S&P cuts Solectron

Standard & Poor's lowered the ratings of Solectron Corp. senior debt to BB- from BB and subordinated debt to B from B+. At the same time, S&P assigned a BB rating to the new $450 million senior secured bank revolver. The outlook is negative.

The downgrade reflects a weaker-than-expected sales forecast for the May 2003 quarter and the company's plans to undertake additional restructuring, S&P said.

Liquidity is adequate, with a cash and short-term investments balance of $2.1 billion in February, and the new $45 million credit facility is fully available.

Debt levels were reduced by more than 20% in fiscal 2002 by using in excess of $1 billion of cash to repurchase debt and S&P expects the company to use cash toward the $522 million put on its convertible in May 2003.

With regard to Solectron's $1.1 billion convertible that is putable in 2004, S&P believes there is sufficient financial flexibility to meet the put.

Failure to improve operating performance and credit measures, which are weak for the current rating, over the intermediate term could result in lower ratings.

Fitch cuts Fleming

Fitch Ratings downgraded Fleming Cos. Inc.'s secured bank facility to B from BB, senior unsecured debt to CCC from B+ and senior subordinated debt to CC from B-.

The downgrade was due to the significant weakness in operating performance, uncertainty on the status of efforts to amend or renegotiate the existing secured bank facility and the lack of clear direction for Fleming from what may be a transitional management team.

The ratings remain on negative watch until further clarity is provided as to its strategic and operating plans going forward.

Fitch believes Fleming's tenuous financial position renders its ability to continue to manage its existing obligations questionable.

Moody's rates Lennox

Moody's Investors Service assigned first-time ratings to Lennox International Inc., including B1 on the $143.75 million of 6.25% convertible subordinated notes due 2009. The outlook is stable.

The ratings reflect healthy free cash flow generating ability, strong market position and respectable balance sheet leverage, Moody's said.

At the same time, the ratings take into account that the economic softness is likely to persist throughout 2003. In addition, the ratings consider that the integration process from some 110 acquisitions since 1998 is still incomplete, and that margins and returns are somewhat low.

Balance sheet leverage is acceptable for the rating and should continue to improve in coming years. Total debt to total capitalization stood at 51.4% at yearend 2002 while total debt to EBITDA was 2.6x. Moody's expects leverage to continue trending down.

Fitch cuts Omnicom

Fitch Ratings downgraded Omnicom Group Inc.'s senior unsecured debt rating to A- from A, and changed the outlook to stable from negative.

The downgrade reflects increased leverage as a result of on-going acquisitions and recent share repurchases combined with expectations that the pace of reestablishing previous credit metrics will be slow.

While recent efforts to strengthen the credit profile, including the cessation of share repurchases and a reduction in acquisition levels, are encouraging, leverage remains above levels consistent with an A rating, Fitch said.

Year-end 2002 debt/EBITDA leverage was 1.6x and debt/EBITDAR was 3.4x, compared with targets of around 1.0x and 3.0x, respectively.

Further, even at reduced levels, acquisitions will continue to absorb sizable portions of free cash flow after capital expenditures and dividends.

While discretionary acquisitions have been reduced, earn-out obligations are significant and limit the ability of the company to improve the balance sheet.

Also of concern is the company's short-duration debt profile, puts on its convertibles, which requires the company to address sizeable short-term events two times per year, Fitch said.

Moody's raises Key Energy

Moody's Investors Service upgraded Key Energy Services, Inc. including raising its $150 million senior secured revolving credit maturing 2005 to Ba1 from Ba2, $275 million 8 3/8% senior unsecured notes due 2008 to Ba2 from Ba3 and $97.5 million 14% senior subordinated notes due 2009 and $49.7 million 5% convertible subordinated notes due 2004 to Ba3 from B2. The outlook is stable.

Moody's said the upgrade reflects Key's demonstrated reduction of leverage, its track record of issuing new equity for acquisitions, enhanced downcycle earnings and cash flow resulting from critical mass of repeatable business in a durable segment of the oil and gas industry, and a strategic shift from maximizing asset utilization to a more bottom-line business model.

Moody's said that Key has achieved significant debt reduction and balance sheet strengthening after near ruinous leveraged acquisitions completed through 1999.

