S&P cuts Allegheny Energy to junk, on watch

Standard & Poor's downgraded Allegheny Energy Inc. to junk and put it on CreditWatch with negative implications, affecting $5 billion of debt. Ratings lowered include Allegheny Energy's senior unsecured debt, cut to B+ from BBB-, Allegheny Energy Supply Co. LLC's senior unsecured debt to BB from BBB, West Penn Power Co.'s senior unsecured debt to BB from BBB, Monongahela Power Co.'s senior secured debt to BBB- from A- and senior unsecured debt to B+ from BBB- and Potomac Edison Co.'s senior secured debt to BBB- from A- and senior unsecured debt to B+ from BBB-.

S&P said the action follows Allegheny Energy's announcement that its principal credit agreements are under technical default.

The CreditWatch will remain in place pending the outcome of the company's negotiations with its banks, S&P added.

S&P noted that Allegheny planned to issue between $400 million and $600 million of equity and convertible debt in September to reduce financial leverage and bolster liquidity. However, the company did not follow through with its plans because of a sharp drop in its stock price and administrative obstacles.

Allegheny then indicated to S&P that as an interim measure it planned to have an additional $400 million bank loan in place by October to provide liquidity but for reasons unclear to S&P the schedule was postponed to early December.

In the meantime, Allegheny's liquidity has become increasingly constrained, S&P said. The company had $450 million of liquidity as of June 1, and as late as Sept. 30, the company indicated to S&P that it still had $230 million in cash and available credit lines.

Even though this liquidity level is low, Allegheny indicated to S&P that this should be adequate for posting an estimated $60 million of collateral following another rating agency's credit rating downgrade last week, $16 million of cash flow consumed in the normal course of business between now and the end of the year, and $54 million of dividend to paid in December, the rating agency said.

However, on Oct. 8, Allegheny stated that it refused to post additional collateral to its trading counterparties, which led those counterparties to declare Allegheny to be in default under their respective trading agreements, S&P noted. This then triggered the cross-default provisions under its principal bank credit agreements and other trading agreements. Subsequent conversations with management revealed that Allegheny had to implement drastic cash conservation measures because its banks pressured it not to make any more draws under its existing credit revolvers, S&P said.

S&P confirms Applied Extrusion, outlook negative

Standard & Poor's removed Applied Extrusion Technologies Inc. from CreditWatch with developing implications, confirmed its ratings and assigned a stable outlook. Ratings affected include Applied Extrusion's $275 million 10.75% notes due 2011 at B and $50 million revolving credit facility due 2004 at B+.

S&P said it removed Applied Extrusion from CreditWatch after the company said it had completed a review of its strategic options, which indicates that the company will not be sold at this time.

Applied Extrusion had hired a financial advisor in July 2002 to evaluate options to maximize shareholder value, including expressions of interest made by third parties to acquire the company, S&P noted.

S&P said the negative outlook reflects its view that if Applied Extrusion's operating performance weakens further or liquidity and financial covenant pressures increase, the ratings could be lowered.

Liquidity is supported by cash and equivalents of about $30 million as at June 30, 2002, and sufficient availability under its recently established $50 million two-year revolving credit facility (subject to a borrowing base), S&P said. Financial covenants tighten meaningfully on a quarterly basis, providing limited headroom under the amended credit agreement. The absence of improved operating performance could result in a weakened liquidity position.

S&P raises AmeriSource-Bergen outlook

Standard & Poor's raised its outlook on AmeriSource-Bergen Corp. to positive from stable and confirmed its ratings. Affected by the action are the company's bank loan at BBB-, senior unsecured debt at BB-, subordinated debt at B+ and preferred stock at B.

S&P said the action is in response to good operational and financial progress since the merger of AmeriSource and Bergen.

The merger improved both AmeriSource's and Bergen's already strong business positions in pharmaceutical distribution, S&P noted. The companies match up well geographically, given AmeriSource's strong presence in the eastern U.S. and Bergen's presence in the West. There is little customer overlap, as AmeriSource's strength in hospital distribution added to Bergen's presence in alternate-site distribution.

The combined company should gain purchasing power and boost operating efficiency through a rationalization of its distribution network, S&P added. Still, the integration of systems and business cultures could prove challenging. The company expects to achieve $150 million in annual synergies within three years of the August 2001 closing.

AmeriSource-Bergen's EBITDA coverage of interest was a solid 6 times for the first nine months of fiscal 2002, tracking well ahead of pro forma coverage at the time of the merger, S&P noted. The results reflect earlier-than-expected merger synergies, improved capital management, and wider operating margins. Free cash flow generated from more efficient use of capital should enable the company to repay debt at a moderate pace.

Moody's cuts Magellan Health

Moody's Investors Service downgraded Magellan Health Services, affecting $1 billion of debt. Ratings lowered include Magellan's secured bank facility, cut to Caa1 from B3, senior unsecured notes, cut to Caa2 from Caa1 and subordinated notes, cut to Ca from Caa2. The outlook is negative.

