Moody's cuts ABB

Moody's Investors Service downgraded ABB Ltd. and its subsidiaries to junk including lowering the senior debt to Ba2 from Baa3, affecting $8.4 billion of securities.

Moody's said it cut ABB in response to its deteriorating operating performance and cash flow generation, the liquidity and refinancing needs faced by the group, the execution risks related to the accelerated restructuring program and the disposals of key assets.

Also playing into the downgrade are uncertainties about the resolution of the company's exposure to asbestos litigation.

The current rating assumes that ABB will successfully complete the disposal of the structured finance portfolio, a cornerstone to ABB's de-leveraging strategy, Moody's added. This would likely lead to a confirmation of the rating at the Ba2 level.

For the nine months period ending Sept. 30, cash flow generated from operations was negative $234 million. While the company confirmed in its result announcements that it expects positive cash flows from operations in the fourth quarter of 2002, Moody's expects the surplus for the year to remain modest in the context of substantial refinancing needs.

Moody's anticipates also that an improvement in the group's operating performance will require decisive and rapid implementation of its cost reduction plan and no further deterioration of the trading environment. Accordingly Moody's assumes that ABB will continue to perform substantially below historic cash flow patterns well through next year and will rely almost exclusively on asset disposals in a difficult investment climate to reduce its debt and return to debt protection measures reflective of the current Ba rating.

ABB faces a substantial refinancing risk with debt maturities of about $4.0 billion over the next 15 months and of $1.4 billion in the fourth quarter of 2002, Moody's added. Sources for the refinancing rely critically on the timely conclusion of the Structured Finance divestment before Dec. 17, a cornerstone of the refinancing strategy, as well as a near-term generation of free cash flows to create financial flexibility.

Moody's upgrades Pogo

Moody's Investors Service upgraded Pogo Producing. The outlook is stable. Ratings raised included Pogo's $200 million 8.25% senior subordinated notes due 2011, $100 million 8.75% senior subordinated notes due 2007, $150 million 10.375% senior subordinated notes due 2009 and $115 million 5.50% convertible subordinated notes due 2006 to Ba3 from B1.

The stable outlook is pending review of 2002 reserve and reserve replacement costs and avoidance of debt-laden acquisitions of scale, Moody's said.

Moody's said the upgrade reflects: productive reinvestment of strong cash flow and sustained diversified production gains; expected reduction in year-end 2002 leverage on proven developed reserves; visibility for 8% to 12% 2003 production gains and increasing visibility for 2004 on solid second-half 2002 drilling and development activity; lower unit operating and funding costs; expected falling leverage absent leveraged acquisitions; sound liquidity; solid cash-on-cash returns on 2001 3-year average reserve replacement costs; and historically conservative reserve bookings.

Moody's said it expects 2002 to be the eleventh year of reserve replacement with the drillbit and substantial 2002 conversion of proven undeveloped reserves to proven developed status.

Moody's upgrades Emcor

Moody's Investors Service upgraded Emcor Group, Inc. including raising its senior unsecured issuer rating to Ba2 from Ba3 and maintained its positive outlook.

Moody's said the upgrades and positive ratings outlook recognize the company's well established market positions across a broad range of electrical, mechanical, and facilities service offerings, its geographic diversity, its relatively strong earnings performance even in the face of weak commercial and industrial construction markets, and its strong balance sheet and liquidity position.

However Emcor also has low operating margins, which are characteristic of its industry, is dependent on fixed-price contracts, faces event risk and integration risk associated with an acquisition growth strategy, and will likely rely on substantial debt financing for future acquisitions (the company has a $275 million senior secured bank credit facility, which is not rated by Moody's, that was undrawn at Sept. 30, 2002, plus the ability to borrow up to an additional $200 million of long-term debt).

The ratings also consider the company's reliance on the more cyclical new construction segment (46% of 2001 revenues), intense competition in the company's markets, and the cyclicality of the commercial and industrial sectors that it serves, Moody's said.

