S&P cuts Dillard's

Standard & Poor's downgraded Dillard's Inc. including lowering the senior unsecured debt of Dillard's Inc., Dillard Investment Co. Inc. and Mercantile Stores Co. Inc. to BB from BB+ and Dillard's Capital Trust I's preferred stock to B from B+. The ratings were removed from CreditWatch negative. The outlook is stable.

S&P said the downgrade reflects a weakening of operating results and its expectation that Dillard's may fail to show the recovery in performance and in credit ratios that was incorporated into the previous rating.

Dillard's operations are being affected by intense competition, lagging consumer confidence, a poor economy, a rising unemployment rate that has pared disposable personal income and consumer apathy to fashion merchandise, S&P said. While this environment is affecting sales growth for the entire department store sector, as all major players have seen same-store sales declines for a protracted period of time, Dillard's results have been especially hard hit.

After several years of poor performance, Dillard's managed a relatively good year in 2002, with improved operating margins, EBITDA, cash flow protection and leverage. Maintenance of the rating was predicated on a continuation of progress in 2003, but many of the same adverse macroeconomic factors that Dillard's and the rest of the retail sector faced on 2002 are unchanged.

First quarter results were disappointing, and the recent 7% and 6% drops in same-store sales for May and June 2003, respectively, suggest that the economy and low consumer confidence are taking a heavier-than-average toll on Dillard's business.

S&P said it anticipates that EBITDA coverage of interest may decline from last year's 3.9x, a level that had been about adequate for the rating. In addition, the company's resumption of share repurchases during the first quarter of 2003 may be a harbinger of greater activity in the future.

Moody's puts Alliance-Atlantis on review

Moody's Investors Service put Alliance-Atlantis Communications Inc. on review for possible downgrade including its senior secured debt at Ba1 and senior subordinate debt at B1.

Moody's said the review is because it is concerned that a recent change to Alliance-Atlantis' accounting policies may lead to a possible bank covenant violation.

While Alliance-Atlantis business is stable and in Moody's opinion it is likely that any possible breach would be waived by Alliance-Atlantis' bank syndicate, the risk of a negative, if unlikely, bank syndicate decision affecting Alliance-Atlantis liquidity also exists.

Moody's anticipates that should the company choose and be able to obtain formal covenant relief of sufficient magnitude the ratings would then be confirmed at existing levels.

S&P upgrades Cott

Standard & Poor's upgraded Cott Corp. including raising its $100 million senior secured term loan and $75 million revolving bank loan to BB+ from BB. The outlook is stable.

S&P said the ratings actions reflect improved profitability and credit protection measures that have benefited from strong results from the company's U.S. operations as well as a reduction in leverage.

These factors are offset by Cott's reliance on a few key accounts and improving, although still somewhat constrained, liquidity.

The U.S. remains by far Cott's most important market, representing 72% of fiscal 2002 sales and an even greater portion of operating income, S&P said. Cott's U.S. revenues grew 11.9% in 2002 and have grown about 18% thus far in 2003, while operating income grew 22.9% in 2002.

Cott has benefited from the increased concentration of larger food retailers in the U.S. and the growth of private label products in the grocery channel, which grew at twice the rate of total grocery sales.

S&P puts MeriStar on watch

Standard & Poor's put MeriStar Hospitality Corp.'s senior unsecured debt on CreditWatch negative including MeriStar Hospitality Operating Partnership, LP's $100 million revolving credit facility due 2005, $250 million 10.5% senior unsecured notes due 2009, $300 million 9% tranche 1 senior unsecured notes due 2008 and $400 million 9.125% tranche 2 senior unsecured notes due 2011 at B-. MeriStar's subordinate debt was confirmed at CCC and corporate credit at B-.

S&P said the Creditwatch placement follows management's announced plans to close on a CMBS transaction in the third quarter of 2003.

Upon closure, S&P said it will likely lower the senior unsecured rating to CCC+.

Anticipated proceeds of around $100 million from the CMBS deal will primarily be used to selectively redeem higher-rated unsecured debt and for capital expenditure needs.

A lower CCC+ rating on the unsecured notes would reflect the less advantageous position of the unsecured note holders following the additional secured financing. Pro forma for the transaction, the company will have roughly $450 million of secured debt in its capital structure.

S&P said MeriStar's ratings reflect the company's weak credit measures and limited financial flexibility. These factors are partially mitigated by the company's well-diversified and generally good quality portfolio of hotels.

