Steel Group Stable Before Acquisition; Davita Upgraded

International Steel Group's (ISG) relatively moderate leverage, good competitive cost position, and growth in value-added products led Moody's Investors Service to affirm a Ba2 rating on the company's term loan "B" and consider upgrading the Ba2 rating on the company's secured credit facility. Additionally, Moody's assigned a Ba3 rating to ISG's $600 million of unsecured bonds and affirmed the Ba2 senior implied rating. The rating outlook is stable.

Proceeds from the bonds will be used to repay the company's "B" term loan. Upon completion of the bond offering, the remaining revolver will have significant collateral supporting it, said Carol Cowan, a v.p. and senior analyst for Moody's.

Though ISG's operating performance was weaker than expected in 2003, the stable outlook reflects Moody's views that the company will successfully continue to implement its strategic business plan and show improving operating performance in 2004. The outlook also considers the improved demand for steel and ISG's good product base. EBITDA for 2003 was $79.5 million. According to Cowan, challenges include the ease and liquidity of the company's acquisitions, the types of synergies put into them and the discipline of their leverage. An ISG spokesperson did not return calls.

*DaVita's $120 million senior secured credit facility and $115 million revolver was upgraded to Ba2 from Ba3 by Moody's. The company's senior implied rating has also been upgraded to Ba2 from Ba3. The upgrade reflects the decrease in the company's leverage after its recapitalization in 2002, continued favorable operating performance and positive industry growth trends. The upgrade also considers withdrawn uncertainties over possible near term Medicare reimbursement changes.

However, Moody's ratings are constrained by the dialysis service provider's still moderately high leverage, lack of business diversification, high concentration of revenues from the administration of its EPO drug, high dependence on government reimbursements, and financial policy focused on shareholder's value.

According to the rating agency, DaVita has delevered rapidly through a combination of growth and debt repayments. Leverage has declined to about 2.7 times for 2003 from 2001 pro-forma leverage of four times. Adjusted EBITDA for 2003 was 3.4 times. A DaVita spokeswoman did not comment by press time.