S&P sees Pacific Gas successors at investment grade

Standard & Poor's said Pacific Gas & Electric Co. will likely be capable of achieving an investment-grade rating of at least BBB- upon emergence from bankruptcy.

In a letter to Pacific Gas's chief financial officer, S&P said its preliminary rating is based on an expected reduction of at least $500 million in the debt of the yet-to-be-named parent of the electric transmission company, gas transmission company and electric generation company prior to or simultaneous with the emergence from bankruptcy. Also, PG&E Corp. will issue $700 million of equity, with proceeds to reduce the four new companies' debt to levels consistent with the model.

S&P said the four companies Pacific Gas proposes to create after a successful emergence from bankruptcy will be capable of achieving investment-grade ratings based on a few conditions, including an updated reorganization plan and regulatory approval.

S&P's preliminary rating evaluation reflects the financial and operational forecasts underlying the plan. Any material deviations from the proposed plan could result in a lower rating. S&P said a definitive ratings opinion will require additional assessment and more detailed analysis at the time a plan is implemented.

S&P cuts Marsh

Standard & Poor's downgraded Marsh Supermarkets Inc. including cutting its $150 million 8.875% senior subordinated notes due 2007 to B from B+ and $90 million unsecured bank facility to BB- from BB. The outlook is negative.

S&P said it lowered Marsh because of weak sales trends and declining EBITDA in recent quarters. These resulted from competitive store openings in Marsh's market, and a highly promotional sales environment and more selective consumer spending patterns due to the weakened U.S. economy.

The company's same-store sales trends were negative for the past three quarters, which has negatively impacted credit protection measures, S&P added.

Marsh's supermarkets have a strong market position in Indianapolis, with a market share of about 29%, similar to Kroger Co., according to the 2002 Market Scope, S&P noted. However, the company has faced increased competitive store openings over the past year from Wal-Mart Stores Inc., Kroger, and others. This factor, coupled with increased promotional activity from competitors and more selective consumer shopping patterns, contributed to a 3.3% same-store sales decline in the first nine months of fiscal 2002.

Marsh's Village Pantry convenience store business segment continues to face challenging trends as volatile gasoline prices and weakened economic conditions persist.

S&P said it expects Marsh will be challenged to improve same-store sales trends significantly in 2003 if increased promotional activity and more selective consumer shopping trends continue.

The company's lease-adjusted operating margin is trending at about 5.0% compared with 5.4% in fiscal 2001, S&P added. Lease-adjusted EBITDA interest coverage is trending at about 2.0x compared with 2.3x in fiscal 2001. Total debt to EBITDA is 5.3x.

S&P confirms Sierra Pacific Resources, off watch

Standard & Poor's confirmed Sierra Pacific Resources and removed it from CreditWatch with negative implications. Ratings confirmed include Sierra Pacific Resources' $200 million floating-rate notes due 2003, $300 million 7.93% premium income equity securities due 2007 and $300 million 8.75% senior notes due 2005 at B-, Nevada Power Co.'s $130 million 6.2% senior secured notes series A due 2004, $140 million floating-rate notes due 2003, $200 million secured revolving credit facility, $350 million 8.25% senior secured notes due 2011 and $45 million 8.5% first mortgage bonds due 2023 at BB and $210 million 6% senior unsecured notes due 2003 at B-, NVP Capital I's $118.871 million 8.2% cumulative QUIPS at CCC+, NVP Capital III's $70 million trust preferred securities at CCC+ and Sierra Pacific Power Co.'s $115 million medium-term notes series A due 2022, $150 million revolving credit facility, $320 million 8% senior secured notes due 2008 and $50 million medium-term notes series C due 2006 at BB and $50 million 7.8% preferred stock class A at CCC+. The outlook is negative.

S&P said the confirmation follows Sierra Pacific's successful completion of its offering of $300 million 7.25% convertible notes.

Sierra Pacific will use the proceeds of the $300 million debt issue to retire $191 million in outstanding floating rate notes maturing on April 20. Another $53 million will be used to fund a debt service reserve that will be pledged to secure interest payments on the convertible notes for the next two and a half years. The balance of about $55 million will bolster liquidity at Sierra Pacific.

With the issue of the convertible notes, the pressure on Sierra Pacific's liquidity has eased, with the next maturity occurring only in 2005, S&P said. The debt service reserve and $55 million in cash from the convertible notes issue, and dividends from Sierra Pacific Power, should enable Sierra Pacific to meet all of its cash requirements until Nevada Power can resume dividend payments to the parent.