Emcor has been very successful at focusing on slower-burn contracts, particularly in the public and institutional sectors, which have mitigated the impact of the sharp reduction in its fast-track telecom work. As a result, the company has prospered in a difficult market while its competitors continue to face increasing difficulties, Moody's said. This has led to Emcor's backlog at September 30, 2002 growing to $2.8 billion, which is conservatively calculated because it generally excludes contracts under $250,000 and facilities work that extends beyond one year.

S&P confirms USI

Standard & Poor's confirmed USI Holdings Corp., removed it from CreditWatch with developing implications and assigned a positive outlook. Ratings affected include USI's $125 million bank loan and $75 million revolver, both at B+.

S&P said the action follows USI's successful completion of its IPO, selling 9 million shares for total gross proceeds of $90 million.

Net proceeds of about $78.4 million will be used to pay down debt, substantially reducing total-debt-to capital to 45.3% from the pre-IPO level of 68.5%, S&P noted.

The offering had been repeatedly delayed and ultimately reduced in size from initial price targets. However, the decreased leverage, pro forma equity in excess of $160 million, and the first quarter of positive net income in the company's history in the second quarter of 2002 place the company on a surer footing than its pre-IPO capitalization and operating levels, S&P said.

Through June 30, 2002, the company has a year-to-date pretax loss from continuing operations of $10.3 million, consisting of a first-quarter pretax loss of $13.2 million and second-quarter pretax income of $2.9 million.

S&P said it believes that the company should be better positioned to continue to further penetrate its target niche market of businesses with 20-999 employees and grow both organically and through measured acquisitions.

S&P puts Goodyear on watch

Standard & Poor's put Goodyear Tire & Rubber Co. on CreditWatch with negative implications. Ratings affected include Goodyear's $100 million 6.375% senior notes due 2008, $150 million 7% notes due 2028, $250 million 6.625% notes due 2006, $300 million 8.125% notes due 2003, $300 million 8.5% notes due 2007, $650 million 7.857% notes due 2011, $800 million term loan due 2004, €400 million 6.375% bonds due 2005 and SFR158 million 5.375% bonds due 2006, all at BB+.

S&P said the watch placement is in response to to concern over Goodyear's financial performance relative to expectations and the likely need to dedicate substantial near-term cash flow to address its underfunded pension benefit obligation.

Third-quarter 2002 results showed EBIT underperformance relative to S&P's expectations, due largely to disappointing results in the North American tire segment.

Although the company's other six operating segments reported improved operating income for the third quarter year-over-year, the North American tire segment accounts for 50% of Goodyear's sales, 30% of income, and over 40% of assets, S&P noted.

S&P added that it is concerned about the adequacy of the company's ongoing restructuring actions to improve revenues and margins in the North American segment over the near term.

In addition, the company indicated that its underfunded benefit obligation is estimated to total $2 billion at year-end 2002, compared with $1 billion at Dec. 31, 2001, due to the decline in market valuation of the plan assets, S&P said.

S&P takes actions on Loral

Standard & Poor's lowered Loral Space & Communications Ltd.'s corporate credit rating to SD (selective default) from CC and cut its series C and series D preferred stock to D from C. The ratings were removed from CreditWatch with negative implications.

S&P said the actions follow completion of the company's exchange offer on a portion of the preferred issues for $13.7 million cash and 45.8 million shares of common stock. The exchange represented a 93% discount off the preferred stock liquidation preference.

S&P viewed the exchange as coercive and tantamount to a default on the original terms of the preferred issues.

Following the selective default, S&P raised its corporate credit rating on Loral to CCC+ and assigned a CC rating to the preferred stock not tendered in the exchange.

Loral's CCC- senior unsecured debt rating CCC+ senior unsecured debt rating on wholly owned subsidiary Loral Orion Inc. were confirmed.

Loral modestly improved its balance sheet and increased its cash flow generating potential by completing the exchange offer, S&P noted. However, the company's liquidity remains strained.

