Moody's rates Province notes B3

Moody's Investors Service assigned a B3 rating to Province Healthcare Co.'s planned $150 million senior subordinated notes due 2013 and confirmed its existing ratings including its $210 million senior secured revolving credit facility at Ba3 and $172.5 million convertible subordinated notes due 2008 at B3. The outlook remains stable.

Moody's said the confirmation anticipates that operating trends over the next couple of years will be positive following an unexpectedly high number of physician departures during fiscal 2002.

The company's focus on building its physician base and controlling costs should drive positive revenue and EBITDAR growth as well as enhance margins, Moody's said. The ratings are limited by the company's high leverage and Moody's concern over the company's ability to deleverage over the intermediate term given its appetite for acquisitions.

Since Moody's assigned ratings to Province in the fourth quarter of 2001, the company has performed below the rating agency's expectations. Leverage (debt/EBITDA) has remained relatively unchanged at 3.8 times for the year ended Dec. 31, 2001 versus 4.0 times for the pro forma last 12 months period ended March 31, 2003. During the same period, coverage, as measured by EBITDA/Interest, declined from 8.2 times to 4.4 times, and EBITDA margins declined from 18.7% to 16.0%, Moody's said.

Management has attributed this weakness to the unexpected loss of physicians and the failure to cut costs as volume declined towards the end of 2002, Moody's added. Appropriate steps to correct the issues appear to have been taken by now, however, as new procedures to retain physicians were implemented, including an early alert system relating to monthly physician trends, the hiring of a new vice president responsible for physician retention and a hospital CEO training program.

S&P rates Texas Industries notes BB-, loan BB

Standard & Poor's assigned a BB- rating to Texas Industries Inc.'s proposed $600 million senior notes due 2011 and a BB rating to its proposed $200 million senior secured revolving credit facility due 2007 and confirmed its existing ratings including its corporate credit at BB- and preferred stock at B-.

S&P said the senior secured revolving credit facility is rated one notch above the corporate credit rating reflecting strong prospects for full recovery in a default or bankruptcy scenario.

Texas Industries' ratings reflect its fair business position in the steel and CAC industries, which are highly cyclical and intensely competitive, S&P said. The ratings also reflect Texas Industries' weakened credit measures.

Texas Industries is the second-largest structural steel producer in the U.S., behind market leader Nucor Corp. The steel beams segment has been challenged by a variety of factors including excess supply from high imports earlier in 2002 (structural steel products were not included in the U.S. government's section 201 tariffs) and weak demand due to lower nonresidential construction activity, S&P said. These difficult conditions have put significant pressure on structural steel prices and have prevented the company from increasing its operating rate beyond 50% at its Virginia-based steel plant. As a result, Texas Industries' steel segment has incurred operating losses consecutively for the past three quarters. A weakened U.S. dollar and low selling prices have subsequently helped to stem the tide of imports.

However, the structural steel market is now being challenged by new capacity ramping up at Steel Dynamics Inc.

The CAC industry is capital-intensive and fragmented regionally because of the high costs required to transport cement, S&P said. Texas Industries is a relatively small player, as 85% of U.S. cement capacity is owned by large global producers but benefits from its leading position in the largest U.S. cement markets (it is the largest cement producer in Texas, and the fourth-largest producer in Southern California).

Texas Industries has typically maintained a moderate financial profile, targeting total debt to total capitalization of 35%, S&P said. The company had breached these targets in the past couple of years, spending heavily on expansion programs and meaningfully increasing debt.

Since completing its growth spending in 2001, the company has focused on reducing costs and generated excess free cash flows to reduce debt. From May 31, 2001, to Feb. 28, 2002, the company paid down debt by $190 million and lowered its debt to capital to 39% from 46%. Despite these actions, the company's EBITDA interest coverage declined to 1.1x for the quarter ended Feb. 28, 2003, from 4.0x in the same quarter the year before, S&P said. This measure is expected to improve nominally as the company realizes some improvement in its profitability in its CAC segment but it is not expected to approach previous levels, mainly due to a significant increase in its interest costs from the refinancing.

Moody's cuts Texas Industries, rates notes B1

Moody's Investors Service assigned a provisional B1 rating to Texas Industries, Inc.'s proposed $600 million guaranteed senior unsecured notes due 2011 and downgraded the company's senior implied rating to B1 from Ba3 and TXI Capital Trust I's preferred stock to B3 from B2. The ratings remain on review for possible further downgrade given that the senior note placement is subject to market availability and other conditions.

