S&P puts A&P on watch

Standard & Poor's put Great Atlantic & Pacific Tea Co. Inc. on CreditWatch negative including its $200 million 7.7% senior notes due 2004, $200 million 9.375% senior unsecured notes due 2039, $275 million 9.125% senior notes due 2011 and $300 million 7.75% notes due 2007 at B+ and its $425 million senior secured revolving credit facility due 2003 at BB-.

S&P said the watch placement reflectis continued weak operating performance, declining cash flow protection, rising leverage and a very cautious outlook for the future.

EBITDA fell 45% for the fourth quarter of 2002 ended Feb. 22, 2003 from the prior year quarter. This followed a 55% drop in EBITDA in third quarter 2002. Although positive same store sales were reported for the company as a whole, for U.S. operations this measure fell 0.7% for the fourth quarter and 1% for the year. Canada's same store sales were positive in the mid- to high-single digits for both periods.

Moreover, promotional activity, due to intense competitive conditions, severely affected gross margin for the quarter and the year. Rising costs, particularly for employee benefits, and the lack of sales leverage also contributed to a lower EBITDA margin.

In an effort to improve results, the company has realigned its management structure, eliminated overhead, and improved its supply chain logistics. However, these actions have been insufficient to offset the impact of soft sales and higher costs.

EBITDA coverage measured 1.7x for 2002 and total debt covered EBITDA by 6.1x, S&P said. To improve its financial condition, the company is selling non-strategic assets, including its New England stores and its Eight O'Clock Coffee business. It expects to receive $300 million in proceeds from asset sales, to be used to pay down bank debt. Near-term financial flexibility should be provided by the company's revolving credit facility, which was amended in February 2003 to provide covenant relief.

Given expectations for a continued tough operating environment, rising employee benefit costs, and the anticipated loss of $40 million in EBITDA currently generated by assets to be sold, near-term operating profit is likely to remain under intense pressure, S&P added.

Fitch upgrades Advanced Medical Optics

Fitch Ratings upgraded Advanced Medical Optics Inc.'s senior secured credit rating to BB- from B+ and senior subordinated debt to B from B-. The outlook is stable. The ratings are based on public information.

Fitch said the ratings recognize Advanced Medical Optics' successful efforts to reduce leverage and to expedite the transition of the company to an independent entity since its spin-out from Allergan on June 29, 2002.

From the time of the spin-out, the company, using proceeds from debt issuances and excess cash flow, met the financial commitments to Allergan ($275 million), increased capital expenditures, and reduced the amount under the senior unsecured credit facilities by $50 million through the first quarter 2003.

The company used expanded capital expenditures in 2002 to build research and development capacity in order to transition from the existing service contract with Allergan.

Fitch anticipates the higher level of capital expenditures to continue in the intermediate term with the majority to be devoted to increasing research and development capacity and to building manufacturing capacity currently outsourced to Allergan.

At December 31, 2002, leverage (total debt-to-EBITDA ) was 3.3 times and annualized interest coverage (EBITDA-to-interest) was 3.1x, Fitch noted.

S&P rates Oxford Industries notes B

Standard & Poor's assigned a B rating to Oxford Industries Inc.'s proposed $175 million senior notes due 2011. The outlook is stable.

S&P said the notes are rated two notches below the corporate credit rating due to its junior position relative to the large amount of secured bank debt.

S&P said the ratings are in response to Oxford Industries' April 27 announcement that it is acquiring all of the outstanding capital stock of Viewpoint International Inc., which owns the Tommy Bahama brand of lifestyle apparel and home furnishing products.

Following the merger, the ratings would reflect Oxford's leveraged financial position, a shift in its business strategy, greater fashion risk, highly competitive and fragmented markets, and Standard & Poor's expectation of further branded acquisitions, the rating agency said.

The ratings also incorporate the operating risk associated with integrating the two firms' businesses. They further reflect Oxford's portfolio of branded and private label products and its diverse channels of distribution. Upon completion of the transaction, Oxford will have greater economies of scale and opportunities for cost savings.