Based on earlier company guidance, Loral should have roughly $100 million in cash and borrowing availability at year-end 2002, after accounting for cash used in the exchange offer, down from $180.7 million at June 30, 2002, S&P said.

The rating agency added that it is concerned that Loral could exhaust its remaining liquidity in 2003, given the potential for continued satellite leasing and manufacturing industry weakness.

S&P puts ClubCorp on watch

Standard & Poor's put ClubCorp Inc. on CreditWatch with negative implications including its corporate credit rating at B+, affecting $674.2 million of debt.

S&P said the action is in response to ClubCorp's weaker-than-expected third quarter operating performance, its modest covenant cushion, and limited liquidity.

ClubCorp has some borrowing availability remaining on its revolving credit facility, and the access to capital market is limited, S&P said. The company's performance has been adversely affected by the soft economy and negative travel trends. Memberships and golf rounds at its business/sports clubs and golf facilities declined, and the travel slump pressured occupancy rates at its resort properties.

Operating performance is expected to remain weak for the medium term until the economy strengthens, S&P added. On the other hand, the company has made significant progress in divesting under-performing and non-core properties.

S&P says Qwest unchanged

Standard & Poor's said its ratings on Qwest Communications International Inc. are unchanged including its corporate credit rating at B- with a developing outlook.

S&P's comments follows Qwest's announcement that it expects to report a goodwill impairment charge of approximately $24 billion as of Jan. 1, 2002, as part of its adoption of financial accounting standard requirements for goodwill impairment, and could potentially write off additional goodwill, based on business conditions in the telecommunications industry.

Qwest also indicated that it expects to record a total of $10.8 billion in write-offs related to its assessment of the recoverability of its traditional telephone network and global fiber optic broadband network and its evaluation of the carrying value of its inter-exchange carrier businesses' intangible assets related to customer lists and product technology.

Qwest's announced write-down of goodwill is in keeping with its previous disclosure that it was evaluating its goodwill for impairment under the statement of financial accounting standards (SFAS) 142, S&P said. The imposition of this accounting standard was therefore already factored into the rating.

The write-down of network and other assets reflects the adverse business trends that have affected the company's operations, and the attendant drop in value that has occurred. However, these business risks have already been factored into the current rating and outlook, S&P said.

Management has indicated that the incurrence of these write-downs does not trigger any violation of the public debt or bank loan covenants of Qwest or any of its subsidiaries. As such, the write-downs do not result in any change in Qwest's liquidity, S&P added.

Moody's cuts A&P

Moody's Investors Service downgraded Great Atlantic & Pacific Tea Co., Inc., concluding its review. The outlook is negative. Ratings lowered include A&P's $425 million secured revolving credit facility, cut to Ba3 from Ba2, and its $22 million 7.70% senior notes due 2004, $242 million 7.75% senior notes due 2007, $275 million 9.125% senior notes due 2011 and $200 million 9.375% senior notes due 2039, all cut to B3 from B2.

Moody's said it downgraded A&P because of the long-term decline in the company's competitive position, its inability to make progress at improving weak operating margins, and the continued negative free cash flow.

The rating agency took the action even thought it believes A&P has "a reasonable amount of liquidity at least for the intermediate term."

The negative outlook considers the possibility that ratings may decline if the regions outside of Ontario and New York do not meaningfully contribute, overall results are further affected by the heavy promotional activity around New York, or return on assets does not improve, Moody's said.

S&P cuts OM Group

Standard & Poor's downgraded OM Group Inc. and put it on CreditWatch with negative implications. Ratings lowered include OM Group's $325 million senior secured revolving facility and $600 million term C bank loan due 2007, cut to BB- from BB and its $400 million 9.25% senior subordinated notes due 2011, cut to B from B+.

S&P said the downgrade is in response to OM Group's liquidity coming under stress due to probable financial covenant violations, the unexpected dismal earnings performance, and the likelihood for a continuation of a weak economy well into 2003.