If the new facilities close as anticipated, Moody's will confirm the ratings with a stable outlook.

The downgrade in the senior implied rating reflects weaker than anticipated operating performance and cash flow generation, Moody's expectations that strengthening in performance and coverage ratios will be stretched out further than anticipated, driven particularly by ongoing pressures in the steel segment, and continued constrained coverage ratios in light of expected interest cost increases and ongoing earnings pressure, Moody's said.

Although Texas Industries is putting in place a new senior secured credit facility (unrated), the B1 rating on the private placement is at the same level of the senior implied rating and reflects Moody's view that adequate enterprise value exists relative to the amount of senior unsecured debt in the pro-forma capital structure.

The ratings acknowledge Texas Industries' position as a major cement producer in Texas and California. Although performance in this segment has been challenged by softness in commercial construction and adverse weather conditions, the CAC segment continues to demonstrate acceptable performance, with segment EBITDA for the nine months to Feb. 28, 2003 of $92 million, and should benefit from improvement in its fundamental sales sectors and a return to better weather conditions, Moody's said.

Important factors in the rating however, are the challenges facing Texas Industries in its steel segment. These include the competitive landscape of this business sector, the company's exposure to cost pressures given volatility in scrap and energy prices, and Texas Industrie's high fixed overhead cost base following its recent plant expansion and start-up, Moody's said.

Although performance in 2003 will reflect the impact of extraordinary incidents at certain facilities and abnormal weather, the underlying fundamentals, particularly on the commercial construction side remain weak and price improvement has been slow to materialize. These factors contributed to a 89% reduction in segment EBITDA, to $6 million, for the nine months to Feb. 28, 2003. Given the likelihood for a slow recovery in this business segment, Moody's said it expects meaningful strengthening and strong contribution to Texas Industries' overall performance will take longer than anticipated. In addition, the entry of new participants into the structural steel sector and dominance of others within this sector, is likely to continue to exert pressure on meaningful price improvement given the excess capacity that exists.

Moody's acknowledges that the proposed note issue will extend Texas Industries' debt maturity profile; however, the new issue also will not be callable for four years, effectively precluding Texas Industries from any meaningful debt reduction until 2007.

S&P rates Quality Distribution notes, loan B-

Standard & Poor's assigned a B- rating to Quality Distribution LLC's planned $175 million senior secured notes due 2008, $65 million revolving credit facility due 2008 and $94.6 million term loan due 2008. The outlook is stable.

S&P said Quality Distribution's ratings reflect its participation in a low-margin, fragmented industry, combined with a weak financial profile.

The company was formed in 1998 by the merger of MTL Inc. and Chemical Leaman Corp., the largest and fourth-largest companies in the industry. The merger expanded the company's geographic coverage and terminal network, while adding other profitable businesses, including specialized dry-bulk handling, tank cleaning, rail transloading, and freight brokerage. However, the acquisition also added a significant debt and interest burden, S&P said. Initial operational challenges from the merger have been resolved and the integration has resulted in the realization of some cost savings.

In the late 1990s through 2002, the weakening of the economy reduced demand for chemicals and, hence, revenues for Quality Distribution, S&P noted. During this time, some customers shifted from truck transportation to rail (which is less expensive for longer hauls), and insurance premiums rose by more than 100%.

However, the company's operating margins after depreciation have remained in the 5.0% to 5.5% range, despite reduced revenues, as a result of management's efforts to reduce operating costs. Quality Distribution's earnings and cash flow suffer from its significant debt and interest burden; lease-adjusted debt to capital was 141%, funds from operations to debt 6.9%, EBIT interest coverage was 0.6x, and lease-adjusted debt to EBITDA was over 6.5x for 2002, S&P said. In addition, the company has limited financial flexibility, with no unencumbered assets and a small amount available under its revolver.

S&P rates Regal Cinemas' loan BB-; convertibles B

Standard & Poor's rated Regal Cinemas Inc.'s proposed $315 million term loan D due 2009 at BB- and proposed Rule 144A $125 million convertible senior notes due 2008 at B. The outlook remains stable.

In conjunction with the new term loan, 40 of United Artists' theaters will be transferred to a Regal Cinemas' subsidiary to provide additional assets to the restricted group and collateral to the bank lenders. The recently acquired Hoyts' theaters will also be part of this restricted group and the collateral package, S&P said.

The convertibles are rated two notches below the bank loan and corporate credit ratings due to the lack of assets and the magnitude of structurally senior debt and operating liabilities of the subsidiaries.

