S&P takes Qwest off watch

Standard & Poor's confirmed Qwest Communications International Inc. and removed its ratings from CreditWatch with negative implications. S&P also assigned a CCC+ rating to Qwest Services Corp.'s $3.4 billion bank loan. Ratings confirmed include Qwest Communications' senior unsecured debt at CCC+, Qwest Capital Funding Inc.'s senior unsecured debt at CCC+ and Qwest Corp.'s senior unsecured debt at B-. The outlook is developing.

S&P said the confirmation follows Qwest's receipt of amendments to its existing $3.4 billion bank loan agreement, which loosens the debt-to-EBITDA test to 6 times from 4x as of year-end 2002. The maturity was extended by two years to May 2005.

The combination of these bank amendments, coupled with the receipt of an additional $750 million from a new secured bank loan at the directories subsidiary and $7.05 billion in expected proceeds from the sale of the directories business, provides reasonable liquidity to the company through at least 2003, S&P said.

The CreditWatch listing - now ended - had been based on liquidity concerns due to the potential for the company to violate bank loan covenants in the third quarter of 2002 and potentially be unable to meet about $4.6 billion in debt maturities in 2003, S&P noted.

S&P said its ratings incorporate the expectation that Qwest will obtain the entire proceeds from the directory sales by the end of 2003. Moreover, given the $1 billion Qwest Corp. debt maturing in mid-2003, the receipt of the first phase of the directory sales proceeds prior to this requirement is factored into the ratings.

The newly amended $3.4 billion bank loan facility, for which Qwest Services Corp. is now the obligor, is rated one notch below the corporate credit rating. This reflects the fact that the approximately $7.7 billion of debt at Qwest Corp. and other obligations at this subsidiary, including trade payables, exceed S&P's 15% threshold for consolidated asset value in a distressed scenario.

S&P said the developing outlook reflects the fact that the company's longer-term prospects are tied to resolution of several key issues, which could be either detrimental or beneficial to its creditworthiness.

These include significant risks from the ongoing SEC investigation of several of its accounting practices, the Department of Justice criminal investigation, and numerous shareholder lawsuits.

But S&P said it ascribes significant value to Qwest's 17-million access line base and accompanying leading position in its local telecommunications markets. Despite somewhat disappointing operating performance over the past six months, as demonstrated by the level of operating cash flow generated during this time frame, if Qwest is able to stabilize performance for its telecommunications businesses in the latter half of 2002 through 2003, the business risk for the company may support a higher rating.

Qwest's business position should also benefit from the eventual receipt of long-distance relief in its various state jurisdictions, assuming the pending investigations do not delay FCC support for the company's filings.

Moody's raises Brand Services

Moody's Investors Service upgraded Brand Services, Inc. and assigned a B1 rating to its proposed new $220 million senior secured credit facility and a B3 rating to its proposed $165 million of senior subordinated notes due 2012. Ratings raised include Brand Services' $130 million 10.25% senior notes due 2008 to B2 from B3 to B2 and $59.1 million 14.5% senior exchangeable preferred stock due 2008 to Caa1 from Caa2. Its $30.2 million term loan was confirmed at B1. The ratings on the existing debt will be withdrawn when the current transaction closes. The outlook is stable.

Proceeds from the new credit facility and notes along with equity from J.P. Morgan Partners to refinance most of Brand's existing indebtedness, purchase the existing equity and to pay fees and expenses.

Moody's said its rating actions reflect the significant financial and operational improvements made by the company over the last several years, its industry leading position, and its base of long-standing customers linked by multi-year contracts.

At the same time, the ratings incorporate the cyclicality of Brand's main business segment, its customer concentration, its trend towards booking more fixed price contracts, and the large amount of negative tangible net worth, Moody's added.

Total leverage, as measured by debt (including preferred)/EBITDA has been reduced from 6.8x to 3.6x as of the 12 months ended June 30, 2002, Moody's said. Pro forma for the transaction, leverage rises to a still relatively improved 4.7x.

Fixed charge coverage (including preferred dividends) has improved from 0.5x in 1997 to 1.7x for the six months ended June 30, 2002. Pro forma interest coverage as of the 12 months ended June 30 will be 2.5x and should exceed 3x within the next two years.

