Moody's puts Charter on downgrade review

Moody's Investors Service put Charter Communications Inc. and its subsidiaries on review for possible downgrade affecting $22 billion of debt. Ratings covered by the review include: Charter Communications' senior debt at B3, Charter Communications Holdings, LLC's senior debt at B2, Charter Communications Operating, LLC's senior secured bank debt at Ba3, CC VIII Operating, LLC's senior secured bank debt at Ba3, Falcon Cable Communications, LLC's senior secured bank debt at Ba3, CC VI Operating, LLC's senior secured bank debt at Ba3, CC V Holdings, LLC (formerly Avalon Cable LLC)'s senior unsecured debt at B2 and Renaissance Media Group LLC's senior unsecured debt at B2.

Moody's said it is concerned about Charter's very high consolidated financial leverage, still large capital investment needs and recent evidence that cash flow growth may be slowing to levels that preclude the ability of management to achieve its targeted financial profile in accordance with expectations.

Moody's said its review will look at management plans to address the company's high subscriber losses, mitigate further margin erosion and resume higher absolute operating cash flow generation and corresponding growth.

While some diminished performance in these areas had been anticipated, there may be a bigger impact than expected, Moody's said.

Moody's upgrades Trump

Moody's Investors Service upgraded Trump Hotels & Casino Resorts Holdings, LP and its subsidiaries. Ratings affected include Trump Hotels & Casino Resorts Holdings' $109 million 15.5% senior secured notes due 2005 upgraded to Caa3 from Ca and outlook revised to stable from negative; Trump Atlantic City Associates' $1.3 billion 11.25% first mortgage notes due 2006, upgraded to Caa1 with a stable outlook from Caa3; and Trump's Castle Funding, Inc.'s $242 million 11.75% mortgage notes due 2003 upgraded to Caa1 with a stable outlook from Caa3.

Moody's said the upgrades reflect its expectation that Trump Hotels & Casinos will remain current on all debt service obligations given the positive impact that recent cost cutting and marketing efforts had on the company overall.

EBITDA margins increased significantly for all three rated Trump entities. For the 12-month period ended June 30, 2002, Trump's Castle's EBITDA margin was 22% compared to 18% for the fiscal year ended Dec. 31, 2000, Moody's said. For that same time period, Trump Atlantic City's EBITDA margin increased to 25% from 21% while Trump Holdings' EBITDA margin improved to 24% from 19%.

However the ratings continue to reflect the upcoming debt maturities associated with Trump's Castle's 11.75% mortgage notes, and the company's need to reduce interest expense in order to increase cash available to refurbish rooms and improve amenities, Moody's said.

Over the past 2½ years, over 80% of consolidated EBITDA was applied towards interest payments, the rating agency noted.

Moody's said the ratings also acknowledge the historically aggressive financing tactics of Donald Trump, the company's chairman, chief executive officer and president, as well as competition from new supply in Atlantic City once the Borgata opens in the summer of 2003.

While the Borgata project is viewed as a positive with respect to the overall development of the

Atlantic City market, it could also result in a significant amount of near-term direct competition, Moody's said.

S&P says Bway unchanged

Standard & Poor's said Bway Corp.'s ratings remain unchanged at B+ with a stable outlook for its corporate credit following the announcement that it will be acquired by an affiliate of Kelso & Co., LP, a private investment firm.

The transaction is valued at about $330 million including the assumption or refinancing of outstanding debt and is expected to be completed in the first quarter of 2003, subject to approval by the company's stockholders and other customary conditions, S&P said.

Supported by its improved operating performance through fiscal 2002, Bway's credit measures are more than adequate for the existing ratings, S&P said. The financing plan is expected to include a mix of debt and equity, in a manner that preserves a financial profile that is consistent with the existing ratings.

Moody's cuts Encompass Services

Moody's Investors Service downgraded Encompass Services Corp., affecting $1.2 billion of debt and preferred stock. Ratings lowered include Encompass' $130 million senior secured term loan A due 2006, $170 million senior secured term loan B due 2006 and $300 million senior secured revolving credit facility due 2005, lowered to Caa1 from B2, $335 million 10.5% senior subordinated notes due 2009, lowered to C from Caa2 and $300.5 million accreted amount 7.25% mandatorily redeemable convertible preferred stock, lowered to C from Caa3. The outlook is negative.

Moody's said its action reflects its concern about Encompass' prospective ability to comply with its bank covenants.

The company had been granted a waiver by the banks in June contingent upon the net investment of $31 million by Apollo Investment Fund IV, LP. This waiver is due to expire on Oct. 15 and the

Apollo equity contribution now appears unlikely to occur, Moody's said.

Unless the waiver is extended again, the company's covenant violations are cured, or its bank credit facility is further amended, Encompass may very well be forced into bankruptcy, the rating agency warned.