Proceeds, combined with about $190 million in cash and a small revolver drawdown, will be used to fund a $600 million to $625 million special dividend to the Regal Entertainment shareholders. Subsequently, Regal Entertainment will reduce its quarterly dividend by about 20%.

The ratings reflect the mature and highly competitive nature of the movie exhibition industry and the company's somewhat aggressive financial profile, S&P said.

On the plus side, the ratings reflect the company's geographically diverse and relatively high quality theater circuit, good profit margins and meaningful discretionary cash flow, S&P added.

Year-to-date industry box office revenue is down about 10%. Regal's pro forma first quarter EBITDA, adjusted for merger and restructuring costs, was down 8.8% compared with year-ago levels. However, EBITDA margins are 20.5%, and more than 30% of EBITDA flowed through to discretionary cash flow. Adjusting for the new financing and the acquisition of Hoyts' theaters, lease-adjusted EBITDA coverage of lease-adjusted interest expense for the year ended March 31, 2003, decreases to about 2.6 times from 2.8 times. Also, lease-adjusted leverage increases to 4.4 times from 3.8 times.

Moody's rates L-3 notes Ba2

Moody's Investors Service assigned a Ba3 ratings to L-3 Communication Corp.'s new $400 million 6 1/8 % senior subordinated notes due 2013 and confirmed its existing rating including its senior implied at Ba2 with a positive outlook and speculative-grade liquidity at SGL-1.

After this transaction, Moody's estimates that L-3 will have approximately $270 million in cash on its balance sheet. Combined with approximately $675 million in availability under L-3's senior secured credit facility, the company's liquidity position will be approximately $1 billion.

Moody's said it anticipates that L-3, which has been actively acquiring companies in the defense sector with complementary business profiles ($1.7 billion spent in 2002), will continue to be acquisitive in the near term, and may pursue additional financing for future large acquisitions.

Moody's notes that the size of this offering, more than twice the amount outstanding of the debt retired, will have a small impact on credit fundamentals. Interest coverage will not materially change, while leverage, as measured by debt/EBITDA will increase slightly (3.2x for the 12 months ending March 2003 to 3.6x pro forma the transaction). Total debt outstanding will increase from $1.8 billion to over $2 billion.

None of this debt becomes due before 2008. However, Moody's noted the status of the company's pension plans, under-funded by $282 million as of December 2002, which is significantly higher than that of the previous year ($102 million), with much of the increase attributable to acquisitions made in 2002. The company intends to contribute $40 million to these plans in 2003.

S&P rates Frontier Escrow notes B

Standard & Poor's assigned a B rating to Frontier Escrow Corp.'s $220 million 8% senior notes due 2013, guaranteed by Frontier Oil Corp and confirmed Frontier Oil including its corporate credit at B+ and kept it on CreditWatch with positive implications. The new issue is also on CreditWatch positive.

Frontier Escrow will be the obligor of the notes and retain all proceeds until immediately before Frontier Oil's merger with Holly Corp. At that point, Frontier Escrow will merge with Frontier Oil and Frontier Oil will become obligor of the notes, which will rank equally with the existing senior unsecured indebtedness of Frontier Oil.

Proceeds from the notes will be used to fund Frontier Oil's merger with Holly.

Frontier Oil's merger with Holly improves Frontier Oil's credit quality by broadening its refining business and strengthening its balance sheet, assuming that the combined company is able to receive a "small refinery" exemption from Tier II gasoline and ultra low-sulfur regulations, S&P said. Through the transaction, Frontier Oil will increase its refining capacity by about 92,000 barrels per day (bpd) to about 260,000 bpd total post-merger across various markets in the Rocky Mountains and the Four Corners region, including the pending acquisition of the Woods Cross refinery in Utah (25,000 bpd) from ConocoPhillips Co.

In addition to broadening Frontier Oil's markets, the transaction will also result in an improvement to cash flow measures, S&P said. Based on pro forma year-end December 2002 results for the combined entity, including new debt from the merger, debt coverage improves nearly 20% for free operating cash flow and roughly 17% for funds from operations. Frontier Oil's balance sheet will also strengthen, with improved debt leverage of around 50% versus year-end 2002 leverage of 61%.

S&P says Hanger Orthopedic unchanged

Standard & Poor's said Hanger Orthopedic Inc. is unchanged including its corporate credit at B+ with a stable outlook in response to the proposed 10-year freeze on Medicare reimbursement rates for durable medical equipment (DME) and orthotic and prosthetic services.

