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A rash of asbestos credits moved up last week, as dealers noted increasing comfort with liability issues. Crown Cork & Seal hit the high 80s from the mid-80s. A $10 million piece of Owens-Illinois' debt traded in the low 90s and a $5 million piece of USG traded into the low 70s from the high 60s. Dealers said the asbestos fear that triggered a downgrade in levels last fall is starting to clear. "The genie is back in the bottle. People are more familiar with the liability issues," said a market player. "At first, the potential losses [from lawsuits] were off the chart." Calls to Timothy Donahue, cfo of Crown Cork, were not returned. Calls to David Van Hooser, cfo of Owens, were referred spokesman Phil McWeeny, who did not comment by press time. Calls to Richard Fleming, cfo of USG, were not returned by press time. Dealers have said that with most of the companies filing for Chapter 11, bankruptcy protection helped them restructure and protected them from mounting liability. Meanwhile, players had time to regain confidence in the credits. USG, which recently filed, has seen an uptick in levels ever since. "People are taking the view that it's going to be a bumpy ride, but that it's worth it to stick it out because of the market share these companies have, meaning they're long-term players," a dealer said.

Beazer Homes USA is replacing its revolving line of credit and has retained BANK ONE as its lead bank. The $200 million revolver replaces a $250 million line of credit that is set to expire in November 2002, a BANK ONE banker said, declining to be named. Beazer Homes reduced the size of the line because it does not need the full capacity after completing a $200 million senior notes offering in May, he added. The lender is seeking eight to 12 banks to round out the syndicate and held a meeting at Beazer's headquarters in Atlanta last Wednesday. Beazer will use the line for general corporate purposes. David Weiss, cfo, at Beazer, was attending an outside meeting with other finance officials at the company and could not be reached. BANK ONE is committing $30 million and will be acting as administrative agent and sole lead arranger. The bank has not yet received additional commitments nor has it set commitment fees. The best efforts deal is expected to close in September, the banker noted. The three-year, unsecured revolver is priced at LIBOR plus 13/4%. Pricing on the previous unsecured line was slightly lower, at LIBOR plus 155. "This is primarily due to higher market pricing relative to last time they re-did the revolver," the banker explained.

Bedford, Mass.-based filtration and purification technology provider Millipore is talking with its lead banks, FleetBoston Financial and ABN AMRO, about refinancing its current $175 million revolving credit agreement. Janet Frick, assistant treasurer for Millipore, said the loan matures in January and this is the primary reason for arranging a new revolver. She declined to comment on whether the same banks would lead the facility, but she said a new loan would be syndicated rather than just rolled over with existing banks. The BioScience market is dynamic and following the separation of the microelectronics division of Millipore, Moody's Investors Service has upgraded the company's bank debt rating from Ba2 to Ba1, said Frick. Millipore is definitely looking to get improved conditions, she added, but declined to say whether this would be through pricing or covenants. The existing revolver was originally $450 million, Frick noted, reduced to $250 million and then $175 million recently. Millipore is not looking to upsize it again, she said. The company spun off its microelectronics division through an IPO this month to create Mykrolis.

Mariner Post Acute Network's debt notched up to 70 in a few small trades last week. Deutsche Bank was rumored to be active in the name, although traders there would not comment. Dealers say the uptick in levels is reflective of a recovering health care industry. "Medicaid is paying higher reimbursements, which should be improving the price of all health care names. Everything is being bid up," said a dealer. Mariner is a long term care provider based in Atlanta. Bill Straub, acting cfo, declined to comment. The company has a $1.09 billion deal that breaks down into five tranches. Pricing is based on a grid and starts at LIBOR plus 4%. J.P. Morgan and Bank of America are the lead arrangers, according to Capital DATA Loanware.

