S&P cuts WorldCom to D

Standard & Poor's lowered the ratings on WorldCom Inc., cutting the long-term corporate credit to D from CC and short-term corporate credit to D from C, due to missing interest payments on its 7.375% senior unsecured notes and the 8.5% senior unsecured notes of subsidiary Intermedia Communications Inc.

Although WorldCom has a 30-day grace period to make interest payments on these issues, S&P feels it is unlikely that the payments will be made given the company's weak liquidity position.

S&P also lowered the ratings on WorldCom's other senior unsecured debt issues to C from CC, and is keeping those ratings on negative watch with implications.

S&P does not expect WorldCom to service its debt due to its precarious financial condition and the likelihood of a debt restructuring or bankruptcy filing in the near term.

WorldCom had about $30 billion of total debt outstanding as of March 31.

S&P cuts Qwest to B+

Standard & Poor's lowered the long-term corporate credit rating on Qwest Communications International Inc. to B+ from BB+. The watch was also revised to developing from negative.

The downgrade was based on S&P's assessment that there is a higher degree of uncertainty regarding Qwest's ability to meet the debt-to-EBITDA covenant in its $3.4 billion bank loan, coupled with increased risk that the company will not be able to meet its roughly $6.5 billion in maturities beginning in May 2003 and continuing through 2004, including repayment of the bank loan in early May 2003.

Previously, S&Ps had expected that Qwest would be able to pay off these upcoming debt maturities with proceeds from the sale of its directories business for about $8 billion in total.

However, it is now more likely that the company will have to sell this business on a piecemeal basis to expedite receipt of proceeds because sale of a portion of the business is subject to regulatory approval by at least several states and the timing for such approval is even more uncertain, S&P said.

Moreover, proceeds from the unregulated part of the business and attendant debt pay-down may prove insufficient to meet the 4 times debt-to-EBITDA test contained in the bank loan agreement, S&P added.

In addition, S&P believes the current SEC investigation could result in the restatement of Qwest's prior years financial statements.

It is not clear if such a restatement would have an impact on Qwest's ability to meet terms under its bank loan agreement for 2001.

In particular, it is uncertain whether a restatement would trigger the material adverse change clause under the loan agreement if the restated financial metrics bring it out of compliance with the maximum 3.75 times total debt-to-EBITDA required in the bank loan agreement for the period in question.

Numerous outstanding shareholder lawsuits related to financial reporting also pose a challenge to the company, especially in light of the current investigation by the SEC and the recently disclosed criminal investigation by the Department of Justice.

Although S&P has not quantified the potential liability to the company of the lawsuits or the investigations, these issues remain overhanging risks and may impair Qwest's ability to take actions to improve its liquidity.

The watch reflects the fact that, unlike other distressed telecoms such as WorldCom Inc., there is potential for a higher rating largely because a substantial value is still ascribable to the assets of Qwest, despite the financial challenges and exogenous factors adversely affecting the credit profile.

Given Qwest's 17 million access lines and assuming a conservative value per access line under a distressed scenario, this customer base provides significant discernable asset value relative to the $26.5 billion in total debt.

Therefore, if the company is able to adequately address S&P's concerns about near-term liquidity, ratings could be upgraded to the BB category.

Longer term, ratings could eventually return to investment grade levels if external issues facing the company are favorably resolved and operating cash flow performance at the local telephone and long-distance businesses stabilize.

On the other hand, the current ratings reflect a serious risk of a crisis or default in the coming months due to the increased likelihood that there will be delays in the directories sales, and the emergence of the much more negative criminal issues.

S&P affirms GM

Standard & Poor's affirmed the ratings on General Motors Corp. and related entities following GM's strong second quarter results and in light of various other disclosures.

GM reported net income totaling $1.3 billion, before special items, for the quarter, compared with net income of $610 million during the same period the year before, significantly stronger than previously assumed by S&P.

GM reiterated guidance of an impressive $3 billion of net income for 2002, and S&P now views achievement of this objective as increasingly feasible.

One significant challenge results from GM's disclosure of a substantial increase in its already large unfunded pension liability.

Also, under an agreement between GM and Fiat SpA, Fiat will have the right to put its remaining 80% ownership stake in Fiat Auto SpA to GM starting in early 2004 at a price that would be determined at that time.

S&P believes that Fiat Auto's continuing poor financial performance increases the likelihood that the put will be exercised. The ultimate valuation is highly uncertain, and GM would have the option of meeting the put in cash or through the issuance of common stock.

The potential negative financial ramifications for GM aside, S&P believes that the need to somehow absorb Fiat Auto's problem-plagued operations could hamper ongoing turnaround efforts at GM's own European operations, which remain unprofitable.

GM's recent disclosure that it is considering a charge to reflect impairment of the value of its $2.4 billion investment in Fiat Auto highlights concerns about this situation.

However, particularly given GM's improving operating results, its liquidity and funding capacity to meet these challenges are satisfactory.

GM had cash and short-term VEBA funds totaling $17.6 billion at June 30, or $2.6 billion in excess of borrowings excluding General Motors Acceptance Corp.

GM's liquidity could be further bolstered by the completion of the proposed merger of its affiliate, Hughes Electronics Corp., with EchoStar Communications Corp. GM has just reiterated that it expects the transaction, which was first announced in October 2001, to close by the end of the year.

However, the transaction has been controversial and prospects for regulatory approval remain uncertain.

Initially, it had been expected that if the transaction was completed as proposed, it would generate upfront cash proceeds for GM of $4.2 billion.

However, there is some risk the proceeds could be less because the $4.2 billion amount was predicated on the trading price of GM's Class H stock remaining above $10 per share and the share price currently stands just at that level.

The outlook reflects S&P's expectation that continuing efforts by GM to enhance the competitive position of its North American automotive operations and turn around its overseas operations will yield sufficient financial benefits that will enable GM to cope with its massive benefits obligations and other liabilities and contingencies.

Standard & Poor's further assumes that GM will contain distributions to shareholders in order to husband financial resources for this purpose.

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