Fitch cuts Corning to junk

Fitch Ratings lowered Corning Inc.'s senior unsecured debt to BB from BBB-, convertible preferred stock to B from BB and the commercial paper program to B from F3.

The outlook remains negative.

The downgrade reflects continued weak end-markets for telecom, deteriorating credit protection measures, negative free cash flow and significant execution and event risk as the company continues to restructure operations.

Current pressure on the telecom revenues, in volume and pricing, should result in further erosion of EBITDA for 2002, reducing interest coverage to less than 1.5 times. Increasing negative free cash flow, despite capital expenditure reductions to about $125 million per quarter, will reduce the company's financial flexibility well into 2003.

Leverage is expected to remain above 15 times as a result of lower EBITDA levels, Fitch said.

The outlook continues to reflect the reduction in telecom infrastructure spending and uncertainty regarding the timing or magnitude of a recovery of spending levels, Fitch said.

While the prolonged reduction in telecom end-market demand remains, Fitch currently expects that Corning's markets will stabilize in 2003 and exhibit slow growth in the second half of 2003.

If market data indicates that this will not occur, further ratings actions could take place.

Due to overcapacity in the long-haul market, reduced capital availability in the telecom sector, bankruptcies among certain providers and continued revisions of capital expenditures by the major providers, Corning's financial and industry outlook continues to remain challenged.

Capital expenditure spending in the telecom industry is expected to decline by greater than 40% in 2002.

Corning took a $494 million restructuring and asset impairment charge in the second quarter and an additional charge of $125 milliion to $150 million charge is expected in the third quarter. The company has reduced headcount by about 4,400 in 2002 in addition to 12,000 in 2001.

Corning has indicated that it is considering asset sales and further consolidation of its manufacturing capacity to reduce its cost structure and capital expenditure requirements, which Fitch believes will result in additional charges.

Total debt at the end of the second quarter was $4.3 billion, a decline of more than $400 million from yearend 2001. Leverage was greater than 15 times for the latest 12 months ending June 30 compared to 5 times at 2001. Interest coverage for the same time period was less than 2 times, a decline from 6 times in 2001.

However, due to expected continuation of cash flow pressures and outlook for the telecom end markets, Fitch said it believes these measures will deteriorate further in 2002 and are expected to improve in the second half of 2003.

While Corning's liquidity is adequate with $1.3 billion in cash and marketable securities as of June 30, free cash flow remains negative and Fitch expects the company will continue to be a net user of cash for the next few quarters both from operating performance and cash restructuring charges.

In addition, a $225 million payment to Lucent Technologies for the previously announced transaction to purchase the China fiber operations has not closed as of the second quarter.

The company also has a $2.0 billion revolving credit facility expiring in 2005 that has not been accessed.

S&P cuts Hanover Compressor to BB

Standard & Poor's lowered the corporate credit ratings on Hanover Compressor Co. to BB from BB+, its senior unsecured debt to B+ from BB- and preferreds to B from B+. The outlook is negative.

Hanover has about $1.7 billion in debt.

The new ratings reflect a burdensome debt leverage and its inability and questionable willingness to repair its financial profile, S&P said.

While the company's business profile and the intermediate-term industry fundamentals remain strong, Hanover has aggressively grown in recent years by running free cash flow deficits that have been financed through a mix of mostly debt and equity.

As a result, the company's financial position has suffered. A rapid improvement in the company's debt leverage is unlikely, as only modest, free cash flow surpluses are likely over the intermediate term.

Hanover had been expected to retire $150 million of debt incurred in its acquisition of Production Operators Inc. with common equity. Market conditions have forced the indefinite delay of that offering and S&P consequently is assigning ratings that exclude any expectation of future equity issuance.

Projected credit protection measures now are commensurate with a BB corporate credit rating. In the medium term, EBITDA and rent interest coverage is expected to fall between 2.6 times and 3.5 times, while funds from operations to total debt should fall between 10% and 20%.

Although the company intends to reduce capital expenditures to a level that enables it to generate consistent free cash flow, near-term debt reduction through the application of free cash flow is expected to be moderate.

Financial flexibility is provided by a highly discretionary capital spending budget, as maintenance capital requirements are about $65 million, about $120 million of borrowing capacity under a $350 million bank credit facility maturing in November 2004, and the absence of significant near-term debt maturities until 2004, when $358 million of long-term debt and operating leases are due.

The negative outlook reflects continued concerns regarding Hanover's ability and willingness to rebalance its capital structure.

