Lower Earnings Drag Great Lakes; US Airways Stumbles

Standard & Poor's has cut Great Lakes Dredge & Dock Corp.'s senior secured debt rating from B+ to B. This is after lower than expected first-quarter earnings of $44-46 million and high financial leverage, noted Heather Henyon, an S&P analyst. Additionally, S&P lowered Great Lakes' subordinated debt rating to CCC+ from B-.

Great Lakes debt levels increased to $336 million from $271 million in 2003 due to its sale to Madison Dearborn Partners. Also in 2003, the company increased capital spending to about $38 million to buy out certain dredging equipment previously under operating lease. According to S&P, during the first quarter of 2004, Great Lakes' total debt-to-EBITDA was approximately 5.9 times.

Henyon said the dredging company's performance has been affected by reductions in federal funding of beach nourishment projects, which constitute 20% of Great Lakes' revenues. The dredging backlog has fallen by almost one-third to $189 million from $281 million a year ago, due to the reduced bid market. Financial performance for 2004 and probably 2005 will be weaker than previously expected, notes S&P. But there are positive considerations. These include Great Lakes' leading position in the U.S. dredging industry and limited competition. A Great Lakes spokesman did not return calls.

*US Airways Group has been downgraded by S&P due to the challenges its subsidiary US Airways faces as it seeks to rapidly lower its operating expenses in response to mounting pressure from low-cost competitors. The company is seeking further major cost-saving concessions from its labor groups, who already took pay cuts in 2002 and 2003. According to S&P, if these negotiations are not successfully concluded over the next several quarters, US Airways could be forced to undertake significant asset sales and/or file for bankruptcy a second time.

Adding to US Airways troubles, Southwest Airlines will begin operations in May 2004 on US Airways' routes. S&P believes that US Airways long-term prospects remain difficult and the airlines best option could either be an acquisition by another airline or some form of close integration into a broader alliance. A US Airways spokesman did not return calls.