Moody's rates new Gap convertible at Ba3, cuts senior unsecured

Moody's Investors Service assigned a Ba3 rating to the new senior unsecured convertible notes of Gap Inc. Moody's also confirmed the company's Ba2 senior implied rating, but lowered the ratings on the company's existing senior unsecured long term debt to Ba3 from Ba2, reflecting the expectation that material assets will secure a new bank agreement that could close as early as next week. Moody's noted that on Feb. 14 it warned that the senior unsecured long-term debt rating was likely to be lowered a notch given the collateral to support Gap's new bank facility.

The rating outlook was revised to stable from negative, reflecting the anticipation that comparable store sales, profit margins and cash flow generation will not deteriorate further, Moody's said.

The $1 billion senior unsecured convertible is a condition to the execution of Gap's new $1.3 billion bank agreement, Moody's said, and will further enhance Gap Inc.'s liquidity, which includes cash of about $1 billion, and will provide working capital financing, if needed, as the company works over the next 12 months to turn around its operating and financial performance.

While Gap Inc. is refocusing its concepts' merchandise offerings, it will be some time before it is evident whether these merchandising changes are gaining traction with the customer, Moody's noted. The current ratings anticipate that operating and financial returns will not deteriorate from the current low level.

Moody's rates new Mail-Well notes at B1

Moody's Investors Service on Wednesday assigned a B1 rating to Mail-Well I Corp.'s proposed $300 million senior unsecured notes. Moody's downgraded the $300 million 8.75% senior subordinated notes due 2008 to B3 from B2, but confirmed Mail-Well's other ratings, including the $139 million 5% convertible subordinated notes due 2002 at B3. The ratings reflect continued reduction in profitability, modest coverage of interest expense and high financial leverage, Moody's said. The ratings are prospective, incorporating the anticipated net effects of the new debt as well as that of pending divestitures, Moody's added.

Moody's also downgraded Mail-Well's senior implied rating to B1 from Ba3, reflecting the company's likely run-rate operations before and after restructuring, and the long term recovery period necessary to post sustained improvements in financial condition. Pro-forma for the new senior note, liquidity is adequate, Moody's said, noting there is a modest cushion under amended covenants and some likelihood that further covenant relief may be required in order to maintain orderly access to funding in a down scenario.

The proposed issue is critical to Mail-Well's liquidity profile, Moody's said, and without it, liquidity would be weak and would pressure the ratings and could likely result in a downgrade.

The stable outlook is also prospective and further reflects our expectation of relatively steady-state performance throughout the remainder of these depressed domestic economic conditions. Stabilization in the ratings would be jeopardized by non-execution of the proposed financing; further delays in the completion of the previously stated divestiture program; and/or erosion in credit statistics.

Pro-forma for the $40 million sale of Curtis 1000 and the new senior notes, Moody's said at Dec. 31 Mail-Well's total debt of about $1 billion to EBITA of around $119 million is 8.4 times (5.7 times EBITDA of about $176 million). The cash position is estimated to be $130 million. On a going forward basis, Moody's said it anticipates pro-forma EBITDA less capital expenditures to cover pro-forma interest expense slightly below 2 times.

S&P rates new Mail-Well notes at BB

Standard & Poor's assigned a BB rating to the proposed $300 million senior unsecured notes due 2012 by Mail-Well I Corp. and guaranteed by its holding company, Mail-Well Inc., whose ratings were also affirmed. The ratings reflect Mail-Well's narrow business focus, competitive business conditions and weak credit measures, S&P said, which are tempered by leading market positions in the envelope and commercial print segments.

While Mail-Well has grown aggressively through acquisition in the past, its focus over the past 18 months has been on improving operating efficiencies and enhancing margins in its core envelope and commercial print segments, S&P noted. This renewed focus has resulted in plant consolidations, headcount rationalization and working capital improvements. While these initiatives have proceeded relatively smoothly, S&P said the weak economy created difficult business conditions, which negatively affected operating results throughout 2001. Specifically, commercial print was hurt by the decline in advertising spending and intense pricing pressures.