Moody's Investors Service has downgraded the senior subordinated notes and revolving credit ratings of industrial cutting tools manufacturer Simonds Industries, citing the historic lows the timber industry has hit, forcing many mills to shut down to reduce inventory. The revolver rating has been moved from B1 to B3 and the notes to Caa2 from B3. Simonds has reported poor operating performance along with weakened credit protection measures and Moody's expects further weakness in both the manufacturing and wood industries. In addition, the strength of the dollar has made the company's overseas sales less price competitive, while aiding several of its European competitors entry into the U.S. market. As of June 30, Simonds was in default of several covenants in its senior revolving facility, though an amendment has been agreed to. * Moody's has downgraded the ratings of Montgomery, Ala.-based Blount, including the $440 million of credit facilities from B1 to B3. Blount is a sporting ammunition business and industrial and power equipment manufacturer. The downgrades reflect poor performance and weakened credit protection measures, aggravated by its high leverage and weak balance sheet. The sluggish economy has battered Blount, with income declining by 40% from a comparable period last year. The industrial and power segments of the company, which manufactures equipment for the timber industry has been affected by the downturn in the paper and pulp industries. Blount's own manufacturing facilities are running at about half of capacity. The ammunition business has been affected by price erosion in the competitive law enforcement market with sales in the first half of this year down 24% from last year, according to Moody's. Management is anticipating a good hunting season in the coming fall, but Moody's believes that the gloomy economic outlook may dampen hunting-related spending. Blount's management has responded with cost-cutting measures, including plant closure, temporary layoffs and outsourcing of certain corporate functions. * Moody's has downgraded San Jose, Calif.-based Condor Systems' $50 million senior secured credit facility to Caa1 from B1, prompted by the company's announcement of non-compliance with financial covenants. The covenants were violated due to sharply lower reported earnings, as the company recorded significant program cost--to complete growth on several multi-year fixed contracts. The company, which provides advanced signal collection and electronic countermeasure products for electronic warfare, indicated that the interim covenant waiver obtained in April expired Aug. 15, and it expects to obtain additional waivers. A financial advisor has been hired and Condor is evaluating alternatives for debt restructuring. As of June 30, there was no available commitment under the facility, though $31.1 million of the borrowings were letters of credit. Customers include most of the U.S. intelligence agencies and military services and a number of foreign governments.

In an outspoken and lengthy comment letter, the New York Clearing House Association urged the Federal Reserve to use regulatory flexibility to make its big, newly proposed Regulation W less restrictive and "more workable with respect to the myriad transactions engaged in the course of modern banking." The first target for its criticisms was the proposed Reg W's prohibition on a bank's engaging in any new transactions with affiliates at all if at the time it already had transactions aggregating at an amount exceeding 10% of the capital and surplus of the bank. This would be a whole new limit, said NYCHA, going beyond the 20% ceiling permitted by statute. The Clearing House took issue with the Fed on several of the new Reg W's limitations on what constituted collateral for purposes of affiliate transactions. The Fed said that securities issued by the bank itself were not eligible collateral, nor were intangible assets nor letters of credit. NYCHA had disagreements with all these positions. On another subject NYCHA tangled with Reg W over the purchase of low quality assets. "The proposal would appear to contain an absolute prohibition" against buying them from affiliates. The Clearing House pointed out that the law permitted an exclusion from 23A for such purchases and suggested it be enlarged.

Active portfolio cleansing among larger banks is producing a developing market for small credits that have rarely--if ever--traded but are now getting attention from dealers and investors. Market players are reluctant to name specific credits for fear of tipping others, but many are in the industrial, manufacturing and textiles sectors, investors said. Those sectors are attractive because they offer relatively high recovery values. "They have reasonable collateral and solid asset bases, which provides more comfort than information technology or services companies," said Art Zimmer, senior v.p. and leveraged loan portfolio manager at OppenheimerFunds. "If you're a secured lender, your ultimate recovery is what you get for the collateral." Dealers said six banks, most prominently BANK ONE and Bank of America, are cleaning their balance sheets and eliminating lesser-known credits. "Half of it you've never heard of before. It's up to you to do the leg work," the dealer said. "This is called making money the old-fashioned way: Instead of buying something and hoping it trades up, you buy it and create a market for it." A spokesman at BANK ONE confirmed that the firm is actively managing its loan portfolio and eliminating minimally performing credits. A spokeswoman at B of A also confirmed that the firm has been cleaning its balance sheet and has sold off $800 million in nonperforming credits year-to-date. She declined to name any of the credits being sold. Zimmer said now is an opportune time for investors, and agreed lesser-known credits are beginning to seep into the market as a result of portfolio cleaning. One dealer noted that the appearance of "no-name" credits is a boon for smaller desks. While big desks are focused on managing the staple credits, smaller shops can jump in on a ripe opportunity to pick up the lesser-known deals. "There are definitely a good deal of names out there that nobody's ever heard of," he said. "The big names don't have the time to deal with it."

