ge offers superior protection when benchmarked against recent US sponsored issuance.
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A stable sponsored structure could be evolving
Other than a concentration in one sector (retail) the only other trend that may be emerging in the last few weeks¡¯ issuance is financial sponsors¡¯ hewing to a somewhat ¡°conventional¡± sponsored high-yield structure. Many new LBOs have the weak structural features exemplified by the J. Crew and Jo-Ann deals. Nevertheless, we contrast the current transactions with the outlier structure of Aleris International, Inc.¡¯s $500 million 7.625% senior notes due 2018 (B1), which came to market in early February of this year. Aleris¡¯ package offers little protection against future debt-financed dividends. While additional outliers in 2011 will no doubt come to market, our principal focus will be to identify emerging trends in the high-yield market.
43
MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES Corporates
Alcoa, Inc.
Significant rating actions taken the week ending 4 March 2011
Outlook Change
30 March 10 2 March 11 Baa3 P-3 Stable Baa3 P-3 Negative
Senior Unsecured Rating Short-Term Rating Outlook
The stable outlook reflects our expectation that performance in the alumina segment will show acceptable growth in 2011 on global increases in aluminum production, and that performance in the primary metals segment will also advance, albeit modestly on strengthening demand and hence production profiles. It also reflects how the flat rolled and engineering products and solutions segments will also benefit from improving end-market demand, particularly in aerospace, automotive and packaging. Aluminum demand and price levels will likely remain supportive of improving performance trends, although we expect the road to full recovery to be gradual. We also expect Alcoa to continue to manage debt in a disciplined fashion. Caesars Entertainment Corporation
4 June 10 Corporate Family Rating Outlook Caa3 Positive
Upgrade
1 March 11 Caa2 Stable
The upgrade reflects our expectation that EBITDA will rise moderately in 2011 given signs of modest improvement in demand trends across the majority of markets in which CET operates. The upgrade also reflects CET's good liquidity profile and the absence of any material debt maturities until 2014. We also upgraded CET's speculative-grade liquidity rating to SGL-2 from SGL-3, reflecting our view that EBITDA will begin to stabilize and that CET has sufficient cash on hand and revolver ability to manage its cash needs over the next several years. Freescale Semiconductor, Inc.
23 Dec 09 Corporate Family Rating Outlook Caa1 Stable
Upgrade
28 Feb 11 B3 Positive
The upgrade of Freescale's CFR to B3 reflects the company's strong revenue growth and EBITDA expansion following the robust 2010 recovery in global demand for embedded processing semiconductors across the company's addressable end markets (i.e., automotive, industrial, networking and consumer). It also incorporates our expectation for continued improvement operating performance, financial leverage metrics, and free cash flow generation over the succeeding 12 months.
44
MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES
Isle of Capri Casinos, Inc.
Significant rating actions taken the week ending 4 March 2011
Review for Upgrade
7 Dec 10 1 March 11 B3 Review for Upgrade B3 Stable
Corporate Family Rating Outlook
The review will conside the proposed debt offering and if it will be structured in a manner that alleviates our concerns regarding Isle's ability to maintain compliance with its financial covenants over the longer-term; and provides the company with a more relaxed debt maturity profile. The review also acknowledges Isle's fiscal third quarter earnings results that benefited from a more stable operating environment than in previous quarters, along with a lower cost structure. As a result, we expect Isle will achieve and sustain debt/EBITDA of six times in the next 18 months, the target leverage Isle needs to obtain a B2 corporate family rating. Jebel Ali Free Zone FZE
8 Dec 09 Corporate Family Rating Outlook B1 Review for Downgrade
Downgrade
3 March 11 B2 Negative
The downgrade was driven by the high uncertainties over the near- to medium-term evolution of the company's capital structure that we consider highly leveraged, with adjusted debt to EBITDA at 8.6 times (as per the 12-month period ending June 2010), and as unsustainable given the company's cash flow profile. Moreover, it is likely that the company's capital structure will remain constrained. These factors have prompted us to reposition the company's baseline credit assessment to 16 (equivalent to B3 on our global scale) from 14 (B1 equivalent), hence the downgrade. MGM Resorts International
26 Oct 10 Corporate Family Rating Outlook Caa1 Positive
Upgrade
2 March 11 B3 Stable
The upgrade reflects signs of modest improvement in demand trends in Las Vegas, improvement in debt repayment during 2010 from the proceeds of equity issuances, and completion of a new multiyear financing package for CityCenter (MGM's 50% owned project on the Las Vegas Strip.) We believe MGM's credit metrics will begin to improve modestly due to the improved operating outlook. Additionally, we estimate that MGM has sufficient revolver capacity and cash on hand to support its debt maturities through mid-year 2013. Nevertheless, MGM's Caa1 probability of default rating reflects the company's high leverage -- debt/EBITDA is over 11 times -- and significant refinancing risk over the medium-term.