Profitability continues to suffer as a result of the continued weak lodging environment. In the first half of 2003, revenue per available room (RevPAR) declined 4.9% over the prior year. EBITDA for the same period was $103 million, representing a 23% decline year over year. For the full year, the company anticipates a 2%-3% decline in RevPAR and $175 million - $180 million in EBITDA, S&P said.

At the end of June 2003, the company had $1.65 billion of debt outstanding. Credit measures have deteriorated considerably over the past few years. At the end of June 2003, debt to EBITDA was around 9x and EBITDA interest coverage was in the low-1x area.

S&P cuts Zale

Standard & Poor's downgraded Zale Corp. including cutting its corporate credit rating to BB+ from BBB-. S&P withdrew its BBB- rating on Zale's $87 million outstanding 8.5% senior unsecured notes due 2007 and $225 million unsecured revolving credit facility after the notes were redeemed and the credit facility refinanced. The outlook is stable.

S&P said the downgrade follows Zale's announcement of the results of its Dutch Auction tender offer that expired July 29. In conjunction with the tender, Zale intends to purchase 4.7 million shares of its common stock at a total cost of $225.6 million. Zale had previously expected to purchase up to 6.4 million shares at an aggregate amount of about $307 million. Given that the tender offer was under-subscribed, the company plans to purchase additional shares of its common stock under its stock repurchase program.

The downgrade reflects a significant increase in debt leverage following the completion of the tender offer and a more aggressive financial policy, S&P said. Because the tender offer will be largely debt financed, debt leverage is expected to increase materially, resulting in weaker-than-expected credit protection measures.

Pro forma for the transaction, credit measures are expected to deteriorate to levels no longer consistent with the investment-grade rating with total debt to EBITDA increasing to over 3.0x from 2.6x for the 12 months ended April 30, 2003, S&P said.

S&P rates Western Gas Resources loan BB+

Standard & Poor's assigned a BB+ rating to Western Gas Resources Inc.'s $300 million revolving credit facility and $133 million of term loans. The outlook remains stable.

S&P said Western Gas Resources' ratings reflect the free cash flows provided by its midstream operations (43% operating earnings at March 31, 2003), coupled with the risks posed by a growing presence in the cyclical, capital-intensive, and fiercely competitive exploration and production unit (40% operating earnings at March 31, 2003) and a somewhat aggressive although improving capital structure.

S&P said it also has incorporated into its ratings an expectation that WGR will be acquisitive, which could result in a spike in debt leverage.

Western Gas Resources's exploration and production activities are expected to grow to approximately 50% of operating income over the medium term as the company explores and develops its considerable coal bed methane properties in the Powder River Basin and resources in the Green River Basin, S&P noted. Western Gas Resources' operations are small, with reserves of 588 billion cubic feet equivalent and 99% natural gas at Dec. 31, 2003. However, Western Gas Resources believes that it has 2 trillion cubic feet equivalent of reserve potential on its properties.

A long reserve life of over 12 years reflects the long-lived nature of its gas wells and a high percentage of proved undeveloped reserves; on a proved developed basis, WGR's reserve life is only about six years.

S&P said it expects Western Gas Resources to maintain debt leverage in the 40% range, although further improvement is possible if robust cash flows continue. Cash flow and profitability measures are anticipated to be solid for 2003, with expected EBITDA interest coverage near 8x.

However, current results are buttressed by extremely strong natural gas prices and EBITDA interest coverage (before preferred stock dividends) is likely to drop to about 5.0x, S&P said. EBITDA coverage of interest and preferred dividends at normalized pricing is about 4.0x. Solid funds from operations to total debt is expected to near 50% for 2003 but would be approximately 30% on an unhedged, midcycle basis.

S&P raises Vicar Operating outlook

Standard & Poor's raised its outlook on Vicar Operating Inc. to positive from stable and confirmed its ratings including its secured bank loan at B+ and subordinated debt at B-.

S&P said the outlook revision reflects both the company's improving operating performance and measures taken to improve its capital structure.

Vicar's ratings reflect its improving but still relatively weak financial profile. However, this weakness is mitigated by the company's position as the leading operator of animal hospitals and veterinary diagnostic laboratories, S&P said.

Although all high-interest-rate debt and preferred stock has been repaid, and though total debt has been reduced with a combination of cash flow and proceeds from equity transactions, Vicar remains highly leveraged, S&P said. Funds from operations to lease-adjusted debt of about 17% and EBITDA interest coverage of 2.5x as of March 31, 2003 (versus 14% and 1.3x, respectively, as of March 31, 2002), are consistent with the rating, given the company's concentration in the veterinary field and the attendant exposure.

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