S&P added that Sierra Pacific's rating reflects the adverse regulatory environment in Nevada, the substantial operating risk arising from the dependence on wholesale markets for over 50% of the utilities' energy requirements, and the substantially weakened financial profile following the disallowance by the Public Utility Commission of Nevada of $434 million in deferred power costs incurred by Nevada Power during the 2001 western U.S. power crisis.

Key credit concerns include the PUCN's ruling on Nevada Power's pending deferred cost-recovery case, the outcome of the Enron Corp. lawsuit demanding cash collateral from Nevada Power, and Nevada Power's ability to overcome the current restrictions on its ability to pay dividends to Sierra Pacific, S&P said.

Sierra Pacific's financial position will continue to be strained, with cash flow interest coverage expected to be under 3x and adjusted debt to total capital at over 55% for the next few years, S&P added.

S&P cuts Norske Skog Canada

Standard & Poor's downgraded Norske Skog Canada Ltd. including cutting its $200 million 8.625% senior unsecured notes due 2011 and Pacifica Papers Inc.'s $200 million 10% notes due 2009 to BB from BB+. The outlook is stable.

S&P said it cut Norske Skog Canada because it expects continued weak credit measures that are unlikely to improve in the near term to levels commensurate with the previous rating.

Despite the May 2002 issue of equity and subsequent reduction in debt, unfavorable newsprint and pulp conditions through 2002 have severely affected profitability and cash flow protection to well below targeted levels, S&P said

Although market conditions have strengthened recently from very low levels, a quick recovery that would substantially improve Norske Skog Canada's credit profile is not expected, S&P added,

S&P upgrades BGF

Standard & Poor's upgraded BGF Industries Inc. including raising its $100 million 10.25% senior subordinated notes due 2009 to CC from D. The outlook is negative.

S&P said the upgrade follows BGF's payment within the 30-day grace period of interest due Jan. 15 on its 10.25% notes.

The payment was financed with proceeds from a new $10 million bridge loan, which was also used to repay all amounts outstanding under the company's senior credit facility on which ratings have been withdrawn.

The ratings reflect a financial profile that remains fragile, S&P added. BGF has experienced prolonged weak market conditions in electronics and aerospace end markets as well as the bankruptcy filing of a major supplier and affiliate, Advanced Glassfiber Yarns LLC.

BGF has downsized operations, reduced operating and capital expenditures, and engaged a crisis management consulting firm, S&P said. Nevertheless, there is substantial doubt about the company's ability to continue as a going concern.

S&P rates Unibanco bonds B

Standard & Poor's assigned a B rating to Unibanco-Uniao de Bancos Brasileiros, SA's $100 million 6% eurobonds due 2003, $100 million 6.875% eurobonds due 2004 and €50 million 6.75% eurobonds due 2003.

S&P said Unibanco's ratings reflect the bank's solid franchise in Brazil, its diversified business profile, high-quality management, strong earnings power, and overall strategy in line with the competitive Brazilian market.

Negatives are Unibanco's low although improving operating efficiency compared with that of its Latin American peers, a track record of substantial charge-offs, and the exposure to Brazil's volatile environment and sovereign risk, S&P added.

Fitch cuts Durango

Fitch Ratings downgraded Corporacion Durango to D from C including its senior unsecured notes due 2003, 2006, 2008 and 2009.

Fitch noted that on Jan. 15 Durango missed interest payments on its notes due in 2009 and on Feb. 1 it failed to make interest payments on its notes due in 2003, 2006, and 2008.

The downgrades were triggered by Durango's failure to cure the missed payment on the 2009 notes during the 30-day grace period, Fitch said.

The default ratings that have been assigned to the company and its notes indicate that potential recovery levels are below 50%.

Durango finished the period ended Sept. 30, 2002 with $835 million of total debt, $30 million of cash and marketable securities and $133 million of short-term debt, Fitch noted. During the first nine months of 2002, the company generated $95 million of EBITDA, a drop from $122 million during a similar period in 2001. Durango's weak financial performance during 2002 was a result of lower prices for its products and stagnant demand.

To counteract these problems and to reduce its debt, Durango sought to divest more than $150 million of assets. To date, the company has not sold any of its assets, Fitch said.

Moody's withdraws FastenTech ratings

Moody's Investors Service withdrew its ratings on FastenTech, Inc. including its $175 million of senior subordinated notes due 2011 at B3 and $40 million senior secured credit facility due 2007 at Ba3 after the company canceled its planned high-yield bond offering.

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