S&P Keeps Dollar General (DG) at CreditWatch Negative Following Revised Bid for Family Dollar (FDO) Sep 2, 2014 12:30PM

Standard & Poor's Ratings Services today said its ratings on Dollar General Corp. (NYSE: DG), including the 'BBB-' corporate credit rating and 'BBB-' issue-level ratings on the company's senior unsecured debt, remain on CreditWatch with negative implications, where we placed them on Aug. 18, 2014.

"Dollar General announced a higher bid for Family Dollar today of $80 per share in cash, up from the original $78.50 offer made about two weeks ago," said credit analyst Diya Iyer. "It also increased the number of stores it would be willing to agree to divest to 1,500 from the original 700 if ordered by the Federal Trade Commission, and has agreed to pay a $500 million reverse break-up fee to Family Dollar relating to antitrust matters."

We anticipate further potential back and forth as Dollar General says it will consider taking its proposal directly to Family Dollar shareholders if the company refuses to engage regarding the revised proposal. We expect to resolve the CreditWatch placement closer to the final outcome of this bidding process. At that time, should this merger occur we will evaluate the business and financial impact of the finalized transaction, the capital structure details, and management's financial policies and strategic plans for the combined entity.


Moody's Lowers OI S.A. (OIBR) to 'Ba1'; Notes Reduced Financial Flexibility, Weak Credit Metrics Sep 2, 2014 11:29AM

Moody's Investors Service (Moody's) has assigned a Ba1 corporate family rating to OI S.A. (NYSE: OIBR) based on the company's reduced financial flexibility and weak credit metrics, which Moody's believes will result in a weakening of Oi's competitive position. Oi has articulated plans to reduce capital spending and may not fully participate in the upcoming 4G spectrum auction in Brazil. In addition, Oi could face operational, competitive or financial challenges related to the quickly evolving competitive environment, which includes an opportunity for consolidation through M&A. Moody's believes that Oi's base business in Brazil faces margin pressure from an unfavorable product mix shift to pay TV and broadband and the price pressure inherent in its value segment target market. In Portugal, Moody's expects continued revenue weakness and margin pressure due to competition and the same unfavorable product mix shift. Oi has detailed operational plans to offset this margin pressure through expense savings initiatives, which Moody's estimates will result in a modest improvement in credit metrics. However, Moody's estimates that leverage will remain above 4.5x (Moody's adjusted) and the company will continue to consume cash until at least 2016.

As part of this rating action, Moody's has also downgraded the ratings on unsecured debt at Oi SA to Ba2, one notch below the corporate family rating due to their junior position in the capital structure. The company has significant indebtedness at subsidiary holding companies which have a priority claim on the majority of operating cash flows.

Moody's has also downgraded unsecured debt at Portugal Telecom International Finance, BV to Ba2, also one notch below the CFR. Moody's believes that these notes are junior to other debt at PT Portugal SGPS SA and are pari passu to unsecured debt at to the parent and guarantor, Oi SA.

Moody's has downgraded three specific note issuances at Oi SA which benefit from a subsidiary guarantee from Telemar Norte Leste SA (Telemar) to Ba1. These three issuances, the 5.5% US$ notes due 2020, the 9.5% US$ notes due 2019 and the 5.125% EUR notes due 2017 were originally issued by Telemar but transferred to Oi SA. Moody's believes that the Telemar guarantee is sufficient to differentiate the creditworthiness of these issuances versus other unsecured obligations of Oi SA.

Lastly, Moody's has withdrawn all ratings for Telemar Participacoes S.A. upon repayment of all debt following the recent recapitalization transaction. These actions conclude the review for downgrade initiated on July 17, 2014.

Oi's negative outlook reflects its ongoing operational and strategic challenges and the uncertainty and distractions related to its recent investment loss at the Portugal Telecom subsidiary.

RATINGS RATIONALE

Ratings withdrawn:

Issuer: Telemar ParticipaƧƵes S.A.

- Senior unsecured

Issuer: Oi S.A.

- Issuer rating

Ratings assigned:

Issuer: Oi S.A.

- Corporate Family Rating: Ba1

Ratings downgraded:

Issuer: Oi S.A.