Ongoing disposition of Mail-Well's labels and printed office products divisions, and certain assets within envelopes and commercial print, are expected to produce net proceeds of about $300 million, which will be used for debt reduction. While the net proceeds are lower than previous expectations because of the difficult operating environment, S&P noted that management remains confident that all divestitures will be completed. The divestitures are also aimed at simplifying the overall business structure and enabling Mail-Well to concentrate on its core businesses.

Although Mail-Well's operating performance will benefit from its cost-efficiency initiatives, S&P said the ratings may be lowered if the company's overall financial profile does not meaningfully strengthen in coming periods.

Moody's cuts Mpower senior notes, confirms convertibles at C

Moody's Investors Service lowered the ratings of Mpower Holding Corp., including the 13% senior unsecured notes due 2010 to C from Ca and the Mpower Communications Corp. 13% senior secured notes due 2004 to Ca from Caa3 but confirmed the 7.25% convertible preferreds at C. The downgrade is a result of the company's plans to file bankruptcy once it receives approval from holders of at least two-thirds of the outstanding 13% senior notes due 2010. The current pre-packaged bankruptcy plan would result in bondholders receiving cash equal to about 5% of the outstanding amount of the bonds, Moody's said.

On Monday, Mpower said it had reached an agreement with an informal committee representing approximately 66% of the 13% senior notes due 2010 for a comprehensive restructuring plan. Mpower expects to retire approximately 92% of its long-term debt and preferred securities in exchange for $19 million cash and a minimum of 85% of common equity.

Fitch cuts UtiliCorp convertibles to BB+

Fitch Ratings downgraded the ratings of UtiliCorp United Inc. and its subsidiaries, including lowering the UtiliCorp convertible MIPS and PEPS as well as the UCU Capital convertible MIPS to BB+ from BBB-. Fitch said the downgrades primarily reflect increasing dependence upon cash flows derived from the merchant energy business, housed in subsidiary Aquila, and take into consideration Aquila's reliance on UtiliCorp for funding, the ongoing integral growth of Aquila's business and high capital expenditures related to merchant generation and gas storage. Potential capital spending of around $600 million per year for 2002 through 2004 and the commitment to acquire Avon Energy in the U.K., will make UtiliCorp dependent on additional long-term debt and equity financing over the next several years, Fitch noted, adding that. UtiliCorp has not ruled out the possibility of additional acquisitions that would enhance the merchant energy business.

The rating outlook is stable, Fitch said, reflecting UtiliCorp's improved financial condition, in particular its increased equity to debt ratio.

Moody's puts Fiat ratings on review for downgrade

Moody's Investors Service said it is reviewing the Baa2 long-term and Prime-2 short-term ratings of entities guaranteed by Fiat S.p.A for possible downgrade, focusing on the degree to which Fiat can effectively implement various components of it operational restructuring program and make timely progress in completing planned asset sales in order to reduce debt.

Nearly all of Fiat's key industrial end-markets are facing some degree of cyclical downturn as well as rising competitive pressures, Moody's noted. As Fiat attempts to address these issues it will benefit from a cash and marketable securities position exceeding euro 5 billion, as well as committed bank borrowing facilities and access to the ABS markets in Europe and the U.S, Moody's added. Over the intermediate-term, Fiat could also benefit from the option to put the remaining 80% of its automotive operations to General Motors beginning in January 2004. In the absence of a plan that is likely to result in the consummation of the proposed asset sales and improvement in near term operating performance, the ratings will likely be lowered.

Fitch rates new GM convertible at A-

Fitch Ratings assigned an A- to both tranches of General Motors Corp.'s convertible senior debentures due 2032. The rating outlook remains negative, Fitch said, adding however that in a global automotive industry in a state of transition, GM is showing signs of rejuvenation in certain key segments of its operations, most notably the North American light truck market.

