Moody's revises El Paso outlook to negative

Moody's changed the outlook to negative for the ratings of El Paso Corp., including its senior unsecured debt at Baa2.

Moody's said the action was in response to El Paso's announcement of weaker than expected cash flows in the first half of the year and lowered expectations for the rest of the year. Moody's said it has the following concerns:

1) Substantial cash that has been consumed by the merchant businesses and concerns about El Paso's ability to limit further cash drains amidst disruption in that sector.

2) Debt that remains very high relative to current cash flows, despite large-scale debt reduction initiatives. Plans to reduce additional debt through asset sales may be a challenge, given that the market is crowded with other companies also selling assets.

3) Reduced near-term cash flow outlook for non-merchant businesses given the current poor commodity price environment.

4) Performance of numerous equity investments that comprise a significant proportion of earnings and balance sheet.

5) Various regulatory proceedings and investigations that could potentially have a material impact on El Paso's financial position or business operations.

However, financial performance for the first six months of this year denotes downward pressure from adverse industry conditions and high leverage.

Second quarter operating income before non-recurring charges fell 32% from the comparable period in 2001, with the most marked declines in merchant energy segment followed by E&P.

Moody's estimates debt, adjusted to include on-balance sheet debt, minority interest financings and the Limestone and Gemstone debt, is roughly two times the annualized revenues for the quarter.

S&P cuts Duke Energy

Standard & Poor's lowered Duke Energy Corp. and subsidiaries, including senior secured to A+ from AA-, senior unsecured to A from A+ and preferreds to BBB+ from A-. The outlook is stable. Duke Energy has about $21.5 billion of consolidated debt outstanding.

The downgrades reflect a reassessment of Duke Energy's consolidated creditworthiness given the increasing risk of energy trading and merchant generation activities.

The negative watch was removed because S&P does not expect the outcome of the ongoing Federal Energy Regulatory Commission and Securities and Exchange Commission investigations into round-trip trades to be onerous.

Duke Energy has said that less than 1% of its trading revenues were comprised of round-trip trades. S&P believes that its revised ratings incorporate this risk due to its evaluation of risk management policies and procedures.

Downgrades also incorporate the financial implications of the current decline in wholesale electricity prices in the U.S.

This deterioration is mitigated by cash flow stability provided by regulated electric and gas pipeline businesses, which are expected to contribute about 65% to 70% of earnings before interest and taxes over the next several years.

Moody's cuts Vivendi

Moody's Investors Service downgraded Vivendi Universal SA's long-term senior debt to B1 from Ba1, affecting €6.9 billion of securities. Also lowered was Houghton Mifflin, which saw its senior debt cut to Ba2 from Ba1. All ratings remain on review for possible further downgrade.

Moody's said the reduction and continuing review reflect the ongoing liquidity problems the company faces as well as significant execution risks in implementing its restructuring plans, in particular the timely implementation of its €5 billion disposal program to be completed over the next nine months.

The actions also reflect a worsening of the company's expected operating cash flow generation for

2002, a challenging operating environment for some of its activities and its continuing contingent liability exposure, Moody's said.

While Vivendi Universal obtained a €1 billion liquidity back-up facility on July 10, Moody's said timely conclusion of a new €3 billion bank facility (which is expected to absorb the original €1 billion facility) remains of "paramount importance" for the company.

In this process Vivendi Universal remains critically dependent on the continuing support of its banks, Moody's commented.

Progress towards negotiating the new €3 billion facility is reflected in the rating level.

Failure to put the facility in place over the next few weeks would lead to a severe short term liquidity problem and further ratings downgrades by several notches, Moody's added.

Moody's said there is a two notch differential between Vivendi's senior implied rating and senior unsecured rating because the rating agency expects that should an adequate longer term refinancing be achieved terms and conditions of the new financing will be onerous and will result in effective and structural subordination of these holding company notes.

Houghton Mifflin's senior ratings are not notched based on the assumption that the negative pledge language in Houghton Mifflin's indentures remains unchanged and in full force, Moody's said.

Fitch confirms Household ratings

Fitch Ratings confirmed Household International Inc.'s long-term debt at A and short-term debt at F1 affecting $70 billion of debt. The outlook remains negative.

The affirmation is in response to Household's announcement that it is restating earnings and balance sheet from Jan. 1, 1999, forward to reflect more conservative accounting for three credit card related agreements after thorough review by their new auditor KPMG.

The matters in question related to decisions made from 1994 to 1999, involving judgments made on complex accounting decisions done in consultation with their prior auditor, Arthur Andersen, and reviewed by Household's audit committee.

