Moody's downgrades Calpine to junk, still on review

Moody's Investors Service downgraded Calpine Corp.'s ratings to junk and kept them on review for further downgrade, affecting $11.6 billion of debt and preferreds. Among the ratings lowered, Moody's cut the senior unsecured rating to Ba1 from Baa3 and its convertible preferreds to Ba2 from Ba1.

Moody's said the ratings remain on review for further downgrade "pending arrangements to obtain additional financing."

The rating agency said it cut its assessment after "reviewing Calpine's near-term cash flow, liquidity sources and financial flexibility."

"A quick-growing capital intensive company, Calpine has acquired a significant debt burden in anticipation of later cash flow generation," Moody's commented. "The company must now, however, operate, carry out ongoing expansion and service this debt burden in the face of modest operating profits. Furthermore, the company's financial flexibility has been reduced as evidenced by investors' materially lowered earnings expectations and the company's resulting fallen stock price."

Noting the company is looking to raise $1.5 billion in bank facilities to replace its existing $400 million corporate revolver and $300 million letter of credit facilities and that it will likely need to refinance $878 million in zero coupon convertible bonds in April, Moody's said it believes "the company's current situation may reduce senior noteholders' debt service coverage for a longer period and increase the likelihood that the senior unsecured note holders will become effectively or structurally subordinated."

Over the coming months it anticipates Calpine's cash flow will be restricted, as is generally the case in the first and second quarters. But "throughout this time, Calpine will need to continue funding power plant construction expenditures as well as cover ongoing interest payments and preferred dividends on its significant debt and preferred burden," Moody's said.

S&P downgrades Global Crossing, Asia Global Crossing, keeps on negative watch

Standard & Poor's downgraded Global Crossing Ltd. its Global Crossing Holdings Ltd. and Frontier Corp. units and its 58.8% owned subsidiary Asia Global Crossing Ltd. All ratings remain on CreditWatch with negative implications. The $7.6 billion of debt affected includes: Global Crossing Ltd.'s preferred stock, cut to C from CCC-; Global Crossing Holdings Ltd.'s senior unsecured debt, cut to C from CCC, its $800 million 9.625% senior unsecured notes, cut to C from CCC, its senior secured bank loan, cut to CCC- from B-, its preferred stock, cut to C from CCC-; Frontier Corp.'s senior unsecured debt, cut to C from CCC, its preferred stock, cut to C from CCC-; and Asia Global Crossing Ltd.'s senior unsecured debt, cut to CCC- from CCC+.

S&P said its downgrade reflects "heightened concerns regarding the company's liquidity position and its ability to obtain an amended bank facility near term. In addition, Global Crossing's liquidity will be further compromised if Asia Global Crossing decides to draw down on the $400 million credit facility available from Global Crossing."

S&P said the company is unlikely to be able to obtain funding in the capital markets adding that "it appears the only alternative to maintaining the company's viability would be through a private equity investor."

That, S&P noted, "normally results in a restructuring of the company's capital structure."

Moody's cuts Kmart ratings to junk territory

Moody's Investors Service on Friday downgraded the ratings of Kmart Corp. based on the decline in credit protection measures and the continuing challenge that the company faces in obtaining benefits from its turn-around initiatives and converting these benefits into substantial improvements in sales, profitability and cash flow generation. In addition, based upon performance in the current fiscal year, the downgrade also reflects the possibility that it may be some time before internal performance and external market conditions improve to the point that a significant de-leveraging is a highly probable event, Moody's said.

Downgraded were Kmart Financing I's guaranteed trust convertibles, to (P) Ba3 from (P) Ba1, and Kmart senior unsecured debt, medium term notes, issuer rating and senior implied rating to Ba2 from Baa3, among other ratings.

The outlook remains negative, which Moody's said reflects the lack of sufficient evidence to conclude that the company's financial performance has bottomed and the potential for further erosion in the company's franchise and credit metrics. Moody's said that, despite some signs of positive improvements, Kmart has yet to achieve a significant increase in sales. If the sales volumes do not materialize as anticipated, Moody's said Kmart may have to introduce a pricing structure that may not provide sufficient gross margin to support an expense rate that is higher than its competitors'.