While it is encouraging to see signs of stabilization in some of GM's key segments, Fitch said, GM has more operational challenges to overcome in the midst of a soft global automotive market. At Dec. 31, liquidity was afforded by $9.2 billion of cash and marketable securities plus $3.0 billion of short-term VEBA trust assets. Additionally, GM has access to $5.6 billion committed line of credit which expires in June 2006. Total debt for GM's Automotive and Communications Services amounted to $13.1 billion. Excluding Hughes, GM's Automotive operations showed net liquidity, including $3.0 billion of short-term VEBA trust assets, of $1.0 billion. Additionally, net liquidity should be aided by the closing of the Hughes transaction later in the year, Fitch said.

Due largely to the negative asset returns in 2001, GM's pension funding amounted to over $10 billion of under-fundedness worldwide at 2001 year-end. Although, GM does not strictly have to cash fund in 2002, for greater flexibility, GM will likely contribute cash for pension funding. The longer-term risk continues to be GM's OPEB liabilities. Another potential longer-term risk is the GM/Fiat tie-up which obligates GM to purchase the remaining 80% of Fiat via stock or cash beginning January 2004 if Fiat decided to exercise its put option to GM, Fitch said.

Moody's cuts Williams outlook to negative

Moody's Investors Service confirmed the ratings of The Williams Cos., Inc., including the convertible trust preferreds at Baa3, but revised the outlook to negative from stable. The change in outlook reflects near-term pressure on Williams' earnings and cash flow stemming from unsettled market conditions and the potential bankruptcy filing of its former subsidiary, Williams Communications Group, Moody's said.

Williams' contingent obligations on certain WCG securities and synthetic leases have been factored into Moody's analysis. Williams is examining alternative actions should WCG file for bankruptcy, each of which has varying impact on Williams's near term cash flow, Moody's said, as well as working with WCG noteholders by pursuing a consent solicitation to confirm Williams's obligation to pay interest and principal under the current schedule and to eliminate certain trigger events.

If approved, this would be a favorable development, Moody's said.

Moody's noted that Williams has sufficient bank line availability to meet maturing obligations, including commercial paper, and to support the working capital needs of its trading and marketing operation. It is expected that Williams's initiatives to reduce debt and to improve liquidity will be substantially completed in the near-term, Moody's said, and that they should help stabilize debt protection measurements at levels commensurate with an investment grade rating.

Despite the near-term challenges, Moody's noted that Williams has a substantial and diverse asset base that provides strong support for its credit. Its businesses are well integrated down the natural gas value chain. Williams's regulated pipelines, which account for about a quarter of its operating income, provide a stable base for further expansion of its pipelines as well as for investments in Williams's unregulated businesses.

Fitch cuts Gap, rates new convertible BB-

Fitch Ratings downgraded Gap, Inc.'s $2 billion of senior unsecured notes to BB- from BB and assigned a BB- rating to the company's planned $1 billion convertible note issue. The outlook remains negative.

Fitch said it cut Gap's ratings because of the significant addition to the company's debt burden, which further weakens its credit profile, and because of somewhat weaker than anticipated year-end results.

Gap's credit profile has deteriorated considerably, due primarily to weak sales and lower operating cash flow, Fitch noted. For the fiscal year ended Feb. 2, 2002, leverage (total debt plus eight times rents to EBITDAR) weakened to approximately 5.2 times from 3.0 times in the same period last year and EBITDAR coverage of interest and rents decreased to 1.8 times from 3.0 times over the same period.

The pending $1 billion convertible will increase the company's total debt to approximately $3 billion, which will further weaken bondholder protection measures from year-end levels, Fitch said.

However, the offering along with $1 billion in cash on hand at year end and the anticipated $1.3 billion secured bank facility should provide the company with sufficient liquidity for 2002.

S&P confirms Penn Treaty, off watch

Standard & Poor's said it confirmed Penn Treaty American Corp. and removed its ratings from CreditWatch. The outlook is stable. Ratings affected include its $75 million 6.25% convertible notes due 2003 at CC.

"Despite improved capitalization, PTAC's subsidiaries will continue to face considerable challenges as they attempt to reestablish their position in the long-term care insurance market," S&P said. "Standard & Poor's believes PTAC will be challenged to refinance its existing debt given its current levels of earnings, capital, and cash flow."

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