Free cash flow was a positive $15.5 million in 2001, a considerable improvement from recent years' performance, and is projected to continue growing over the next two years, Moody's said.

Moody's takes Champion off watch

Moody's Investors Service removed Champion Enterprises, Inc. from negative watch, confirmed its ratings and lowered the outlook to negative. Ratings affected include Champion's $170 million 7.625% senior notes due 2009 at B3 and Champion Home Builders Co.'s $150 million 11.25% senior notes due 2007 at B2.

Moody's said the negative outlook reflects the continued decline in the manufactured housing industry, Champion's need for an amendment to its mortgage warehouse facility in order to remain in compliance, and that the company has no bank credit facility currently in place. These factors outweigh its large current cash balance and restructuring and cost cutting that have stanched recent cash burn.

Moody's said it began the ratings review after Champion said it would be taking further restructuring charges to reflect the continued weakness in the manufactured housing industry. Specifically, management announced plans to close and/or consolidate 64 retail locations and seven manufacturing locations at an expect cost of approximately $44 million (including $31 million of nonc-ash charges), a goodwill impairment charge of $97 million, and a deferred tax asset charge amounting to approximately $110-$120 million.

Despite signs of a bottoming out late in 2001, the manufactured housing industry has entered its fourth straight year of contraction, Moody's noted. If 300,000 unit sales (both new and repossessions) at retail are considered a "normal" year, some 15,000 to 30,000 units may currently be going unsold because of the tightness of consumer financing. In addition, repossessions are persisting at a high rate of 90,000 units per year, versus a more normal 30,000 to 50,000 units per year.

The situation may not improve much in the near term because of problems at Conseco, the largest retail lender in the industry, and because of the rumored possibility that Deutsche Bank, the largest remaining wholesale floor plan lender, may sell its finance unit, Moody's said. The exit of either lender from its niche in the industry would add further pressure on inventories and shipments and likely lead to further manufacturing and retail consolidation.

Moody's cuts British Energy to junk

Moody's Investors Service downgraded British Energy's debt to Ba3 from Baa2 and kept it on review for downgrade.

Moody's said the action follows British Energy's announcement that it has approached the U.K. government for immediate financial assistance, and the suspension of the bonds and shares from trading on the London Stock Exchange.

Moody's said that even if negotiations with the government on both replacement liquidity and longer term prospects prove successful the credit no longer displays investment-grade characteristics.

Should discussions with the government on replacement liquidity fail, Moody's warned the company may become insolvent rapidly. In such an event, the recovery prospects for bondholders may be slim and the bond ratings may be downgraded to the lowest categories.

British Energy's announcement follows the apparent failure of negotiations with BNFL (itself a government entity), regarding restructuring of the contracts to reprocess spent fuel and other commercial arrangements, Moody's said.

Fitch cuts British Energy to junk

Fitch Ratings lowered British Energy plc's ratings to B+ from BBB and its short term rating to B from F2 and moved the company to Rating Watch Evolving from Rating Watch Negative.

Fitch said the downgrade to junk follows the company's announcement that it is in discussions with the U.K. government with a view to seeking "immediate financial support" and "to enable a longer term restructuring to take place."

British Energy said it has "reasonable grounds" for believing these discussions will be successful but warned that if the discussions are not successful, the company may be unable to meet its financial obligations as they fall due, and therefore the company "may have to take appropriate insolvency proceedings."

Fitch noted it has already lowered British Energy twice this year, reflecting a combination of continuing stress on U.K. wholesale prices and reductions in output forecasts, variables to which the company is extremely sensitive.

The latest action was triggered by a chain of events including the breakdown of negotiations between British Energy and state-owned British Nuclear Fuels Ltd., Fitch said.

S&P cuts British Energy to junk

Standard & Poor's downgraded British Energy plc to junk and put the company on CreditWatch with developing implications.

Ratings lowered include British Energy's £134.59 million 6.202% bonds due 2016, £163.44 million 6.077% bonds due 2006 and £109.86 million 5.949% bonds due 2003, all cut to BB from BBB.

S&P raises La Quinta outlook

Standard & Poor's raised its outlook on La Quinta Corp. to stable from negative and confirmed its ratings including its corporate credit rating at BB-.