The company has $170 million of availability under its credit agreement, but there is the potential for non-compliance with debt covenants at Dec. 31, 2002, because of expected further deterioration of operating results in the fourth quarter, S&P said.

Moreover, the price of cobalt is expected to remain low through 2003, reflecting the tough market environment and the lack of foreseeable improvement in the demand for super alloys, S&P added. The $108 million noncash inventory writedown in the 2002 third quarter reflected this cobalt price outlook and the company's decisions to start liquidating cobalt inventory to generate cash and to reduce cobalt production in the fourth quarter.

Although some debt reduction has occurred this year, total debt to EBITDA is in the area of 5.0 times, a level aggressive even for the revised BB- corporate credit rating, S&P said.

S&P rates Veritas DGC loan BB+

Standard & Poor's assigned a BB+ rating to Veritas DGC Inc.'s planned $200 million term loan due 2007 and $75 million revolving credit facility due 2005. The outlook is stable.

S&P said the ratings on Veritas reflect its participation in the highly competitive, cyclical, capital-intensive seismic services segment of the petroleum industry, and moderate financial leverage.

Over the past few years, the seismic services industry has been plagued by excess capacity, S&P noted. A shift toward multiclient services has increased the industry's capital requirements, essentially forcing seismic operators to shoulder a greater degree of financial risk.

Although the four largest seismic companies account for roughly 80% of the market, Veritas' proposed merger with Petroleum GeoServices Inc. was viewed as important for better rationalizing industry conditions. With that merger cancelled, Veritas competes with WesternGeco, a joint venture between oilfield services behemoths Schlumberger Ltd. and Baker Hughes Inc., the financially distressed Petroleum GeoService, and Compagnie Generale de Geophysique, which is a smaller competitor.

Without further industry consolidation and a shake-out of excess capacity, S&P said it believes seismic market conditions will continue to be challenging.

Veritas compensates for its participation in a difficult industry by maintaining moderate financial leverage, with total debt-to-total capital expected to remain around 25% and total debt to EBITDA likely to remain below 1.0 times, S&P said. While the company historically has outspent its operating cash flow due to hefty investment in its multiclient library, management has publicly stated that it is targeting free operating cash flow in 2003. EBITDA interest coverage is expected to remain above 10.0x in the near-to-medium-term, or about 4.0x adjusting EBITDA for multiclient expenditures.

S&P puts Navistar on watch

Standard & Poor's put Navistar International Corp. and Navistar Financial Corp. on CreditWatch with negative implications. Ratings affected include Navistar International's $100 million 7% senior notes due 2003 and $400 million 9.375% senior notes due 2006 at BB and $250 million 8% senior subordinated notes due 2008 at B+.

S&P said the watch listing is in response to its concerns that the loss or postponement of the Ford Motor Co. V6 diesel engine business, combined with heavy cash outlays associated with the recently announced $456 million restructuring charge and continued challenging end market conditions, could pressure the credit profile and cash flow.

Additionally, the company has approximately $200 million in manufacturing debt maturities it needs to refinance in the next 12 months, which heightens financial risk, S&P said.

In the past Navistar has tried to diversify to help reduce its exposure to the cyclical swings in the truck market, as evidenced by its role as a leading supplier of mid-range diesel engines to Ford, S&P noted. However, Navistar announced that Ford no longer considers the V6 diesel engine program viable and commencement of Navistar's production is very uncertain. Accordingly, Navistar is taking a $120 million to $130 million after-tax charge associated with assets directly related to the V6 program.

The longer-term impact of this event on Navistar's engine strategy is unclear, as the V6 program had been viewed as a significant factor in its engine growth strategy, S&P said.

Elements of the $456 million restructuring charge include costs associated with the closing of the Chatham, Ont., heavy-duty truck facility, and the ceasing of operations at its body plant located in Springfield, Ohio; asset write-downs related to the company's V6 diesel engine program with Ford; and costs related to exiting the Brazilian domestic truck market. Cash outlays associated with this charge are significant and come at a time when cash generation is weak as a result of soft market conditions, S&P said.