Management demonstrated its skill of delevering the company while remaining an active consolidator in the oil and gas services sector. In conjunction with completing the 16 acquisitions since 1999, Key raised approximately $323 million of new equity and issued $32 million of equity for the purchases, while reducing debt by $364 million from its peak of $867 million at March 31, 1999.

As a result, Key's debt/capitalization (adjusted for capitalized leases) declined from 88% at March 31, 1999 to 42% as of Dec. 31, 2002, with run rate debt/EBITDA improving from 9.6x at June 30, 1999 to 3.2x at Dec. 31, 2002.

S&P confirms El Paso

Standard & Poor's confirmed El Paso Corp.'s ratings including its senior unsecured debt at B, El Paso CGP Co.'s senior unsecured debt at B and the senior unsecured debt of Tennessee Gas Pipeline Co., El Paso Natural Gas Co., ANR Pipeline Co., Colorado Interstate Gas Co. and Southern Natural Gas Co. at B+. The outlook remains negative.

S&P said the confirmation reflects a settlement reached in principle with the state of California relating to El Paso's bidding practices and market power issues pertaining to natural gas pipeline capacity in California.

The settlement, which is in line with expectations and suitable for current ratings, will minimally effect the company's current liquidity and should improve the company's ability to renegotiate its $3 billion credit facility maturing in May, S&P said. The settlement includes an up-front cash payment of $100 million, the payment of $22 million per year (half of which can be in stock) over 20 years, delivery of $45 million of natural gas per year to the California border over 20 years, reduced sales price of El Paso's long-term power contracts with the California Department of Water Resources by $125 million through 2005, and $125 million in common stock.

El Paso's ratings continue to be pressured by continued reductions in cash flow estimates, ongoing refinancing risk, the inability to successfully meet debt reductions goals, and a stressed liquidity position, S&P added. Reduced cash flow expectations are due primarily to lower capital spending at the exploration and production unit while at the same time the company's financial improvement has been prolonged by the need to use cash to fulfill collateral and margin posting requirements versus paying down debt. Continued deterioration in El Paso's cash flow to interest coverage measures are foreseen due to higher current and anticipated borrowing rates for all El Paso entities.

Of paramount importance to the company's ability to maintain current ratings and an adequate liquidity position is the renegotiation of its $3 billion credit facility and regaining access to the capital markets at the holding company level, S&P said. The likelihood of successful resolution of these issues has improved as a result of the proposed settlement with California. Thus, executing on planned asset sales (targeted at $3.4 billion in 2003) is crucial to meeting debt maturities and accounting for the continued shortfall in cash flow (expected at about $2.5 billion in 2003) versus capital spending ($2.6 billion) and dividend requirements ($200 million) in 2003.

The negative outlook reflects significant hurdles the company faces in renegotiating bank facilities, regaining access to the capital markets at the holding company level, halting the erosion in cash flow, and receiving final approval of its settlement with California, S&P added. Successful execution in these matters could ultimately lead to ratings stability and upward credit momentum.

S&P cuts ACE convertibles

Standard & Poor's downgraded some ratings of ACE Ltd. including lowering its $300 million 8.25% Feline Prides to BBB- from BBB and removed it from CreditWatch with negative implications. The outlook is negative.

S&P said the downgrade to ACE Ltd. is to reflect standard notching under its criteria and the belief that ACE's earnings capacity has not been predictable enough for the company to operate at an additional (nonstandard) financial risk level.

ACE's insurance subsidiaries were confirmed.

The ratings were put on watch after ACE announced that its earnings for 2002 were $354 million (net after taxes) lower than had been expected because of asbestos reserve strengthening.

To address immediate capital-adequacy concerns and reinforce its property/casualty insurance operations' capital structure, ACE Ltd. is expected to raise $500 million by offering perpetual preferred securities in the near term, S&P noted. This action, combined with projected earnings and cash flows for 2003, should allow these operations to organically replenish their capital bases.

S&P said the negative outlook reflects its belief that ACE's near-term earnings potential and financial strength will continue to be burdened by its parent's capital management pressures, sizable goodwill, and material exposure to credit risk.

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