- USD 1,003 mln GLOBAL BONDS due 2017: to Ba1 from Baa3

- USD 142 mln GLOBAL BONDS due 2019: to Ba1 from Baa3

- USD 1,787 mln GLOBAL BONDS due 2020: to Ba1 from Baa3

- USD 483 mln GLOBAL BONDS due 2016: to Ba2 from Baa3

- USD 1,500 mln GLOBAL NOTES due 2022: to Ba2 from Baa3

Issuer: Portugal Telecom International Finance B.V.

- BACKED Senior Unsecured MTN: to (P) Ba2 from (P) Baa3

- USD 802 mln GTD EURO MTNS due 2016: to Ba2 from Baa3

- USD 334mln GTD EURO MTNS due 2017: to Ba2 from Baa3

- USD 669mln GTD GLOBAL MTNS due 2017: to Ba2 from Baa3

- USD 1,003mln GTD EURO MTNS due 2018: to Ba2 from Baa3

- USD 66mln GTD FLT RT EURO MTNS due 2019: to Ba2 from Baa3

- USD 1,003mln GTD EURO MTNS due 2019: to Ba2 from Baa3

- USD 1,338mln GTD EURO MTNS due 2020: to Ba2 from Baa3

- USD 669mln GTD EURO MTNS due 2025: to Ba2 from Baa3

The outlook for all ratings is negative

Oi's Ba1 corporate family rating reflects its scale, geographic diversity, broad asset base and network coverage and strong margins. These strengths are offset by the company's challenges to upgrade its network in Brazil to meet shifting consumer demand, the highly competitive markets in both Brazil and Portugal, the margin pressure it faces from an unfavorable product mix shift and the company's limited financial flexibility. Moody's forecasts Oi's leverage will approach 5x (Moody's adjusted) at year-end 2014 and fall towards 4.5x (Moody's adjusted) at year end 2016. Moody's expects Oi to continue to consume cash through 2016.

Oi's recent merger with Portugal Telecom succeeded in simplifying its equity ownership, dramatically reduced its dividend commitment and raised a large amount of equity capital to reduce debt. However, the unexpected commercial paper investment lost by PT has resulted in higher consolidated leverage for Oi. The R$3 billion loss has also impacted Oi's ability to raise capital which may force the company to cut capital investment further and Moody's believes it may influence Oi's decision on whether to participate in the upcoming 4G spectrum auction. These actions to reduce network investment would negatively impact Oi's competitive position and would occur at exactly the wrong time for the company. Oi's main competitors, Telefonica Brazil and America Movil remain well capitalized and are investing heavily in Brazil for growth, both organically with capex and on spectrum and through M&A.

Moody's believes that Oi has adequate liquidity to meet its obligations over the next 12 to 18 months. Moody's forecasts that Oi will continue to consume cash through 2016, excluding any potential spectrum purchases. Oi had approximately R$6 billion in cash at June 30 and access to approximately R$7.5 billion in comlnitted credit facilities. The company has upcoming maturities of R$5.5b in 2014 and R$3.4 billion in 2015. Oi's debt covenants include a 4x leverage maintenance test. The company expects to maintain cushion under this covenant as it measures EBITDA including the gains from asset disposals. Moody's views this as a material weakness over the longer term as it could motivate management to sell assets to avoid a covenant breach. However, the company's planned tower sale which will close in 4Q'14 will provide near term covenant cushion for the twelve month measurement period starting in 4Q.

Moody's rates unsecured debt at Oi S.A. Ba2, one notch below the corporate family rating due to its junior position in the capital structure. Certain note issuances at Oi (the 5.5% US$ notes due 2020, the 9.5% US$ notes due 2019 and the 5.125% EUR notes due 2017) which benefit from an upstream guarantee from its main Brazilian subsidiary Telemar Norte Leste S.A. (Telemar) are rated Ba1 reflecting their priority claim on approximately two thirds of Oi's Brazilian operating cash flows and assets. Moody's rates the unsecured debt at Portugal Telecom International Finance B.V. (PTIF) Ba2, also one notch below the CFR due to their junior claim on the cash flows of the Portugal subsidiary and the significant indebtedness at PT Portugal SGPS SA which is senior to PTIF. The notes at PTIF do benefit from a guarantee from Oi SA.