Moody's said the downgrade follows Magellan's announcement that in lieu of its previous refinancing efforts, it has retained Gleacher Partners to help with other options to reduce debt, including restructuring alternatives.

Magellan also intends to seek appropriate covenant waivers from its existing bank lenders, Moody's said.

Moody's said that without the refinancing Magellan's restructuring efforts may result in less than full recovery for some of its financial stakeholders.

In addition, Moody's said it believes that Magellan's inability to finalize refinancing plans may cast additional uncertainty on the successful renewal of its contract with Aetna, which, under a restructuring scenario, might limit recovery value.

S&P rates Wynn Las Vegas loan B, notes CCC+

Standard & Poor's assigned a B rating to Wynn Las Vegas LLC's planned $1 billion senior secured bank debt and a CCC+ rating to the $340 million second mortgage notes due 2010 to be issued by Wynn Las Vegas LLC and Wynn Las Vegas Capital Corp. The outlook is developing.

Proceeds from the proposed bank facility and second mortgage notes, together with an expected IPO, a $188.5 million furniture, fixtures, and equipment loan facility and owner equity contributions will be used to help fund the construction of the company's $2.4 billion casino resort on the Las Vegas Strip, Le Reve, S&P noted. The bank facility and second mortgage note issue are contingent upon the successful IPO or an alternative equity infusion of a like amount, which is expected to be more than $400 million in net proceeds.

Pro forma for the offering and assuming peak borrowings, Wynn Las Vegas will have in excess of $1.5 billion in total debt and $130 million in interest expense.

The ratings reflect Wynn Las Vegas' high amount of debt, the execution risk in building, designing, and operating a property of this size, the competitive market environment and reliance on a single source of cash flow, S&P said. In addition, since the property will target a higher-end customer, the status of the economy in 2005 could materially affect operating results after the opening.

These factors are somewhat mitigated by the significant equity component of the project's funding, Steve Wynn's success in developing and operating properties on the Las Vegas Strip, the lack of new property openings expected over the next few years, and Le Reve's close proximity to the city's major convention centers, S&P added.

S&P said it believes the quality of Le Reve's amenities, the lack of new property openings over the next few years, and experienced operating management will likely drive hotel room rates and gaming volumes to levels consistent with other top-performing Las Vegas Strip operators over time.

But it said risks exist if the ramp-up is slower-than-expected, as certain required financial benchmarks are calculated using run-rate cash flows.

Moody's confirms Eye Care Centers

Moody's Investors Service confirmed its ratings on Eye Care Centers of America, Inc. including its $35 million senior secured revolving credit facility due 2003, $67.3 million acquisition facility due 2003 and $23.5 million term loan facility due 2003 at B2 and its $100 million 9.125% senior subordinated notes due 2008 and $49.7 million senior subordinated floating rate notes due 2008 at Caa1. The outlook is stable.

Moody's noted that Eye Care Centers is currently seeking to refinance its credit facilities, with a new $35 million revolver and $100 million term loan. Should this transaction be completed as planned, Moody's would withdraw its ratings on the company's existing bank credit facilities.

Moody's also said it would look again at its outlook on the company if the refinancing is successful since the current outlook is "materially constrained" by liquidity pressures, including approximately $100 million in maturing bank lines over the next 12-15 months.

Given current business trends, Moody's said a positive outlook may be warranted in the absence of liquidity concerns.

The company's operating performance over the past few quarters has greatly improved, and the optical retail industry has rebounded from delayed purchases in 2001 caused by economic weakness and consumers considering surgical corrective procedures, Moody's noted.

Moody's rates VCA-Antech loan B1, confirms notes, raises outlook

Moody's Investors Service assigned a B1 rating to Vicar's new $143 million secured term loan C, confirmed the ratings of Vicar and its parent VCA Antech, Inc. and raised the outlook to stable from negative. Ratings confirmed include Vicar's $50 million senior secured revolving credit facility and $143 million senior secured term loan due 2008 at B1 and $170 million 9.875% senior subordinated notes due 2009 at B3.

Moody's said it does not expect debt protection measures to change significantly over the next 18 to 24 months. While VCA does generate positive cash flow, Moody's expects cash from operations to be primarily invested in growth activity rather than used for de-leveraging.

While the rating outlook is stable, VCA is relatively weak in its rating category as a result of its very high level of intangible assets supported by debt, Moody's said. Intangibles of about $320 million represent almost 70% of assets, while debt is equal to about 80% of total assets.

As a result, Moody's said it is concerned about the company's ability to overcome issues which indicate a deterioration in the enterprise value which supports the debt.

S&P rates Huntsman loans B+, BB

Standard & Poor's assigned a B+ rating to Huntsman Co. LLC's $938 million term loan A due 2007 and $450 million term loan B due 2007 and a BB rating to its $275 million priority revolving loan facility due 2006. The outlook is positive.