Navistar continues to experience very challenging end market conditions. The company's key end markets, heavy-duty and medium-duty trucks, are expected to continue to experience very weak demand over the near term, reflecting the reluctance by trucking customers to place orders for new trucks during the current soft economic conditions in the U.S., S&P added.

S&P cuts NDCHealth, rates loan BB-, notes B

Standard & Poor's downgraded NDCHealth Corp. and assigned a BB- rating to its planned $125 million term loan due 2008 and a $75 million revolving credit facility due 2007 and a B rating to its proposed $175 million senior subordinated notes due 2012. Ratings lowered include the corporate credit rating, cut to BB- from BB and its $143.75 million 5% convertible subordinated notes due 2003, cut to B from B+. The outlook is stable.

Proceeds from the notes and the term loan, totaling $300 million, would be used to redeem $144 million in outstanding convertible notes due November 2003, to repay $91 million of the company's existing revolving credit facility, and to bolster cash balances. The new $75 million revolving credit facility would be unused and available.

By May 2003, NDCHealth is expected to acquire the remaining interest in TechRx Inc., a provider of software that automates the prescription-fulfillment process. The price, expected to be $100 million-$200 million, can be paid in cash or equity, or a combination of both at the company's option, S&P noted.

NDCHealth has historically maintained EBITDA interest coverage exceeding 5 times and total debt to EBITDA of less than 2.5x on average, S&P said. Assuming funding of a mid-range purchase price primarily with debt and cash on hand, increasing leverage, debt-protection measures are expected to fall outside these parameters.

Despite expectations for acquisition-based and internal sales growth, profitability gains could be muted and capital spending could increase over the near term, while the company integrates new products, challenging free cash flow, S&P said. While NDCHealth has generated about $30 million in free cash flow in each of the past two fiscal years, which ended in May, free cash flow in the August 2002 quarter was negative. Still, ratings continue to reflect a good niche market position and recurring revenue streams, as well as expectations that the company's cash-flow generation capability will improve, despite near-term challenges. These are offset by a narrow business profile and moderate financial flexibility.

S&P cuts S-C Newco, P-G Newco

Standard & Poor's downgraded S-C Newco LLC and P-G Newco LLC and kept them on CreditWatch with negative implications. Ratings lowered include the issuer's $210 million senior secured term loan due 2005, cut to B- from B+.

S&P said the action reflects the adverse impact that recent aviation industry pressures have had on collateral values and cash flow streams.

The bank facility is secured by a first-priority interest in the assets of the borrowers and their subsidiaries, which consists of a portfolio of medium-size widebody freighter aircraft, S&P noted.

The ratings remain on CreditWatch due to concerns over near-term liquidity and covenant compliance. The company is currently negotiating with lenders to amend the existing credit facility, S&P said.

Ratings were initially assigned based on a loan to value of around 50%. As a result of industry pressures over the past year, the value of the collateral has declined and asset protection levels have deteriorated even though a significant amount of principal has been amortized over the past two years, S&P said. Industry pressures have also had an adverse impact on lease payment streams and have made it more difficult to complete required aircraft sales. Standard & Poor's expects industry conditions to remain challenging over at least the near term.

S&P puts Revlon on watch

Standard & Poor's put Revlon Consumer Products Corp. and REV Holdings, Inc. on CreditWatch with negative implications. Ratings affected include REV Holdings' $80.522 million 12% notes due 2004 at CCC- and Revlon Consumer Products' $117.9 million bank loan due 2005 and $132.1 million revolver due 2005 at B, $363 million 12% notes due 2005 at B- and $250 million 8.125% senior notes due 2006, $250 million 9% senior notes due 2006 and $650 million 8.625% subordinated notes due 2008 at CCC.