Although it is still early in the process, it is still uncertain whether operating changes are resonating sufficiently with customers to ensure a sustainable long-term improvement in credit metrics, Moody's said. Several major initiatives come with an immediate, negative financial impact. The decision to reinvest money back into the stores by increasing store payroll is one example.

Kmart's credit statistics have deteriorated over the last year, but Moody's said it remains comfortable with Kmart's liquidity situation reflecting its strong bank relationships and external committed sources of funding in excess of its borrowing needs.

Moody's notes that Kmart's new management team has made progress on several key components of its revitalization plan. However, with an undertaking as complex as this, there is execution risk. For example, Moody's said, the recent conversion from seven merchandise payable and inventory ordering platforms into one system has proved challenging and could have longer term issues for relationships with suppliers.

Fitch puts Calpine on watch negative

Fitch on Friday placed its BBB- rating of the senior unsecured debt of Calpine Corp. on watch, negative. The action relates to an ongoing review of Calpine's liquidity and business prospects in the light of turbulent market conditions that have impacted the company's access to the capital markets, Fitch said. While the company's operating fundamentals are sound, the financial profile is aggressive, and is not consistent with the current market environment. Based on the company's strong asset portfolio and long-term contracts for a substantial portion of its current and future output, Fitch believes that if the rating is changed, the most likely outcome would be BB+ or BB.

While Calpine has a number of alternatives to address short-term financing requirements, Fitch said it will focus on the company's long-term plan for adjusting its capital structure to the new market environment. However, high financial leverage is somewhat mitigated by the relatively low cost and high efficiency of the company's generation fleet, ownership of gas and oil reserves valued on the balance sheet at less than their current value, and a meaningful level of contractual cover for future sales with credit-worthy counterparties, Fitch said.

The anticipated completion of the current phase of the company's capacity construction will result in reduced capital expenditures and increasing free cash flow over the next five years, providing an opportunity for management to reduce debt, Fitch noted. From a credit viewpoint, management's recent statements that it may curtail the aggressive development of power projects not currently under construction is a favorable sign.

S&P rates new Corus convertibles BBB

Standard & Poor's assigned a BBB rating to Corus Group plc's recent issue of €307 million 3% convertible notes due 2007.

S&P confirms Prudential

Standard & Poor's confirmed its outstanding ratings on the U.S members of the Prudential group of companies. The outlook is stable.

S&P said its announcement follows the recent demutualization of The Prudential Insurance Co. of America (Prudential) and the creation of Prudential Financial, Inc. (PFI), a new publicly traded holding company.

S&P noted demutualization posed "great challenges of reorganization, realignment of businesses, and the elimination or mitigation of problem areas within the company."

But it said the result is a company with "improved capital, liquidity, and earnings positions; tactical successes in resolving market conduct related issues and selling non-core businesses; favorable scale in virtually all its businesses; and strong franchises in life and property/casualty insurance and in retail securities brokerage," S&P said.

However, the rating agency believes major challenges remain, chief among them the "inevitable difficulties in executing the relatively newly revised strategies for all business units at the same time that the company confronts the realities of operating in a publicly owned format."

S&P lowers IT Group, still on watch

Standard & Poor's downgraded IT Group Inc. and kept its ratings on CreditWatch with negative implications. Ratings affected include IT Group's bank debt, cut to B from B+, its senior subordinated notes due 2009, cut to CCC+ from B- and Ohm Corp.'s convertible subordinated debentures due 2006, cut to CCC+ from B-.

S&P said the downgrade follows IT's announcement it will not be in compliance with the year-end 2001 financial covenants of its senior secured credit agreement. Previously, IT was expected to be in compliance for the fourth quarter and the year.

"The worsening liquidity situation stems mainly from continued weak operating environment, ineffective project execution, and failure to reduce high debt levels," S&P said.

While the firm has acted to reduce costs, sell non-core assets, access additional sources of capital, and better manage its working capital, S&P said "considerable uncertainties remain whether those efforts will be successful in restoring profitability and financial flexibility and providing a cushion to meet debt service requirements in 2002."

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