45
MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES
Vulcan Materials Company
Significant rating actions taken the week ending 4 March 2011
Downgrade
17 Dec 10 4 March 11 Ba1 Stable Baa3 Review for Downgrade
Corporate Family Rating Outlook
The downgrade was driven by our expectation that Vulcan's operating earnings, cash flow, and EBITDA will remain weak over the intermediate term as it grapples with soft pricing in several key markets, low demand from private construction, and, ultimately, a conclusion to federal stimulus spending. In our view, Vulcan will be unable to restore investment-grade credit metrics over the next two years. At December 31, adjusted debt-to-EBITDA leverage exceeded 7x. Leverage metrics will likely remain elevated and coverage metrics will remain weak until more robust private construction demand takes hold. In the meantime, the company's overall margins will likely remain pressured by weak volumes and diminished pricing power in several key US markets, particularly in Florida and parts of the Western US, which offset strength in other key markets.
Financial Institutions
Cypriot Banks
Downgrade of Hellenic Bank to Ba1/NP/D-; outlook stable (Cyprus) Downgrade of Marfin Popular Bank to Baa3/P-3/D-; outlook negative (Cyprus) Downgrade of the Bank of Cyprus to Baa2/D+ from A3/C-; outlook stable
The bank downgrades follow our decision to downgrade the ratings of the Cypriot government to A2 from Aa3. That downgrade has prompted us to lower our assessment of the capacity of the Cypriot government to support its banking system. We utilise a systemic support indicator (SSI) as an anchor to assess a country's capacity to support its banking system in case of need, and uses the SSI to assign the supported deposit and debt ratings of banks. Cyprus' SSI has been repositioned at the same level as the national government's new debt rating of A2. The SSI was previously Aa2, one notch above the old rating of the government. The realignment of the SSI with the government's rating reflects the government's reduced capacity and the size of the contingent liabilities of the banking system relative to the balance sheet of the government and, in our opinion, the somewhat increased risk that these contingent liabilities may crystallise on the sovereign's balance sheet.
46
MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES US Public Finance
Belvoir Land LLC (VA)
Significant rating actions taken the week ending 4 March 2011
Review for Downgrade
26 March 10 1 March 11 Aa3 A1 Baa1 Review for Downgrade Aa3 A1 Baa1 Stable
Revenue Bond Rating (Class I) Revenue Bond Rating (Class II) Revenue Bond Rating (Class III) Outlook
This action is based on several factors, most prominently the downgrade from A3 to Baa1 of AIG, which provides the debt service reserve fund surety for all three debt classes. We consider the debt service reserve fund to be an important component of support for the bonds and a key factor in the rating. In order to understand the impact of this downgrade on the rating of the bonds, we will obtain further information on project performance, including the 2010 audit. As of the 2009 audit, there had been a slight decline in debt service coverage for the project from 2008, to 2.03x from 2.13x on the Class I bonds, 1.56x from 1.64x on the Class II bonds, and 1.20x from 1.26x on the Class III bonds. Oakland Unified School District (CA)
16 April 10 Revenue Bond Rating Outlook A1 Stable
Downgrade
2 March 11 A2 Stable
The downgrade reflects the district's trend of operating deficits over the past three fiscal years through fiscal 2010 (ended June 30) resulting in relatively narrow reserves. This positions the district poorly for the challenges likely to be faced as a result of the state's budget difficulties. The absence of audited financial statements since fiscal 2008 adds to the risk associated with the district's bonds. The A2 rating continues to incorporate Oakland USD's very large tax base with slightly above-average wealth levels, and its comparatively high-but-manageable debt burden.
47
MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES
Southeast Housing, LLC. (FL)
Significant rating actions taken the week ending 4 March 2011
Review Direction Uncertain
29 March 09 1 March 11 Baa2 Review Direction Uncertain Baa2 Developing
Revenue Bond Rating Outlook
The action is due to a decrease in the scope of the project. In conjunction with the modified scope, the issuer intends to purchase and cancel a portion of the bonds outstanding, and the Navy will make an equity contribution. The rating will be updated once we receive information that is sufficient to determine the impact of the modified scope on the project's credit rating. The overall number of housing units of the project will be reduced because six of the 11 bases have experienced significant reduction in actual occupancy vs. the occupancy projected at closing and incorporated in the financing pro forma. In addition to decreased occupancy, the weighted average rent is less than was projected at closing due to the presence of lower-rank tenants, more civilian tenants, and decreases in the basic allowance for housing rates.
Infrastructure
FirstEnergy Corp.
11 Feb 10 Senior Unsecured Rating Outlook Baa3 Stable
Affirmation
25 Feb 11 Baa3 Stable
Our action reflects the expectation that the merger between FE and AYE will be consummated shortly. The merger, which was announced on February 11, 2010, has received all needed regulatory approvals. The affirmation of the ratings considers the increased scale and scope of the merged entity and the potential to achieve significant synergies. The rating affirmation also reflects an expectation for near-term improvement in the company's consolidated balance sheet through debt reduction.
48
MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
RATING CHANGES
FirstEnergy Solutions Corp.
Significant rating actions taken the week ending 4 March 2011
Review for Downgrade
11 Feb 10 25 Feb 11 Baa2 Review for Downgrade Baa2 Stable
Senior Unsecured Rating Outlook
Our action reflects the expectation that the merger between FE and AYE will be consummated shortly. The review was triggered by a reduction in the price for electricity that has impacted the company's financial performance. Specifically, FES' ratio of CFO pre-WC to debt and interest coverag