Tuesday's announcement regarding the retention of Houlihan Lokey as a restructuring advisor suggests that the company is considering all available options, Moody's said. In any event, Moody's added that it believes that the bank lending group may block the coupon payment of $17.6 million on the subordinated notes that is due on Nov. 1, 2002 unless a long-term solution to the company's problems is reached by that date, which appears increasingly uncertain.

S&P keeps Venture Holdings on watch

Standard & Poor's said Venture Holdings Co. LLC remains on CreditWatch with negative implications. Ratings affected include its senior secured debt at CCC, senior unsecured debt at CCC- and subordinated debt at CC.

S&P said its announcement follows the beginning of formal insolvency proceedings against Venture's European subsidiary, Peguform GmbH in the German Municipal Court.

Peguform accounted for about 70% of Venture's 2001 sales. Venture had opposed the commencement of insolvency proceedings as it pursued a global restructuring and recapitalization plan, S&P said. It now appears that Peguform could be sold to a third party, although the potential magnitude and ultimate distribution of sale proceeds are unclear.

Nevertheless, Venture does not have access to Peguform's cash flow, which severely constrains its ability to meet its debt service requirements, S&P said. Venture's liquidity position is unclear because access to the company's bank credit facility may be restricted as a result of the Peguform insolvency proceedings. A potential bankruptcy filing of Venture's domestic operations is possible.

Moody's cuts Cenargo

Moody's Investors Service downgraded Cenargo International plc, affecting $111 million of debt. Ratings lowered include Cenargo's first priority ship mortgage notes and bank facilities, cut to Caa1 from Ba3.

Moody's said it lowered Cenargo because of its significantly reduced financial flexibility as a result of cash usage caused by service disruptions and lost market share in the first half of 2002.

Interim traffic data for the summer months indicate a stabilization of traffic and the potential for modest free cash generation in the seasonally strong third quarter, Moody's added.

But the rating agency said this may not be sustainable in view of capacity increases by major competitors in the Irish Sea ferry market and the general economic slowdown affecting traffic rates.

Even though the individual debt instrument are secured by vessels with current valuations above outstandings, Cenargo has a very high leverage and relies on continued support by its core bank to maintain its limited level of liquid funds and borrowing headroom, Moody's noted.

S&P raises G+G Retail outlook

Standard & Poor's raised its outlook on G+G Retail Inc. to stable from negative. Ratings affected include its senior secured debt at BB and senior unsecured debt at B+.

S&P said the action is in response to continued positive operating and financial trends.

S&P said G+G's ratings reflect its participation in the highly competitive retail market for teenage apparel, relatively small size compared with other industry participants, and inconsistent operating performance.

Fashion risk in this segment is especially high as customer tastes tend to change frequently, which can lead to excess inventories, high markdowns, and lost sales, S&P noted. G+G's same-store sales increased 7.5% in the first half of 2002 and 2.1% in 2001 after a poor 2000 when comparable-store sales declined 5.3%.

G+G's operating margin increased to 11.3% in the first half of 2002 from 8.7% in the first half of 2001 due to an increase in the initial mark-on and a decrease in markdowns, as well as sales leverage, S&P said. G+G operating margin of 14.0% in 2001 was essentially flat with 2000 and well below the 16.7% margin generated in 1999. In 2001, sales leverage and higher initial mark-on were offset by increased store and administrative expenses.

The company is highly leveraged, with total debt to EBITDA of about 5.2 times, S&P said. Credit protection measures are adequate for the rating category, with EBITDA to interest at 1.5x. EBITDA coverage of interest was less than 1.0x in the first half of 2001.

S&P puts Alliance Laundry on positive watch

Standard & Poor's put Alliance Laundry Systems LLC on CreditWatch with positive implications. Ratings affected include Alliance Laundry's $50 million revolving credit facility due 2007 and $193 million senior secured term loan due 2007 at CCC+ and its $110 million 9.625% senior subordinated notes due 2008 at CCC+.

S&P said the action follows the company's announcement that Alliance Laundry Systems Income Fund filed a preliminary prospectus with securities regulators in Canada to raise funds from a planned initial public offering and use them to acquire an indirect ownership interest in Alliance Laundry.

Alliance Laundry would use the planned proceeds from the sale of such ownership interest to the fund to reduce its existing debt, which will strengthen the company's financial profile.

S&P said it will review the company's new capital structure and financial policies.

Moody's cuts Massey Energy to junk

Moody's Investors Service downgraded Massey Energy Co. to junk including lowering its guaranteed senior unsecured credit facilities to Ba1 from Baa3 and its guaranteed senior unsecured 6.95% notes to Ba1 from Baa3, and kept the company on review for possible further downgrade.

Moody's said the action reflects the negative impact on Massey's earnings performance and coverage ratios due to weak demand for coal, reduced productivity at a number of its mines and significant increases in the company's cost base.