If enacted, the proposal would temper revenue growth, but to a limited extent, S&P said.

Hanger, which was upgraded to B+ from B in January 2003, has the ratings capacity to weather a measure of revenue pressure, S&P noted.

About 30% of Hanger's sales are affected by Medicare rates. An additional 20% are indirectly tied to these rates through Medicaid and Veterans Administration programs. Nevertheless, expectations for sales growth rest mainly on higher patient volumes from intensified facility utilization and acquisitions and stronger sales of higher margin products, rather than on Medicare rate increases.

Also, as the company renews its managed care contracts, it will have the opportunity to offset Medicare-influenced pressures to lower prices with reductions in the volume-based discounts it offers those customers, S&P said. Still, if the proposed regulations are passed, successful cost-containment, same-store-sales growth, and conservatively priced expansion will be all the more critical to Hanger's credit profile.

Moody's rates Pliant notes B3

Moody's Investors Service assigned a B3 rating to Pliant Corp.'s planned $250 million senior second lien notes due 2009 and confirmed its existing ratings including its $320 million secured first lien credit facility at B2 and $320 million 13% senior subordinated notes due 2010 at Caa1. The outlook remains negative.

Moody's said the ratings continue to reflect the magnitude of Pliant's debt, the absence of profitability and the shortfall in EBIT coverage of interest expense, all of which are exacerbated by on-going challenges in its business environment.

Liquidity pro-forma for the proposed transactions is improved. Additional comfort is gained from the $25 million capital call provision by the sponsor established in the March 2003 bank amendment, Moody's added.

The negative ratings outlook reflects continued downward pressure on margins and returns principally from rising resin costs and pricing constraints, Moody's said.

Moody's rates GCI loan Ba3

Moody's Investors Service assigned a Ba3 rating to GCI Holdings Inc.'s amended and restated $225 million senior secured credit facility and confirmed its $180 million senior unsecured notes due 2007 at B2. The outlook remains negative.

Moody's said the ratings reflect the limited growth prospects and pricing pressure that characterize GCI's geographic and competitive environment and incorporate Moody's concern that GCI will continue to suffer from further spillover of the problems that have plagued long distance operators in the lower 48 states, namely flat traffic growth, soft carrier demand, rate compression and an inability to recoup heavy capital costs incurred for recent network upgrades.

The ratings are supported by the stability and defensibility of GCI's cable business which presently commands a dominant market share within Alaska and to a lesser degree by the strength of GCI's long distance business, which shares market dominance with one other major carrier.

Moody's expected that GCI would refinance its credit facility in 2003, to obviate classifying the facility as a current liability after the third quarter of 2003.

Although Moody's believed that there was only moderate risk associated with a refinancing, nevertheless, management's success in amending and extending the facility has removed the looming overhang of the prior maturity.

The rating outlook remains negative largely because of uncertainties regarding the MCI contract, which has been in default following WorldCom's bankruptcy filing in 2002. Moody's expects to change the ratings outlook to stable upon the re-affirmation of the contract expected later this year, assuming GCI can demonstrate success in managing MCI-related churn.

Moody's raises Zale's outlook

Moody's Investors Service raised its outlook on Zale Corp. to positive from stable and confirmed its ratings including its $87 million senior unsecured notes due 2007 and $225 million revolving credit facility expiring 2005 at Ba1.

Moody's said its actions recognize that Zale is strongly positioned within its rating category despite some decline in its credit protection measures during this weak retail environment.

A rating upgrade is possible within the near to medium term if Zale's new senior management is able to improve credit metrics by increasing sales or profitability, and maintains prudent financial policies as the operating environment improves, the agency added.

The ratings reflect Zale's focus on conserving cash and financing operating needs and share repurchases solely through operating cash flow; the benefits of size and name recognition, which have helped Zale and other large jewelers prosper during a period in which many smaller operators were severely weakened; low debt levels, which have helped Zale maintain appropriate coverage ratios in an environment of low sales growth and reduced profit margins; and a decision to emphasize bridal jewelry over fashion merchandise. This has been a successful defensive tactic, as bridal typically has lower profitability but more stable sales volume, Moody's said.

The ratings are constrained by declines in profitability which have in turn caused coverage measures to fall off during each of the last three years. These declines are due largely to reduced operating leverage as same store sales have varied from slightly negative to slightly positive. The ratings also reflect the write-off of goodwill related to the purchase of Piercing Pagoda, implying an inability to achieve anticipated returns on that operation in the near term; uncertainty about the company's future growth and operating strategies particularly in light of changes in the senior management team during the last year; and competition from specialty retailers, department stores, and discounters targeting all of Zale's customer groups.