Ratings could be further lowered if Hanover continues to run significant, free cash flow deficits and is required to seek significant external financing such that the company's fixed charges materially increase.

The outlook could be revised to stable if Hanover is successful in rebalancing its capital structure and demonstrates its commitment to maintaining a more conservative financial profile.

Moody's cuts Williams to B1

Moody's downgraded the ratings of The Williams Cos. Inc. senior unsecured debt to B1 from Baa3. William's pipeline subsidiaries' senior unsecured debt was downgraded to Ba2 from Baa2. The ratings are under review for possible downgrade.

The downgrades reflect concerns about the sufficiency of operating cash flow in relation to debt as well as the adequacy of the company's liquidity in the coming quarters. Operating cash flow has been below expectations so far this year.

Energy marketing and trading operating cash flow fell short of expectations in the first half of the year, though the pipeline and energy services segments were relatively steady. The weaker-than-expected operating cash flows and looming debt repayments have put a strain on the company's liquidity resources.

To address these concerns, Williams is seeking to renew its bank credit facilities and Moody's expects that these facilities will likely be recast on a secured basis rather than on an unsecured basis as was previously planned.

The downgrade of the parent company's senior unsecured ratings to B1 reflects the effective subordination of the senior unsecured bonds to the secured bank lines that are being negotiated.

Moody's said it expects the secured bank debt will be amply collateralized by hard non-pipeline assets. Non-pipeline subsidiaries, which do not have significant debt of their own, are expected to provide upstream guarantees on the parent's secured facility. The Ba2 senior unsecured ratings for the pipeline subsidiaries reflect their structural seniority to the parent debt but also their lack of regulatory ringfencing.

The current rating reflects the potential that Williams can stabilize its financial position by successfully recasting and increasing the amount of its committed credit facilities and by selling assets.

The company has a good base of unencumbered assets which can serve as collateral for the credit facilites and the potential, through its non-trading businesses, to produce a stable level of cash flow, although that level is currently insuffient relative to the company's debt.

The ratings remain under review for possible further downgrade, reflecting the considerable execution risk in the near-term.

Further rating action may be considered if Williams is unable to renew its bank facility in a timely manner and of an appropriate size to comfortably accommodate needs, does not make sufficient progress on its $3 billion debt reduction program from asset sales or cash flow from operations fails to improve.

The company is likely to have to post in the range of $600 million in trading margins, must repay $185 million of bonds with rating triggers, and has $1.5 billion of debt due the second half of 2002. In

Moody's believes the company will have to rely on asset sales in order to meet its debt reduction target by yearend.

Williams' latest iteration of its near-term cash outlook is significantly weaker than was expected just two months ago. The increased use of cash for margining and financial assurances for its trading and marketing business has lowered its cash balances.

Moody's said that Williams is negotiating $1.8 billion of new secured bank lines. If these lines are obtained, together with an existing $700 million term facility, Williams would have $2.5 billion of alternate liquidity that, combined with modest success in asset sales, should cover short- and intermediate-term liquidity needs.

Moody's upgrades Omega Healthcare

Moody's Investors Service upgraded Omega Healthcare Investors, Inc., affecting $200 million of securities. The outlook is stable. Ratings affected include Omega's senior unsecured debt, raised to B3 from Caa1 and cumulative convertible preferred stock, raised to Caa3 from Ca.

Moody's said the action follows Omega's repayment of $125 million of senior notes at maturity in June 2002 and improvements in operational performance from the new management team.

Omega's new management team has been implementing a program to focus on strengthening the core operations of the REIT, and on addressing challenging property-level and operator-related problems that had developed over the past few years in its core skilled nursing facility leasing and mortgage finance business, Moody's said.

Although more remains to be done, Moody's said the REIT has enjoyed some success in selling assets and addressing weak operators and in improving the REIT's cash flow from operations and coverages.

Omega still faces earnings challenges stemming from a few weak tenants, tenant concentrations, and potential constrictions on Medicare and Medicaid reimbursements, Moody's said. However, some key tenants, such as Sun Healthcare and Mariner Healthcare, have emerged from bankruptcy.

In addition, Omega has no debt maturities until its senior secured bank credit facility comes due in December 2003, which Moody's said is a plus.

Moody's added that the REIT remains in default on its preferred stock in the amount of $30 million in accumulated, unpaid dividends, with dividends accumulating at $5 million a quarter. Curing this default may take some time. However, the REIT's stronger performance raises the likelihood that it will be financially capable of curing the default.

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