Fitch says rating outlook for upstream oil & gas stable, price seen lower in 2002

While oil and gas prices have declined, the upstream sector of the industry has derived much benefit from the last two years of high prices, which Fitch said has lead the rating agency to assign a stable rating outlook to the upstream segment. Prices for West Texas Intermediate crude oil averaged $30.36 per barrel in 2000 and will average around $26.00 per barrel in 2001. Meanwhile, natural gas prices averaged about $4.29 per million cubic feet in 2000 and will average around $4.00 million cubic feet in 2001. Prices during the last two years for WTI are nearly 50% above their historical averages of $19 per barrel to $20 per barrel.

"As a result of current prices remaining in line with historical averages and current expectations of midcycle-type hydrocarbon pricing, Fitch has assigned a stable outlook for the upstream segment of the oil and gas industry," said Sean Sexton, senior director, Fitch, who also said, "Global demand will wane and fundamentals of supply and demand will force oil lower, while high inventory levels coupled with decreasing industrial demand will factor into lower gas prices." Waning global and industrial demand are likely to drive the prices of oil and gas lower and keep them there for the near to intermediate term, according to Fitch. Fitch has lowered its price forecast for oil and gas to $19.50 and $2.15, respectively, for 2002.

S&P says insurers could suffer from terrorism regulations

Commercial insurers face a potentially untenable situation if the federal government fails to pass legislation that would help cushion terrorism costs to the industry by the end of November, and if state insurance regulators do not allow terrorism exclusions from commercial policies by year-end, Standard & Poor's said Monday. With recent delays in passing Federal backstop insurance legislation and no clear indication that states will allow policy exclusions, it is becoming more likely that insurers may have to choose between continuing to offer terrorism coverage and withdrawing completely from commercial risks. Either choice would result in rating downgrades.

"With each day that Federal legislation is not passed, pressure mounts on commercial insurers to withdraw from lines of business that unduly expose their capital to these potentially large and unpredictable risks," said Steve Dreyer, head of S&P's insurance ratings. "To ensure continuity of coverage through 2002, the industry and insurance regulators would need at least a month, we believe, to react to federal government legislation. While many companies are willing to provide commercial insurance cover excluding these risks, they have generally found state regulators unreceptive to allowing terrorism exclusions on commercial insurance policies. If legislation is not passed and state regulators do not allow exclusions, property/casualty insurers that concentrate on commercial lines will be caught in a squeeze that could have serious financial consequences."

S&P puts Elektrim on negative watch

Standard & Poor's put Elektrim SA on CreditWatch with negative implications. Affected ratings include the company's B senior unsecured rating.

S&P said the CreditWatch placement reflects concern over possible short-term refinancing risk. It noted holders of Elektrim BV's €440 million of convertible bonds sold in July 1999 can put the bonds at 109.22% on Dec. 15, 2001. The potential resulting liability totals about €481 million.

S&P commented: "Elektrim is currently negotiating a €330 million bank facility, which would enable it to restructure its debt successfully and fully cover the potential liability of the put option. If the facility were not available, the company might not be in a position to fully redeem the bonds and pay the redemption premium based on its current liquidity position and limited financial flexibility."

S&P downgrades Exide, still on negative watch

S&P downgraded Exide Technologies and Exide Holdings Europe SA and kept the ratings on CreditWatch with negative implications, where they were placed Aug. 31, 2001. Ratings affected include the senior unsecured rating and the subordinated debt, both cut to CC from CCC, and the senior bank loan, cut to CCC from B-.

S&P said believes "there is an identifiable risk that Exide could default on its debt obligations within the coming year."

S&P said it is worried about: "The recent deterioration in Exide's operating results; the likelihood that weak industry fundamentals will prevent the company from achieving any material improvement in operating results over the near term; the company's currently constrained liquidity; the likelihood that the acceleration of restructuring efforts will put additional pressure on liquidity in the near term; and the heavy debt service burden the company faces."

Fitch downgrades XO

Fitch downgraded XO Communications' senior secured rating to CCC- from B, its senior unsecured rating to CC from CCC+ and its convertible subordinated note rating to C from CCC-. It also put the ratings on Rating Watch Negative.

Fitch said the downgrade reflects "the increased risk of bankruptcy due to the low degree of flexibility the company has within its bank covenants, the company's announcement that it hired an investment banking firm to help restructure its debt and the overall negative economic and industry conditions which could pressure the financial achievement that is required."

Fitch said it is specifically concerned XO will not be able to meet its fourth quarter of 2001 and its first quarter of 2002 revenue covenants of $375 million and $400 million respectively.

The willingness of the bank lenders to waive a potential technical default will likely be predicated on the details of XO's imminent restructuring, Fitch commented.

XO is funded through the first half of 2002 but Fitch said it needs to "raise a substantial amount of capital within the near term to fund the remaining portion of its business plan. Fitch believes the company is working on a restructuring plan that will be predicated on an equity infusion and a fully funded business plan post the restructuring. Based on the restructuring transactions for industry peers, this could involve a debt-for-equity recapitalization, causing debtholders to receive less than par value for their securities."

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