Moody's rates El Paso Production notes B2

Moody's Investors Service assigned a B2 rating to El Paso Production Holding Co.'s proposed $1.2 billion of 10-year senior unsecured notes. The outlook is stable.

El Paso Production's ratings reflect the notes' modest covenant protection (which El Paso Production just enhanced for the first two years), their structurally senior position on El Paso Production oil and gas reserves, and upstream guarantees from El Paso Production subsidiaries, Moody's said. However, covenant protection is too weak to further separate El Paso Production from El Paso Corp.'s ratings.

Furthermore, the B2 note rating would be downgraded by one notch if El Paso Production's advances to or dividends to El Paso and/or affiliates prevent El Paso Production from internally funding annual capital spending in the range of $600 million over the next two years and/or if secured borrowings become material to El Paso Production's note ratings.

The ratings reflect: the credit implications of El Paso Production's reserve mix, short reserve life of 74% of production (60% has a 2.2 year proven developed PD reserve life), and higher risk and cost of the major portion of the drilling program dedicated to replacing that production; high leverage on proven developed (PD) reserves; very long-lead time before coalbed methane production becomes a substantial part of El Paso Production production; high debt and development capital burden on proven reserves; negative natural gas reserve revisions in each of the last three years; the parent and affiliates' potential capital needs; and the indenture's large secured debt carveout and restricted payments carveouts, Moodys' said. This is tempered by EPPH's long history in its major core regions, sophistication in commercially exploiting challenging geologic or reservoir conditions, very large diversified drilling program, and reasonable reserve replacement success in the past.

S&P rates TransMontaigne notes B+

Standard & Poor's assigned a B+ rating to TransMontaigne Inc.'s proposed $200 million senior subordinated notes. The outlook is stable.

S&P said TransMontaigne's ratings reflect its solid business profile and the stable cash flow garnered from its terminal and pipeline business. These strengths are offset by the company's continued focus on higher-risk product supply and marketing activities.

The ratings are supported by an increasingly diversified portfolio of assets (primarily terminals) operating from the Gulf Coast to the Northeast and fairly inelastic demand for the liquid petroleum products transported by pipeline or stored in terminals, S&P said. However, these strengths are tempered by the uneven, but improving, performance from TransMontaigne's product supply and marketing activities. This business unit will continue to represent a sizable percentage of the company's cash flow mix, which elevates consolidated business risk.

TransMontaigne's financial business profile is adequate compared with other terminaling and liquids pipeline companies, S&P said. Over the intermediate term, EBITDA interest coverage is expected to be about 3.5x while expected debt to EBITDA ratios should approach 2.5x, with these measures expected to improve slightly from these levels. Debt leverage of about 45% in 2003, is expected to trend down below 40%, which would be more in line with rating expectations.

S&P rates Plains Exploration notes B

Standard & Poor's assigned a B rating to Plains Exploration & Production Co.'s new $75 million senior subordinated notes due 2012 and confirmed its existing ratings including its subordinated debt at B. The outlook is stable.

S&P said Plains Exploration's ratings reflect its significant debt leverage, the challenging economics associated with the company's reserve base, and its position as a midsize, independent oil and gas company in the volatile exploration and production sector. The ratings also reflect Plains's fair business position, characterized by a combination of low-risk development programs and extremely long-lived reserves in California, and 3TEC's higher-risk, faster-producing natural gas exploration prospects on the Gulf Coast.

3TEC's reserve base provides an attractive contrast to Plains's existing properties, S&P noted. Plains has historically pursued acquisitions of underdeveloped crude oil properties, which it exploited using secondary recovery techniques. Although this strategy has provided only moderate growth opportunities through internal means, it does provide predictability regarding future production volumes. Plains's considerable hedging activities further augment this policy and help to limit cash flow volatility.

S&P said it Poor's expects that Plains will generate strong cash flow in the near term, supported by favorably priced hedges on more than 60% of production. EBITDA interest coverage is expected to be around 7.0x, while expected debt to EBITDA should be between 2.5x and 3.0x over the intermediate term. S&P expects meaningful debt reduction in the intermediate term from internally generated cash flow.

Moody's rates Rhodia notes Ba2

Moody's Investors Service assigned a Ba2 rating to Rhodia SA's planned senior notes, a Ba3 to its planned senior subordinated notes and confirmed its current senior unsecured debt at Ba2. The outlook is stable.

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