 8.625% senior subordinated notes due 2007 and $150 million 9.875% senior subordinated notes due 2006 at B2. The outlook is stable.

Moody's said the ratings reflect Cole's high leverage and modest debt protection measures; its modest return on assets since the acquisition of Pearle Vision; dependence on traffic at Sears stores for a large part of its licensed business; competition for customers and personnel in its eyecare business as other chains look to aggressively grow their territories; and seasonality of its Things Remembered business, which produces a significant amount of the company's operating income.

Positives include the stability of Cole's business trends, which leads to little expected variance to its leverage measures over time, the restored positive trend in the eyecare businesses, which Moody's believes is due in part to the return to normal replacement cycles which had been disrupted by the introduction of laser technology; by the enterprise value of its Things Remembered Chain and the Pearle franchise, as well as the value of Cole's investment in Pearle Europe; by the variable nature of rents for its leased locations, which reduces the burden of fixed costs faced by many retailers; and by the company's longstanding expertise in vision care, Moody's said.

S&P puts Dynacare on positive watch

Standard & Poor's put Dynacare Inc. on CreditWatch with positive implications. Previously the company had a negative outlook.

Ratings affected include Dynacare's $125 million 10.75% senior notes due 2006 at B+.

S&P rates new Cole National notes B

Standard & Poor's assigned a B rating to Cole National Group Inc.'s planned offering of $150 million senior subordinated notes due 2012 and confirmed its senior secured bank loan at BB+ and corporate credit rating at BB-. The outlook is stable.

S&P said its ratings reflect Cole's challenges of operating in the increasingly competitive optical retail industry and the risks associated with expanding into Target Inc.'s discount stores.

However the company has leading market position and good long-term industry demographics, S&P said.

The rating agency noted merchandising and customer service initiatives at Pearle Vision in 2000 have contributed to positive comparable-store sales growth in the past two years. At Pearle company-owned stores, comparable-store sales grew 2.6% in 2001, reflecting a higher average transaction selling price for the first nine months of 2001 and an increase in the number of transactions in the fourth quarter, S&P said.

Although margin and cash flow improvement lagged sales growth in 2000 due to costs associated with new operating initiatives, EBITDA increased to $77 million in 2001 from $72 million in 2000. Lease-adjusted operating margins improved to 13.7% in 2001, from 13.4% for the same period the year before, reflecting the higher average selling price of spectacles and better operating efficiency. This improvement in operating profits was achieved after absorbing losses from the continued expansion of Target Optical, S&P added. Despite the costs associated with this new business, the expansion appears to be manageable and is not expected to affect Cole's consolidated credit profile materially in the near term.

Moody's rates new Hammons notes B2

Moody's Investors Service assigned a B2 rating to John Q. Hammons Hotels, LP's planned $500 million of first mortgage notes due 2012. The outlook is stable.

Moody's said the ratings reflect John Q. Hammons' continued high leverage. Pro forma for the new transaction, restricted company debt/EBITDA is about 6.2 times.

Additionally, while management has stated its intention to reduce debt going forward, Moody's said it expects the company will only be able to generate a modest level of operating cash surplus during fiscal 2002.

This operating cash surplus is expected to result from the combined effect of continued operating improvements and the company's September 1998 decision to cease development activity, Moody's added.

Helping the ratings are the elimination of upcoming scheduled debt maturities related to the existing first mortgage notes and certain other non-rated mortgage debt including the company's Omaha Embassy Suites property.

The stable outlook reflects John Q. Hammons' pro forma debt service schedule, expected continued improvement in operating performance, improvements related to overall lodging industry trends, and management's stated intention to reduce leverage going forward, Moody's added.

S&P lowers Penton outlook

Standard & Poor's lowered its outlook on Penton Media Inc. to negative from stable and confirmed the existing ratings include its senior secured debt at B- and subordinated debt at CCC.

S&P said it revised Penton's outlook because of additional concerns about the company's profitability in light of continued revenue declines and the operating difficulties of key end markets.

Penton continues to experience significant revenue softness in key segments of its portfolio and this is likely to prevent the company from achieving its goal of generating at least $50 million in EBITDA in 2002, S&P said.