S&P said the priority revolving loan is rated two notches above the corporate credit rating to reflect the strength of the collateral package.

Pro forma for the completed restructuring actions, Huntsman will have nearly $1.6 billion of debt outstanding, S&P said.

The completion of Huntsman's financial restructuring reduces debt by approximately $775 million through the exchange of existing notes for equity in a new holding company. This closes a difficult chapter that began with the lapse of interest payments during December 2001 and substantially improves Huntsman's financial position, S&P said. The restructured financial profile will also benefit from an extended debt maturity profile, and access to the new revolving credit facility.

Huntsman is expected to generate profitability consistent with broader cycle trends in the U.S. petrochemical industry and its past results, S&P commented. Accordingly, EBITDA margins are likely to reach the attractive high-teens percent range at the top of cycle peaks, but decline sharply to the single-digit level during periods of oversupply.

Importantly, Huntsman is nearing completion of a cost rationalization program that has eliminated unattractive assets, focused R&D spending, and eliminated approximately 1,100 staff positions, S&P said. These efforts should add incrementally to the company's performance at the top of the cycle and allow for somewhat stronger performance at the bottom.

Pro forma for the debt restructuring and refinancing plan, Huntsman's balance sheet will be highly leveraged with a ratio of total adjusted debt to total capitalization near 95%; total adjusted debt to EBITDA will be in the 6 times area, S&P said. Management plans to gradually improve the financial profile as the chemical cycle improves. Capital spending is expected to be substantially below historical levels to maximize cash flow available for debt reduction. At the current ratings, the key ratios of total debt to EBITDA and EBITDA to interest coverage are expected to approach 4.5x and 2.5x, respectively, over the next couple of years.

Moody's rates Aerostuctures' loan B1

Moody's Investors Service rated The Aerostructures Corp.'s $165 million senior secured credit facility at B1. The loan consists of a $35 million revolver due 2007 and a $130 million term loan B due 2008. The outlook is stable.

Proceeds from the term loan will be used to refinance the existing $73 million senior secured credit facilities, $55 million of PIK seller notes, consisting of $50 million of 11.5% notes due 2005 and $5 million of 8.5% notes due 2002, as well as related fees.

Ratings reflect the company's relatively small revenue base, dependence on the commercial aircraft OEM market, near-term weak industry economic fundamentals and significant sourcing of revenue from a single customer, Moody's said.

Ratings are supported by the company's leading niche position as manufacturer of certain airframe components, decades-long relationships with Lockheed Martin and Bell Helicopter and equity support provided by The Carlyle Group, Moody's added.

The stable outlook reflects the expectation that production levels, EBITDA and cash flow generation will remain at or near current levels.

Pro forma year-end 2002 total debt is estimated to be 2.5 times EBITDA, while EBITDA will cover pro forma interest expense 7.7 times (6.6 times after deduction for capex).

Moody's ups Central Garden & Pet outlook

Moody's Investors Service revised the outlook for Central Garden & Pet Co. from negative to stable and confirmed its ratings, including the $115 million of 6% senior subordinated convertible notes due 2003 at B3.

The action follows fiscal third quarter results showing improved profit margins, resulting in higher cash flow and lower funded debt as well as the recent two-year extension of its primary credit facility, Modoy's said.

The outlook is stable due to, among other things, an increase in liquidity resulting from the extension of its principal credit facility and lower debt levels, with total funded debt of $234 million at June 30 compared to $308 million a year before.

The rating and outlook could be negatively impacted by a failure to successfully extend or restructure upcoming debt and credit facility maturities, including the September 2003 maturity of the Pennington credit facility and the November 2003 due date for the senior subordinated convertible notes, Moody's added.

The use of cash for rationalization of manufacturing and distribution facilities, especially if it occurs contemporaneously with aggressive sales and marketing responses from competitors, could also negatively impact the ratings and outlook.

Continued traction in the branded products businesses, reflected by unit sales growth without material margin reduction, could positively impact the rating outlook. Another positive impact is possible from regularized credit facilities possessing longer maturities and allowing a freer inter-company flow of funds.

Moody's lowers Spherion outlook

Moody's Investors Service lowered its outlook on Spherion Corp. to negative from stable. Debt affected includes Spherion's $207 million 4.5% convertible subordinated notes due 2005 at Ba3.

Moody's said the outlook change is in response to weakened demand for Spherion's personnel staffing and recruitment related to general weakness in the staffing industry.

The outlook change also reflects the uncertain timing of an economic recovery and the company's reduced liquidity after the restructuring of its credit facilities, Moody's said.

The rating outlook also takes into account the company's cost cutting initiatives including the divestment of a number of less strategic businesses.

At current run rates, free cash flow generation on its $2.1 billion of revenues is likely to be marginal or even slightly negative for 2002, Moody's noted.

In addition, Moody's said it remains concerned that the company may restart its acquisition program to offset weak customer demand or to take advantage of opportunities that may not be available in a stronger market.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.