S&P said the change is in response to La Quinta's improved credit measures resulting from its successful asset-sale program and use of proceeds toward debt reduction.

Current management assumed control in April 2000 and has made good progress in its efforts to shed its health-care assets in order to focus exclusively on the limited-service lodging sector, S&P said.

As of June 30, 2002, the company had reduced the size of its health-care assets to $51 million (net of impairments) and had used all proceeds to reduce debt. Debt totaled $812 million at the end of June 2002, down from $1.6 billion at the end of 2000 and $1 billion at the end of 2001, S&P added.

The Sept. 11 terrorist attacks and the slowing economy have hindered management's ability to improve operating performance, S&P noted. For the first half of 2002, La Quinta experienced a 9.5% decline in revenue per available room (RevPAR) from the prior year. Lodging EBITDA margin for the first half of 2002 was around 35%; margins remain lower than the historical portfolio highs of roughly 45%.

For the 12 months ended June 2002, total debt to EBITDA leverage (excluding nonrecurring items) was in the 4 times area and is expected to end the year at the mid to high 3x area as the company makes further progress on its asset sale program, S&P said. Interest coverage was in the mid 2x area. Liquidity was adequate, with $131 million of cash at the end of the second quarter and nothing drawn under the $225 million revolving credit facility.

S&P puts Res-Care on watch

Standard & Poor's put Res-Care Inc. on CreditWatch with negative implications including its $109.36 million 6% convertible subordinated notes due 2004 rated B-, its $80 million senior secured revolving credit facility due 2004 at BB- and its $150 million 10.625% senior notes due 2008 at B.

S&P said it took the action because Res-Care may violate certain bank covenants at Sept. 30, 2002. Specifically, minimum rolling EBITDA interest coverage levels may not be met, largely due to a decision to defer certain anticipated acquisitions earlier in the year.

In that event, bank facility access could be curtailed, limiting an important source of financial flexibility, S&P said.

Although Res-Care may obtain a waiver or amend relevant covenants before Sept. 30, S&P said it is also concerned that the challenges of operating in an environment of significant government reimbursement pressures and material cost pressures (including staff turnover and rising labor and insurance costs) could limit the highly leveraged company's ability to strengthen already-thin credit measures.

S&P upgrades Doman

Standard & Poor's upgraded Doman Industries Ltd. and removed the company from CreditWatch with negative implications. The outlook is negative.

Ratings affected include Doman's $425 million 8.75% notes due 2004 and $125 million 9.25% notes due 2007, both raised to CC from C and its $160 million senior secured notes due 2004, raised to CCC from CCC-.

S&P cuts Pueblo Xtra loan

Standard & Poor's downgraded Pueblo Xtra International Inc. (now Nutritional Sourcing Corp.)'s $43 million senior secured credit facility due 2003 to D from CCC following the involuntary Chapter 11 petition filing on Sept. 4 by creditors PAM Capital Funding LP, Barclay's Bank plc and ML CBO IV Ltd.

The company's corporate credit and senior unsecured debt had already been lowered to D after it missed its Aug. 2 interest payment on its $177 million senior unsecured notes due 2003.

Moody's cuts EES Coke Battery

Moody's Investors Service downgraded EES Coke Battery, LLC's $75 million series B notes due 2007 to Caa2 from Caa1. The outlook remains negative.

Moody's said the downgrade reflects continued uncertainty about National Steel Corp.'s Chapter 11 bankruptcy filing and whether it will continue to operate its River Rouge steel complex where the coke facility is located and whether it will attempt to vacate the existing coke sales agreement.

Although National Steel has not attempted to vacate the coke sales agreement and remains current in its post-bankruptcy petition payments, the current rating and negative outlook reflect the distinct possibility that future operating cash flow, for various reasons, could be insufficient to make payment, Moody's said.

Repayment of the series B notes is solely through operating cash flows.

Moody's cuts DDi

Moody's Investors Service downgraded Dynamic Details, Inc. and its parent DDi Corp. Ratings lowered include Dynamic Details' $24 million senior secured tranche A term loan due 2004, $49 million senior secured tranche B term loan due 2005 and $50 million senior secured revolving credit facility due 2004, all cut to B3 from B1, DDi's $100 million 6¼% convertible subordinated notes due 2007 and $100 million 5¼% convertible subordinated notes due 2008 cut to Caa3 from Caa1 and DDi Capital Corp.'s $16 million 12.5% senior discount notes due 2007 cut to Caa3 from Caa1. The outlook is negative.