These deals were related to its Mastercard/Visa co-branding and affinity credit card relationships and a credit card marketing agreement with a third party.

In total, the restatement actions will result in Household showing reduced net income in prior periods, which will ultimately result in a decline in common equity of $386 million, lowering total equity to about $10.48 billion from a previously reported $10.87 billion. The adjustments will cause Household's tangible equity to tangible managed assets ratio to decline to 7.94% from a previously reported 8.24% at June 30.

While the announcement is disappointing, it is understandable that accounting adjustments related to previous interpretations can occur in financial statements, Fitch said. While the avoidance of restatements through use of more conservative accounting would clearly been preferable, similar restatements are not expected for Household in the future.

While the required equity reduction is concerning, Fitch believes that Household maintains the financial wherewithal to absorb this restatement and we are satisfied that management is committed to replenishing capital ratios to levels above what were originally reported at June 30, 8.5%, by year-end 2002.

Moody's confirms Household

Moody's confirmed the ratings of Household International Inc. (senior long-term debt at A3) and subsidiaries. The outlook remains stable.

The affirmation is in response to Household's announcement that as a result of a review of its accounting policies by its new auditors, KPMG, Household would restate its earnings and financial statements for the periods spanning 1994 through second quarter 2002 for a cumulative accounting adjustment totaling $386 million after tax.

According to the company, the financial restatements are limited to the accounting for co-branded, affinity and credit card marketing agreements that were approved by Household's prior auditor and represent a "good faith difference of opinion." No other material accounting issues have arisen with KPMG.

Moody's said it does not believe the accounting changes and cumulative restatements do not represent a systemic breakdown in Household's accounting policies or controls, or corporate governance. Going forward, the direct financial impact on Household will likely be small.

Moody's noted that the charge would initially reduce Household's tangible capitalization. However, the rating agency expects that Household will take the necessary actions to improve its capitalization over the next several quarters. Moody's noted that the indirect cost of Household's earnings restatement is the potential negative impact on investor confidence and funding access given the elevated levels of volatility that continue to persist in the unsecured debt markets.

Moody's puts Agere on review

Moody's put Agere Systems under review for possible downgrade, including $410 million of subordinated convertible debt at B2.

The action was taken in response to Agere's announcement that it will exit the optoelectronics business, focus on advanced integrated circuit solutions for network information and further consolidate manufacturing facilities in order to achieve a break even operating cost structure by the second half of calendar year 2003.

Agere's revised plan calls for an additional $130 million of cash costs related to its prior plan, which included estimated cash costs of about $300 million, $105 million of which has already been spent.

At June, Agere had $1.2 billion of cash on hand and $222 million of secured bank borrowings, which matures Sept. 30, 2002, unless it achieves an additional $90 million of fund raising as defined in the bank facility.

Should the company not achieve the necessary fund raising, Moody's expects the company will pay off the bank facility with cash on hand.

The optoelectronics business accounted for about $55 million, or 10% of revenues, in the June quarter, continues to lose money and has diminished prospects over the next few years due to the excess supply in the global telecom infrastructure and related ongoing cuts in capital spending by those customers.

Consequently, Agere's restructuring action is intended to focus resources on the integrated circuit business, which serves the PC, storage and wireless networking markets.

Revenues in this business have stabilized in the last few quarters and, while Agere maintains solid or leading market positions in a number of areas, the cost structure is still too high to achieve sufficient profitability.

Moody's cuts AOL Time Warner outlook

Moody's confirmed the Baa1 long-term, senior unsecured and short-term debt ratings of AOL Time Warner Inc. and its 72.4% owned subsidiary, Time Warner Entertainment LP, and assigned Baa1 long-term ratings to the new $10 billion senior unsecured bank credit facilities of AOL Time Warner Inc.

However, the outlook was cut to negative from stable.

The negative outlook reflects Moody's expectation that despite the fact that a definitive agreement has not yet been reached in connection with a Time Warner Entertainment negotiated restructuring, some amount of incremental financial risk will likely be required of AOL.

The risk for AOL Time Warner comes from restructuring the ownership of Time Warner Entertainment while meeting Comcast Corp.'s and AT&T's objectives. If a negotiated transaction is not struck, then there may be uncertainty about Time Warner Entertainment issuing debt-like preferred stock to the public if Comcast/AT&T were to proceed with the registration of their limited partnership interest.

Also, without a negotiated deal, Moody's said it believes that prospects for AOL reaching a broadband ISP carriage arrangement with Comcast/AT&T Broadband for the intermediate future would dim.

