Moody's lowers WorldCom to junk

Moody's Investors Service downgraded WorldCom Inc. and its subsidiaries and kept the long-term ratings on review for possible further downgrade. Lowered ratings include WorldCom's senior unsecured long-term debt to Ba2 from Baa2, preferred stock to B2 from Ba1 and commercial paper to Not Prime from P-2; Intermedia Communications Inc.'s senior unsecured long-term to B1 from Ba1 and redeemable preferred to B3 from Ba3; MCI Communications Corp. senior unsecured long-term debt to Ba2 from Baa2; MCI Capital I's backed preferred stock to B1 from Baa3; and MCI WorldCom Synergies Management Co. Inc.'s preferred stock to B3 to from Ba1.

The downgrades reflect the company's decline in operating performance, expectations for continued weakness, substantial debt load that includes maturities within the next two years and its need to restructure its maturing credit facility and accounts receivable securitization program, Moody's said. WorldCom's adjusted gross debt increased to $33.5 billion in April 2002 from $26.6 billion at the end of 2000. Adjusted gross debt to EBIDTA will reach and possibly exceed 4 times in 2002, compared to just over 2.1x for 2000. Capex is expected to decline to less than $5 billion on a consolidated basis in 2002.

The continuing review for further downgrade will focus on the company's ability to renegotiate its $2.65 billion credit facility and receivable securitization facilities. Also, the review will look into WorldCom's ability to reduce its debt burden and developments in the SEC investigation of its accounting practices.

Moody's said the Ba2 rating reflects its expectation WorldCom will be successful in its negotiations to extend its $2.65 billion 364-day credit facility which matures on June 7 and that the company will be able to arrange access to a receivable sales program in the near term, although on terms less favorable than the existing structures.

Moody's said it anticipates WorldCom may have to provide security to its bank creditors in connection with the renegotiation of its 364-day facility. Should collateral be provided, the public debt would be effectively subordinated to future outstanding bank debt.

"While the public indentures contain negative pledge clauses, Moody's believes the company has sufficient flexibility of provide collateral in its bank restructuring without tripping the most restrictive negative pledge covenant. If the company is unable to successfully restructure these facilities, a further, significant downgrade is likely," Moody's added.

Fitch cuts WorldCom to junk

Fitch Ratings downgraded WorldCom Inc.'s senior unsecured debt rating to BB from BBB-. Ratings on its preferred securities and quarterly income preferred securities were lowered to B+ from BB+ and the commercial paper rating was lowered to B from F3. In addition, Intermedia Communications' senior unsecured debt was lowered to BB- from BB+. The outlook is negative.

Fitch said the downgrade reflects the company's triggering of its accounts receivable program, "which will stress the company's ability to amend this program, and complete a renewal of its bank revolver in a credit neutral manner. The company still may be successful in amending its program and removing the rating triggers, but this will require greater structural enhancements. Anticipated structural enhancements are expected to reduce the size of the accounts receivable program and increase pressure on the company's liquidity absent an offsetting event."

The negative outlook reflects expected weak operating performance in 2002, uncertain recovery timing for data and internet products and voice long-distance business, ability to generate consistent meaningful free cash flow, ability to amend credit facilities and accounts receivable securitization program and significant debt requirements in 2003 and 2004, Fitch said.

WorldCom is expected to generate $1 billion of free cash flow in 2002. In 2003, the company has about $3.2 billion in debt maturities. Fitch anticipates that the company will rely on its credit facilities, if they are amended, and improvements in cash flow from operations to meet these debt obligations.

S&P affirms LabCorp ratings

Standard & Poor's affirmed the BBB+ corporate credit and senior unsecured debt and BBB subordinated ratings on Laboratory Corp. of America Holdings following the announcement of its planned acquisition of Dynacare Inc. for about $680 million, including the assumption of $200 million of debt.

The outlook remains stable.

LabCorp will gain a profitable and stable laboratory business in Canada, where Dynacare operates. In addition, LabCorp will have the opportunity to make its combined U.S. operations more efficient.

Still, LabCorp must successfully execute the Dynacare integration. Indeed, competition is strong and pricing will remain an ongoing issue, as third-party payors continue to focus on containing health-care costs and economic conditions remain soft.

Nevertheless, S&P expects funds from operations to lease-adjusted debt to average more than 40%, permitting maintenance of LabCorp's sound financial position.

S&P said it does not expect LabCorp to make additional large debt-financed acquisitions near term.

S&P revises Gap outlook to negative

Standard & Poor's revised the outlook on The Gap Inc. to negative from stable. The BB+ long-term and B short-term corporate credit ratings were affirmed.

The outlook revision was based on continuing negative sales trends in the Old Navy and Gap divisions, S&P said.

Gap's same-store sales declined 17% in the first quarter. S&P said it had expected Gap's comp sales to be negative in the quarter, but not to that magnitude.

The ratings reflect management's challenge to improve business fundamentals in an industry that will continue to experience intense competition and to improve its weakened credit protection measures.

Those factors are partially offset by the company's strong business position in casual apparel, its geographic diversity, and strong cash flow before capital expenditures.

Gap's credit protection measures have weakened substantially due to poor operating results and increased leverage since 1997.

EBITDA coverage of interest declined to 3.0 times in 2001, from 5.2 times in 2000 and 7.3 times in 1999.

The Gap should generate greater cash flow in 2002 through its substantial planned reduction of capital expenditures, S&P said.

The company's debt leverage is high, with lease-adjusted total debt to EBITDA at 4.7 times in 2001, including the $1.38 billion senior unsecured convertible note offering. Nevertheless, The Gap still has adequate financial flexibility, S&P said.

The company had more than $1 billion of cash on the balance sheet at Feb. 2 and the convertible issue bolsters liquidity.

S&P said the ratings could be lowered if Gap doesn't improve operating performance, especially during the second half of 2002.

Moody's lowers New World Infrastructure

Moody's Investors Service downgraded New World Infrastructure Ltd. to Ba3 from Ba1 including its $173 million 1% convertible bonds due 2003 and put it on review for further possible downgrade.

Moody's said it lowered New World because of concerns about the company's increasing focus on technology through increasing investments in this sector and the potentially less than expected operating performance of its underlying basic infrastructure assets.

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