The troubled technology and manufacturing segments of the economy represented approximately 50% and 25% of Penton's revenue in 2001. Penton's revenue from these sectors, adjusted for show timing, dropped by 50% and 27%, respectively, in the first quarter of 2002. These trends continue the declines that started in 2001 due to sector-specific problems and the sharp drop in business travel following September 11, S&P noted.

In addition, second quarter results will be hurt by a 75% drop in the number of exhibitors at its recent Internet World Spring event, typically one of its largest shows, compared with the company's expectations of a 50% decrease. These results highlight the difficulty of predicting revenue in this environment and the severity of the market conditions being experienced by Penton's key customer groups, S&P commented.

Moody's cuts Cherokee International

Moody's Investors Service downgraded Cherokee International, LLC and kept the outlook at negative. Ratings affected include Cherokee's $100 million 10½% senior subordinated notes due 2009, lowered to Caa3 from Caa1, and $25 million guaranteed senior secured revolving credit facility due 2005 and $42 million guaranteed senior secured term loan due 2005, both lowered to B3 from B2.

Moody's said it lowered Cherokee because of the company's cautious outlook, suggesting it may not be in compliance with the financial covenants under its bank credit agreement at June 30, 2002.

Moody's said it believes that any further waiver of and amendment to the financial covenants governing the credit facility could be contingent upon concessions demanded from the senior subordinated noteholders.

Continued weakness in the company's networking, telecommunications and high-end computing end markets accounted for declines in revenues and operating income in 2001, and are likely to have resulted in further year-over-year decreases in the first quarter of fiscal 2002, Moody's said.

Fiscal 2001 EBIT did not cover the company's annual interest expense and the company closed the year with only $3.8 million cash and investments available on Dec. 31, 2001.

As a result Cherokee's liquidity and full principal recovery on the senior subordinated notes are at risk, Moody's said.

S&P rates Roundy's notes B, loans BB-

Standard & Poor's assigned a BB- rating to Roundy's Inc.'s new $90 million senior secured revolver due 2007 and $250 million senior secured term B loan due 2009 and a B rating to its $200 million senior subordinated notes due 2012. The outlook is positive.

S&P puts Riverwood on positive watch

Standard & Poor's put Riverwood International Corp. on CreditWatch with positive implications.

Ratings affected include Riverwood's $250 million 10.25% senior notes due 2006, $400 million 10.875% senior subordinated notes due 2008, $250 million 10.625% senior notes due 2007 and $250 million 10.625% senior unsecured notes due 2007, all rated CCC+, and its $300 million revolving credit facility bank loan due 2005, $335 million term bank loan due 2005 and $250 million senior secured loan due 2007, all rated B.

Moody's cuts US Timberlands Klamath Falls

Moody's Investors Service downgraded U.S. Timberlands Klamath Falls, LLC including cutting its $225 million senior notes due 2007 to Caa1 from B2. The outlook is negative.

Moody's said the downgrade reflects the significant decline in timber prices and timberland asset values in the past two years, the uncertain timing of a recovery of prices and the fact that the company is harvesting timber above its level of sustainable yield growth, thereby raising concerns about whether the asset values will be sufficient to support a refinancing of the bonds at maturity in 2007.

The average log price in 2001 was $349 per thousand board feet, which was down 11% from 2000, which in turn was down 10% from 1999, Moody's noted.

Moody's said it believes that although U.S. Timberlands Klamath Falls' timber and timberlands asset value may presently exceed its book value of $215 million, future asset impairment charges may be necessary if values decline further or deficiencies are found in certain timberland holdings.

The chief credit support for the bonds is the value of its timber and timberland assets because the company's cash after payment of interest and capital expenditures is used for potential distributions to affiliates, or to unitholders of the master partnership (U.S. Timberlands Company LP), Moody's said.

The rating agency noted that in May 2001 the company's board suspended distributions to unitholders due to declining log prices and deteriorating business conditions.

S&P downgrades Key3Media

Standard & Poor's downgraded Key3Media Group Inc. and kept the company on CreditWatch with negative implications.

Ratings affected include Key3Media's $300 million 11.25% notes due 2011, cut to CCC- from B, and its $150 million revolving credit facility due 2004, cut to B- from BB-.

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