Moody's added that it expects that this situation will continue to impact the company's performance through the balance of 2002 and into 2003.

In addition, although cost increases can be attributed to a variety of factors, including cyclical factors, one-off items, initial mine idling costs, and lower productivity due to new mine start-up and geological problems, Moody's said it believes that there has been a permanent increase in Massey's cost base relative to historical averages enjoyed. Therefore Moody's expects mine operating margins going forward to remain pressured.

Moody's said it also believes that the composition of Massey's earnings generation has shifted as thinner margin steam coal sales have become an increasing percentage of total tons sold.

The continuing review for downgrade reflects the fact that availability under Massey's 364-day bank facility expires in November 2002 (the facility contains a one-year term-out option) and the company is presently in negotiation with its bankers to refinance its bank facilities.

S&P takes Hines off positive watch

Standard & Poor's removed Hines Horticulture Inc. from CreditWatch with positive implications and confirmed its ratings. The outlook is positive. Debt affected include Hines' $120 million 12.75% notes due 2005 at B- and its $115 million working capital revolving credit facility due 2004, $111.4 million term loan due 2004 and $99 million secured loan series B due 2004, all at B+.

S&P said the actions follows the completion of the divestiture of Sun Gro Horticulture Canada Ltd. and Sun Gro Horticulture Inc. to Sun Gro Horticulture Income Fund, a newly established Canadian income fund.

Proceeds from the transaction of about $120 million were used to repay borrowings under the bank credit facilities, which has resulted in total debt to EBITDA improving to 3.7 times for the trailing 12 months ended June 30, 2002 from 6.3x in the prior year, S&P said. In addition, the firm is beginning to realize some of the benefits of its four-phase operational and financial plan.

The ratings reflect Hines' leveraged financial profile, a high level of customer concentration risk, and vulnerability to unfavorable weather conditions, S&P said. These factors are mitigated by Hines' leading market position in the consolidating, but highly fragmented, color and nursery product lines, some moderation of Hines financial policies, and an experienced management team.

Hines' business position is offset by its leveraged but improving capital structure, S&P said. Since 2000, management's emphasis has been on cash flow generation. In fiscal 2001, operating cash flow was $26.6 million, a $24 million increase from the prior year.

S&P said it expects that Hines will be able to continue to generate at least $25 million in operating cash flow, which will be used for modest capital expenditures and debt repayment under the excess cash sweep provisions of the bank credit facility.

Despite a challenging spring selling season in many parts of the country and lower sales to Kmart, which resulted in lower gross and operating margins, financial measures benefited from the decline in debt outstanding. EBITDA to interest was about 2.0 times for the trailing 12 months ended June 30, 2002, as compared with 1.7x in the prior year period, S&P said.

Moody's cuts El Paso sub debt to junk

Moody's downgraded El Paso Corp.'s senior unsecured debt to Baa3 from Baa2 and subordinated debt from Baa3 to Ba1, and the ratings remain under review for possible further downgrade.

The downgrade reflects low cash flow relative to substantial debt, Moody's said.

Annualized second quarter 2002 retained cash flow-to-debt was only 2% and Moody's expects improvement near-term will be challenged by the severe downturn in merchant energy sector and uncertainties related to the pending ruling by the FERC.

The FERC is expected to issue its order around the end of the year.

Liquidity appears adequate to meet foreseeable near-term obligations, with cash balances at about $1 billion, net of about $250 million of commercial paper outstandings.

All outstanding commercial paper is scheduled to roll off by end of the year and no new issuance is expected, Moody's said.

El Paso has $240 million of long-term debt maturities for the remainder of the year, which should be manageable given current liquidity.

The company also has a $3 billion 364-day bank facility expiring in May 2003 and a $1 billion term loan expiring in August 2003. The 364-day facility has a one-year term-out option, which, if exercised, could potentially provide liquidity through May 2004.

About $1.9 billion of debt matures in 2003.

Under severe scenarios, unencumbered assets could be pledged as collateral for future borrowings and to bridge to asset sales.

At June 30, 2002, consolidated total assets were reported at $50 billion against adjusted debt of $23 billion.

Moody's: Lodging REITs' outlook negative

Moody's said recent warnings by several lodging REITs that third quarter results will be lower than expected underscore a weak operating environment and the group's near-term outlook remains negative, including for FelCor Lodging Trust Inc. and Host Marriott Corp.

Moody's anticipates that recovery in lodging REITs' operating performance to more normalized levels will be delayed well into 2003 but no immediate rating actions are contemplated.

Moody's said lodging REITs for the most part have some cushion available at current rating levels to withstand weak hotel market conditions. However, some ratings could be lowered if there is not a pick-up in operating results over the next few quarters.

REITs such as Host Marriott, that have larger hotel properties with well-established brands, are benefiting from stronger demand recovery in group and convention business.

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