S&P said the watch placement reflects Revlon's reduced liquidity position, which has continued to weaken because of negative operating cash flow.

Furthermore, Revlon has announced it may not be in compliance with its bank financial covenant of minimum EBITDA of $210 million for the quarter ending Dec. 31, 2002, due to the company's weaker-than-expected operating performance and anticipated soft 2002 holiday selling season, S&P said.

S&P added that it remains very concerned that Revlon's liquidity position may be severely stressed over the near term given the pace at which the company's cash balances are depleting and credit facility availability is reducing.

Revlon's financial flexibility has declined substantially in 2002; availability under the $132.1 million revolving credit facility declined to $32 million at Sept. 30, 2002, from $104 million at Dec. 31, 2001. Furthermore, cash balances have dropped to $59 million at Sept. 30, 2002, from $103 million at Dec. 31, 2001.

S&P rates Owens-Brockway notes BB

Standard & Poor's assigned a BB rating to Owens-Brockway Glass Container Inc.'s proposed $300 million senior secured notes due 2012 and confirmed all ratings on Owens-Illinois Inc. and related entities including Owens Illinois' senior unsecured and senior secured debt at B+ and preferred stock at B and Owens Illinois Group Inc.'s senior secured bank loan and senior secured debt at BB.

S&P said the confirmation incorporates expectations that Owens-Illinois' asbestos liability will remain manageable and that management's efforts to improve cash flow protection measures will be realized in the near to intermediate term.

The ratings reflect the company's aggressive financial profile and meaningful concerns regarding its asbestos liability, offset by an above-average business position and strong EBITDA generation, S&P added. Owens-Illinois' above-average business risk profile reflects the company's preeminent market positions (which are bolstered by superior production technology), operating efficiency, and the relatively recession-resistant nature of many of its packaging products.

Although Owens-Illinois' financial results reflect a degree of exposure to changing conditions in regional economies and the vagaries of currency swings, the breadth of operations tends to provide better growth opportunities and more stability during the business cycle than that of many other industrial companies, S&P noted. Owens-Illinois' leading cost position is demonstrated by strong EBITDA margins averaging about 25%, a level that soundly tops its peer group.

Owens-Illinois has had to make sizable payouts for asbestos-related claims, with 2001 seeing the peak payout at $245 million, S&P said. The acceleration in its asbestos payouts was due to increased levels of filings and management's proactive efforts to resolve claims.

Net payouts in 2001 were reduced by proceeds from insurance settlements, however, the bulk of Owens-Illinois' insurance coverage has now been utilized. The company took a charge of $475 million in the first quarter of 2002 to increase the reserve for estimated future asbestos-related costs to a total of $712.5 million. The increase raises concern because the liability has exceeded earlier estimates and suggests that Owens-Illinois' obligations relative to asbestos may decline more slowly than previously expected, S&P said. Still, Owens-Illinois expects that its asbestos-related cash payments in 2002 will be about 10% lower than 2001 payments and should continue to decline thereafter.

S&P added that it differentiates Owens-Illinois' asbestos litigation from many other defendants, in that the company exited the business several years earlier, has a much older claimant base (average age 76), and is receiving fewer claims.

Moody's cuts Forest City Rental

Moody's Investors Service downgraded of Forest City Rental Properties to Ba2 from Ba1 and confirmed Forest City Enterprises, Inc. at Ba3. The outlook is stable.

Moody's said it downgraded Forest City Rental's bank debt based on its evaluation of the expected credit loss differential between the debt of the operating subsidiary and Forest City Enterprises, the holding company. The higher likely recovery for the debt of Forest City Rental Properties warrants a one notch differential to reflect its seniority and priority of claim, Moody's added.

The confirmation of Forest City Enterprises' Ba3 rating reflects the firm's diverse, well-established business franchise of developing and operating mixed-use projects, which are offset by the current difficult real estate cycle, a leveraged capital structure and a substantial development program, Moody's added.

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