Moody's said the downgrade is in response to Dynamic Details' anticipated continued operating losses, even after factoring savings from the company's fiscal second quarter of 2002 restructuring initiatives.

Moody's said it is concerned that a protracted delay in spending on information technology and the deterioration in capital investment by the telecommunications service providers, now assumed to extend through 2003, would pressure OEM research and development budgets. R&D spending constraints would likely result in even less demand for time-critical printed circuit board fabrication, the company's principal margin generating activity, than has been exhibited in 2002.

However the company does have "significant" liquidity, Moody's said, noting unrestricted cash, cash equivalents and marketable securities were nearly $50 million as of June 30 at the combined Dynamic Details, Inc. and DDi Corp. entities. Another $24 million is available to Dynamic Details under its revolving credit facility, while $15 million would be available to DDi Europe under a European credit line.

The negative outlook reflects Moody's expectation that a recovery in Dynamic Details' communications end markets will be realized further out than was previously anticipated.

S&P cuts AirGate PCS, iPCS

Standard & Poor's downgraded AirGate PCS and iPCS Inc.

AirGate PCS was removed from CreditWatch with negative implications and given a negative outlook. Its $300 million senior subordinated discount notes due 2009 were cut to CCC- from CCC.

IPCS was maintained on CreditWatch with negative implications. Its $300 million 14% discount notes due 2010 were cut to CC from CCC and iPCS Wireless Inc.'s $140 million senior secured bank loan due 2008 was cut to CCC- from B-.

S&P said it had previously rated AirGate and its iPCS subsidiary on a consolidated basis but now rates AirGate and iPCS separately because of factors such as distinct geographic markets, restrictions in AirGate's bond indenture that would prevent AirGate from providing credit support to iPCS, the fact that a default at iPCS would not trigger a default under AirGate's separate bank facility, and management's lack of intention for AirGate to financially support iPCS in the future.

Because AirGate on a stand-alone basis is not at risk of immediately violating any bank covenant, its ratings were removed from CreditWatch, S&P said.

However it was downgraded because of concerns over weak liquidity, problems at iPCS distracting management, and the need to improve EBITDA to meet leverage covenants that become effective in the quarter ending on March 31, 2003, S&P said. The rating agency added that it does not believe the company's liquidity, comprised of about $4 million in cash and $22 million in available bank credit at the end of its third fiscal quarter, provides adequate cushion against risks relating to competition and the weak economy.

S&P said it lowered iPCS because of concern that it is at substantial risk of violating three maintenance covenants under its bank agreement as well as the company's weak liquidity.

Due to competition and the weak economy, iPCS could violate the minimum subscriber, minimum revenue, and maximum EBITDA loss covenants in the very near term, S&P said. The company's recent measure to improve revenues and net subscriber additions by removing the deposit requirement from all but the lowest sub-prime credit quality customers could increase bad debt expense and negatively affect EBITDA.

Independent of covenants, iPCS's liquidity of about $19 million in cash and $30 million in available bank credit at the end of the third fiscal quarter provides little margin of safety against execution risks, in particular because the company is not expected to generate free cash flow in the near term, S&P added.

Moody's confirms Marsh Supermarkets

Moody's Investors Service confirmed Marsh Supermarkets, Inc. and maintained its stable outlook. Ratings affected include Marsh's $150 million 8.875% senior subordinated notes due 2007 at B2 and its $20 million 7.0% convertible notes due 2003 at B3.

Moody's said Marsh's ratings are constrained by its financial leverage (especially adjusted for operating leases) relative to higher-rated supermarket peers, intense competition in the company's trade area, and exposure to the economic fortunes of a narrow geographic region. It also suffers from relatively low operating margins and return on assets.

Positives include the long-term stability of the company's strategy, its established competitive position as a leading supermarket operator around Indianapolis, and the diversity of revenue sources from other food retailing and foodservice sectors, Moody's said.

Moody's added that it expects the company will maintain stable revenue and margins in spite of the high level of competition in its trade area.

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