The acquisition of the Tommy Bahama brand will add significant debt as well as integration and fashion risk, S&P noted. Furthermore, Tommy Bahama's retail operations will add another dimension of risk to Oxford's overall profile. While Tommy Bahama has been able to successfully evolve into a premium brand image based on its "casual resort lifestyle," its business is closely tied to the travel and leisure industries, both of which are suffering in the current economic and geopolitical environment.

S&P said it expects credit protection measures to be somewhat weaker due to the additional debt service requirements. Pro forma for the acquisition, EBITDA to interest coverage is expected to be about 3.5x and total debt to EBITDA is expected to be in the 2.5x to 3.0x range.

S&P rates JLG notes BB-

Standard & Poor's assigned a BB- rating to JLG Industries Inc.'s new $125 million senior unsecured notes due in 2008 and confirmed JLG's existing ratings including its $250 million revolving credit facility due 2004 at BB and $175 million 8 3/8% senior subordinated notes due 2012 at B+. The outlook is negative.

S&P said JLG's ratings reflect its concern over limited prospects for a significant turnaround in the company's end-markets over the near term and resulting reduced credit measures compared with previous expectations.

Although JLG remains profitable, its financial results have deteriorated materially during an economic downturn that has deflated nonresidential construction and industrial markets, aggravated excess capacity in the industry, depressed prices in the used equipment market, and prompted a credit crunch for some of JLG's customers, S&P noted.

S&P said it expects credit protection measures for JLG over the intermediate term of total debt to EBITDA in the 3x-3.5x range and funds from operations to total debt approaching 20%-25%, treating AFS on an equity basis.

Financial flexibility will be enhanced by the issuance of the pending $125 million of notes having a maturity of 2008.

Moody's upgrades Hollywood Entertainment

Moody's Investors Service upgraded Hollywood Entertainment, Inc. including raising its senior unsecured rating to B2 from B3. Moody's assigned definitive ratings to its new debt including its $200 million secured amortizing term loan and $50 million secured revolving credit facility maturing 2007 at Ba3 and $225 9.625% million senior subordinated notes due 2011 at B3. The outlook is stable.

Moody's said the action follows completion of documentation for the new debt.

The ratings reflect the improvement to Hollywood's capital structure as a result of extending debt maturities, as well as the expectation that Hollywood will be able to generate positive net cash flow and maintain appropriate coverage ratios while it continues to invest in growth, Moody's said.

The increased revolver also increases Hollywood's access to liquidity.

Moody's upgrades Alfa Laval

Moody's Investors Service upgraded Alfa Laval Special Finance AB including raising its €575 million senior unsecured credit facilities due 2007 to Baa3 from Ba1 and €220 million 12.125% senior notes due 2010 to Ba1 from Ba2. The outlook is stable.

The upgrade reflects Alfa Laval's continued strong operating performance and cash flow generation following the last rating action in June 2002, Moody's said.

Despite a weakened operating environment and decreased revenues in fiscal 2002, the company has continued to improve its operating profitability (largely as a result of its "Beyond Expectations"

cost-cutting program, launched in 1999), and has further de-leveraged the business through strong internal cash flow generation.

For the fiscal year ended Dec. 31, 2002, Alfa Laval reported net debt/EBITDA of approximately 1.68x, EBITDA/net cash interest of 3.9x (estimated at above 6.0x on a pro forma basis as if the IPO had occurred January 1, 2002), retained cash flow/net debt (excluding IPO costs and M&A activity) at around 40.0%, and free cash flows (pre-M&A activity) of approximately SEK 1.1 billion (approximately €118.0 million), Moody's noted.

For the first quarter of 2003, the company reported last 12 months net debt/EBITDA of approximately 1.63x and EBITDA/net cash interest of 4.20x.

To date, free cash flow generation has been utilized primarily to fund small bolt-on acquisitions (including Danish Separation Systems A/S in September 2002 and Toftejorg A/S in January 2003) and to aggressively reduce absolute debt levels, the rating agency said. Going forward, Moody's believes that further opportunistic bolt-on acquisitions will continue to form an integral part of the company's strategy, but will remain focused on complementary business lines or capabilities aiming at optimising Alfa Laval's product portfolio. Moody's also expects cash flows to be applied to further debt reductions going forward, albeit primarily for continued opportunistic open market repurchases of outstanding senior notes to reduce the interest burden associated with the notes.

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