Tesoro Slicks Up; Competition Pressures Interstate

Fitch Ratings' outlook on Tesoro Petroleum Corp.'s BB- rated senior secured debt has been changed to stable from negative, reflecting the company's improving capital structure. The company has repaid its $125 million secured term loan. "We're very much focused on reducing debt," said Scott Spendlove, Tesoro's v.p. finance and treasurer. He noted that the company is currently operating with a debt-to-capital ratio around 63% and would like to reduce that ratio to the mid 50% range by the end of next year.

With the repayment, the company was able to reach its goal of reducing balance sheet debt by $500 million and management has committed to further debt reduction, notes Fitch. Ratings for the company are restrained by the company's substantial debt related to the acquisition of several refineries in 2001 and 2002. While Tesoro's credit protection measures were weak over the last year, Fitch expects that these will improve given the recent strengthening in margins.

* Weak operating performance and restructuring efforts continue to weigh on Interstate Bakeries Corp., causing Standard & Poor's to downgrade the company's corporate credit rating and senior secured bank loan rating to BB from BB+. Operating performance has been hurt by pricing pressure on its branded bread products due to declining volumes and increasing competition. In addition, S&P anticipates a three-year, $50 million restructuring project focused on creating operating efficiencies through hardware and software system upgrades to take longer than expected.

Interstate operates in a highly competitive industry, but S&P notes that the company's broad distribution could soften the effects of regional competition. The Kansas City, Mo.-based company serves markets that represent more than 90% of the U.S. population and Interstate operates a company-owned, direct-store distribution system. Still, challenges for the company include the reduction of its high fixed-cost structure associated with its distribution system, its number of high-cost thrift store outlets and relatively high employee compensation levels. Interstate's financial profile has also become aggressive with leverage over the last 12 months, reaching 3.4 times at the end of August. S&P expects that covenant ratios will remain tight for the next couple of quarters with the company's leverage covenant tightening to 3.25 times in the fourth quarter. Calls to Paul Yarick, senior v.p. finance and treasurer of Interstate Bakeries, were not returned.