Any incremental debt with an uncertain path to the timing or means of repayment could challenge AOL Time Warner's and/or Time Warner Entertainment's ability to have their debt-to-EBITDA return to AOL Time Warner's stated target of 3.0 times or less within the near term, despite targeting a significant portion of free cashflow in 2003 to reduce debt.

Although Moody's understands that the SEC and Department of Justice are conducting investigations, the outlook does not presume that accounting and internal controls are improper in any material respect.

If internal controls are found to be materially deficient or accounting practices are not effectively and materially in accordance with GAAP and SEC regulations, more pressure on the ratings will occur, Moody's said.

Moody's cuts ARRIS

Moody's downgraded ARRIS International, Inc., formerly know as ANTEC Corp., including the 4.5% convertible subordinated notes to B3 from B2. The outlook is negative.

The rationale for the downgrade is the prospect of diminished liquidity near term as the convertible must be redeemed during the first half of 2003, as well as the business risk associated with the strategic shift toward cable-telephony due to the continued reductions in capital expenditures in the cable industry.

In addition, Moody's is concerned about the Nortel Membership Interest, which is a $109 million financial obligation that pays an in-kind dividend of 10% and must be redeemed before ARRIS's $143 million revolving credit facility expires on Aug. 3, 2004, or any extension thereof.

Supporting the ratings is ARRIS's leadership in developing and supplying advanced technology to cable operators that transmit high-speed Internet data, video and voice services over hybrid fiber-coax networks, relatively modest leverage and operations that have generated free cash flow on a last-12-months basis.

While Moody's believes that ARRIS generates sufficient cash from operations to fund its business, it is facing a debt maturity in the next 12 months.

Under terms of its revolving credit facility and recent amendments, ARRIS is required to refinance or convert $54 million of the remaining $100 million outstanding of the convertible before March 31, 2003, and the remaining balance of about $46 million comes due on by May 15, 2003.

Successful resolution of its looming maturities is likely to lead to improving the ratings outlook.

S&P confirms Georgia-Pacific

Standard & Poor's confirmed Georgia-Pacific Corp. including its senior unsecured debt at BBB- on the company's agreement to sell a 60% interest in its Unisource Worldwide paper distribution subsidiary to Bain Capital, a private investment firm.

Management expects the transaction to result in about $850 million in after-tax proceeds. This amount includes about $150 million from the sale and leaseback to third parties of certain real estate assets now owned by Unisource and $180 million in income tax benefits associated with the writedown of Unisource's goodwill and fixed assets.

Net proceeds will be used to reduce debt.

In addition, Georgia-Pacific will provide $170 million in seller financing.

The transaction is a positive from the standpoint of debt reduction, although the sale price is well below the $1.7 billion Georgia-Pacific paid to acquire Unisource in 1999.

Despite the expected debt reduction, Georgia-Pacific will remain highly leveraged for the ratings with more than $11 billion of debt. Moreover, a difficult earnings environment and turbulent financial market conditions make it challenging to achieve the expected post-separation capital structure.

S&P cuts Vivendi

Standard & Poor's downgraded Vivendi Universal SA and its subsidiaries to junk and kept the ratings on CreditWatch with negative implications. Ratings lowered include Vivendi's bonds, convertible bonds, exchangeable bonds and credit facility, lowered to B+ from BBB-, Houghton Mifflin Co.'s notes and medium-term notes, cut to B+ from BBB-, Joseph E. Seagram & Sons Inc.'s bonds, notes, debentures and QUIDS, cut to B+ from BBB-, and The Seagram Co. Ltd.'s notes and debentures, cut to B+ from BBB-, and ACES, cut to B+ from BB.

S&P said the action follows Vivendi's release of half-year results and significantly lower-than-expected cash flow generation forecasts for second-half 2002.

The downgrade to Vivendi's long-term senior unsecured debt also reflects the increasing subordination risks for Vivendi's existing long-term-debt holders.

Vivendi's revised second-half 2002 free cash flow projections further underscore the visibility and transparency problems that prevailed under the previous management team, S&P said.

Such a cash flow shortfall could result in a much earlier financing gap than we initially anticipated, S&P commented. It may also make it more difficult for Vivendi to rapidly arrange a new, substantial credit line to fund its operations over the next few months.

Although Vivendi's access to the €1 billion syndicated credit line has just been confirmed by its main banks - which is viewed as a positive sign for upcoming refinancing steps - the company's liquidity position will continue to be exposed to tight financial covenants as well as to its creditors' desire to continue to provide funding over the next 18 months, S&P said.

S&P estimated Vivendi's refinancing needs could exceed €3 billion - the amount of the credit line currently under negotiation as indicated by management - on top of the €1 billion credit line and refinancing at Vivendi Universal Entertainment.

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