Moody's could lower Oi's ratings further if leverage remains above 4.5x (Moody's adjusted) for an extended period or if the company is not on a trajectory to produce sustainable positive free cash flow. Oi's ratings could be upgraded if leverage can be sustained comfortably below 4x (Moody's adjusted) and the company produces sustained positive free cash flow. In addition, an upgrade would be predicated upon the company's willingness and ability to continue investing (both network capex and spectrum acquisition) at a level which will improve its competitive position. Alternatively, Moody's could consider an upgrade if the company's asset-light strategy is successful in retaining market share and result in EBITDA growth such that it meets the financial metrics above.


Good Competitive Position, Improved Leverage, Strong Capitalization Benefit StanCorp Financial Group (SFG) - Fitch Aug 29, 2014 03:06PM

Fitch Ratings has affirmed the Issuer Default Rating (IDR) of StanCorp Financial Group (NYSE: SFG) at 'BBB+' and the Insurer Financial Strength (IFS) ratings of its subsidiaries, Standard Insurance Company and Standard Life Insurance Company of New York at 'A'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Today's affirmation reflects SFG's improved operating performance in 2013, good competitive position in the group life and disability market, strong capitalization and improved financial leverage. The company's ratings also reflect continued challenges in terms of its overall operating profitability in a very competitive market environment, with persistently low market interest rates and poor economic conditions, which has resulted in slow employment growth and adverse claims experience in recent years.

SFG's operating performance improved significantly in 2013 after several years of declining performance driven by an intense competitive environment and poor economic conditions. SFG reported pretax operating income of $329 million in 2013, up from $192 million in 2012. In the first half of 2014, the company reported pretax operating income of $118 million, down from $143 million for the same period in 2013, with the decline driven by lower group insurance premiums, reduced investment income and increased operating expenses. The benefit ratio for the company's group insurance business, its primary earnings driver, was 78.9% in 2013, down significantly from 83.9% in 2012. For the first six months of 2014, the group insurance benefit ratio was 81.4%, down from 82.1% for the same period in 2013.

SFG's statutory total adjusted capital increased 8% in 2013 to $1.49 billion, and the NAIC risk based capital ratio of its insurance subsidiaries improved to 398% from 364% in 2012. Fitch estimates the company's RBC ratio receives a benefit of approximately 40 percentage points from a reinsurance agreement executed at the end of the 2011 and expanded in 2012.

SFG's ratings are supported by the company's solid balance sheet fundamentals and solid competitive position in the U.S. group insurance market. The company's balance sheet fundamentals reflect strong asset quality, good risk adjusted capitalization, and reasonable financial leverage. SFG's total financing and commitments ratio was approximately 0.3 times (x) and financial leverage was 20% at June 30, 2014.

Fitch believes that SFG's insurance subsidiaries maintain a high-quality bond portfolio. Below investment grade (BIG) bonds accounted for only 6% of the fixed maturity portfolio or a low 29% of total adjusted capital (TAC) at June 30, 2014. Market values of SFG's fixed maturity investments reflect the low interest rate environment and good quality portfolio, with gross unrealized losses $21 million and gross unrealized gains $473 million at June 30, 2014.

While SFG's commercial mortgage portfolio allocation of approximately 43% of total statutory invested assets at June 30, 2014, is much higher than the industry average, Fitch believes it is complementary to the company's stable liability structure, despite its lower liquidity relative to publicly traded bonds. Commercial mortgage loan loss experience, although heightened during the financial crisis, has improved significantly in recent years and remains in line with Fitch's overall loss expectations.

RATING SENSITIVITIES

The key rating triggers that could result in an upgrade include:
--A substantial increase in run-rate risk-adjusted capital above 350%, with no significant deterioration in capital quality;
--A long-term improving trend in the group benefit ratio substantially below its historic baseline of about 76%.

The key rating triggers that could result in a downgrade include:
--A prolonged deterioration in the company's group benefit ratio above the 2011 level of 83%;
--An increase in financial leverage above 30%;
--GAAP-based interest coverage below 6x for an extended period of time;
--A decrease in RBC below 300%, or a significant decrease in the quality of capital supporting the company's RBC;
--A significant deterioration in the performance of the company's commercial mortgage loan portfolio.

Fitch affirms the following ratings with a Stable Outlook:

StanCorp Financial Group
--IDR at 'BBB+';
--$250 million 5.000% senior notes due Aug. 15, 2022 at 'BBB';
--60-year $253 million junior subordinated debt due June 1, 2067 at 'BB+'.