PacifiCare Health Systems bought itself time with a credit extension after an attempt to refinance its existing bank line fell short. The company had lined up a $1 billion bank credit contingent upon the successful completion of a $600 million bond offering. But the bond deal did not fly, so Pacificare instead extended the maturity of its bank debt with a $650 million term loan and a $150 million revolver that refinances an existing $705 million in bank debt, said Suzanne Shirley, director of investor relations. The new financing will buy the company some time while it completes its turnaround plan, Shirley said. With the extension, pricing was upped to LIBOR plus 31/2%, compared to LIBOR plus 2%. There were additional covenant changes that Shirley declined to disclose at this point. Funding will go toward operating expenses. The company stuck with existing lead arrangers Bank of America, J.P. Morgan and Citigroup and did not add any new members to the 31-member syndicate. Shirley says the company is hopeful it can execute a bond offering in the future, but notes that now isn't the time. "The market just wasn't cooperative on our attempt to get high-yield financing," she said. "We certainly hope conditions improve and we can still seek an alternative type of financing. In the meantime, we're going to make progress." She noted that companies outside of the health care sector have also made unsuccessful attempts at getting a bond deal this year. PacifiCare has announced a turnaround plan which includes diversifying its product line and eventually moving beyond health insurance and getting into broader health services. "We looked at every alternative for financing since the beginning of the year. While the [bond deal] was our first choice, we knew the bank group would be supportive and a bank deal was the most viable alternative," Shirley said. "PacifiCare is in a distinct situation with the fact that we are going through a turnaround."

Riverwood International, faced with maturing credit lines, took advantage of favorable markets to ink a $635 million senior secured credit and issue $200 million of senior notes with J.P. Morgan and Deutsche Bank. Steve Myers, corporate controller of the Atlanta-based maker of coated unbleached paperboard, said the timing was right for Riverwood. "The market was good and Riverwood had some significant loans maturing, including an $80 million line due in 2002 and term loans in '03. We needed a package with good rates that would secure our liquidity position." Myers said the company sought proposals from several banks. "A decision was made based on pricing and maturity schedules," he added, though there was little significant difference in the actual pricing proposed by the banks. He could not provide further comment on the different pricing levels and declined to name the unsuccessful bidders. Chase Manhattan Bank, now J.P. Morgan, was the lead on the previous loan. That deal had a slightly larger revolver at $400 million compared to the $300 million now. The option to issue bonds and reduce the revolver was attractive because the fixed-rate on the notes makes it easier to manage interest-rate risk and it is better for forecasting purposes and swap agreements, explained Myers. The credit is split into the $300 million revolver and $335 million term loan, both maturing in 2006 and carrying all-in pricing of LIBOR plus 23/4%. The term loan begins to amortize in two years. Myers said $51 million was drawn on the revolver.

The Mills Corporation, an Arlington, Va., real estate investment trust, is seeking a new $100-150 million credit line and is now accepting term sheets from banks. "We are talking to a lot of banks," said Kenneth Parent, cfo and executive v.p., declining to elaborate. The REIT is seeking pricing that is similar to its current line, which is priced at LIBOR plus 2 3/4%. Banks including Banc of America Securities and Fleet Securities are interested in the business, bankers said. Salomon Smith Barney is also a likely applicant, given its participation in the REIT's recent $84 million equity offering. "We hope they come into our line," Parent said. HypoVereinsbank, which leads the REIT's existing credit along with Commerzbank, may also look to lead this line. The REIT will make its decision based on the bank's ability to provide an overall relationship. "That and pricing, of course," he said.

Fixed-income retail analysts and investors were stunned last week when Standard & Poor's upgraded Target Stores from A to A+. "From a balance sheet and cash flow perspective, it's tough to look at the story and believe they merit an upgrade," says Matt Clark, an analyst at Morgan Stanley. Several observers note that the discount retailer was not on review for an upgrade, and had only a "stable," rather than "positive," outlook from the agency. As the economy continues to slump, an upgrade to an increasingly leveraged retailer struck many as bizarre. Standard & Poor's own retail group head Jerry Hirschberg wrote in a report last month that "the outlook for credit quality [in the sector] is bleak."