Standard Insurance Company
--IFS rating at 'A'.

Standard Life Insurance Co. of New York
--IFS rating at 'A'.


S&P Lowers Outlook on Arch Coal (ACI) to Negative; Potential Downgrade on Met Coal Price Activity Aug 29, 2014 02:35PM

Standard & Poor's Ratings Services said it revised its rating outlook on Arch Coal, Inc. (NYSE: ACI) to negative from stable. At the same time, we affirmed our 'B' corporate credit rating on the company. In addition, we affirmed our 'B' issue-level ratings on the company's senior secured bank facility and term loan B remain, commensurate with a '2' recovery rating and indicating our expectation of substantial (70%-90%) recovery for holders in the event of a payment default. We also affirmed our 'CCC+' rating on the company's senior unsecured notes, two notches below the corporate credit rating and commensurate with the '6' recovery rating, indicating our expectation for negligible (0%-10%) recovery in the event of a default.

The negative outlook reflects the potential for a downgrade if average met coal prices do not improve in line with our expectations of $140 to $160 per ton in the next 12 to 18 months. This would cause Arch to continue burning cash and use liquidity faster than forecast. Downside risks include slower steel production in China, continued weakness in Europe, and excess global met coal supply depressing met coal prices beyond 2015. However, we are expecting these prices to improve under our base case because of significant capacity curtailments that have been announced. We also expect domestic thermal coal markets to improve modestly as utilities replenish depleted stockpiles stemming from the harsher-than-expected 2013/2014 winter--thermal coal prices for Arch's Powder River Basin (PRB) mines are up 6% for 2015 commitments made through the end of July.

"The negative outlook reflects the possibility that global supply and demand conditions for met coal will not support a near-term price recovery, driving Arch to encroach its senior secured leverage covenant in June 2015 and burn more cash than expected," said Standard & Poor's credit analyst Amanda Buckland.

We could lower the rating if the weak met coal environment persists at an average benchmark price less than $140/ton in 2015, causing possible violation of the senior secured leverage covenant. We could also lower the rating if continued cash burn deteriorates liquidity to less than $550 million in cash and revolving credit facility availability, which could occur if average met coal prices remain about $120/ton or less beyond 2015.

An upgrade is not likely in the near term because we expect leverage to remain very high, with debt to EBIDTA above 10x through 2015. We could revise the outlook to stable if we see a sustained recovery in met coal leading to an improvement in cash flow generation and operating performance.


S&P Raises Outlook on American Airlines Group (AAL) to Positive; Notes Strong H114 Performance Aug 29, 2014 12:48PM

Standard & Poor's Ratings Services said that it revised its rating outlooks on American Airlines Group Inc. (Nasdaq: AAL)(AAG) and its subsidiaries American Airlines Inc. and US Airways Inc. to positive from stable. At the same time, we affirmed our ratings on the companies, including the 'B' corporate credit ratings.

AAG reported strong earnings during the first half of 2014, with net income of $1.3 billion, and we expect that this trend will continue for the remainder of the year and into 2015. The company is benefiting from generally positive revenue conditions in the U.S. airline industry, since the largest four airlines, which have a combined market share of more than 80%, are adding capacity cautiously and focusing on raising load factors (utilization) and yield (pricing). AAG is also capturing merger cost and revenue synergies, which should increase further once regulatory approvals (a single operating certificate) allow the full operational integration of the company's two airline operating subsidiaries. That integration, which AAG expects to be complete in late 2015, also carries risks, since it will involve combining information technology systems and aircraft crews.

The outlook is positive. "We expect continued growth in AAG's earnings and cash flow, which should result in improved credit measures despite heavy capital spending and a share repurchase program," said Standard & Poor's credit analyst Philip Baggaley.

We could raise rating if AAG's FFO to debt exceeds 16% and we expect it to remain at that level, and if debt to EBITDA remains consistently below 4.5x. In addition, in assessing the sustainability of AAG's credit ratio improvements, we would consider its progress on merger integration as well as the general industry outlook.

We could revise the outlook to stable if the company's trend of improvement falters, funds flow to debt slips to the low-teens percent area, and debt to EBITDA rises above 4.5x. This could result from worse-than-expected merger integration problems, general industry challenges such as a fuel price spike, or a more aggressive financial policy.


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