S&P cuts AES ratings

Standard & Poor's lowered the ratings The AES Corp., including the 4.5% convertible notes due 2005 to B from B+ and the two convertible trust preferreds to B- from B. The outlook is negative.

The downgrade is due primarily to the increasingly challenging environment that AES is facing in managing businesses in Latin America.

Specifically, political instability in Venezuela and Brazil has made refinancing current obligations more challenging than usual, which could limit distributions, and a weakening currency in Venezuela could also weaken dollar-denominated distributions from that country.

In addition, S&P believes liquidity constraints at AES Gener SA make significant distributions from that subsidiary unlikely.

While it is certainly plausible that AES will get cash out of these businesses and make up some potential shortfalls with upside from some of its more stable businesses, the company's increased risk profile in Latin America, given its current debt levels, results in a profile more in line with a BB- rating, S&P said.

S&P noted that AES has improved its liquidity position since the beginning of the year and is not in the trading business, so therefore has no trading liabilities and no issues arising from the recent FERC inquiries.

S&P does not expect the downgrade to lead to any serious liquidity problems at AES.

The negative outlook reflects refinancing risk associated with debt maturities at the parent of $300 million in 2002 and $1.8 billion in 2003, given heightened uncertainty in the bank markets.

AES has put forth a plan whereby it will utilize the proceeds from asset sales, potential capital market issuances and excess operating cash flows to fund the debt maturities and assist in refinancing the credit facility.

The maturities include an $850 million revolving credit facility, approximately $775 million of other bank debt, and $500 million in senior unsecured notes.

Once the revolver is renewed, the rating will likely stabilize.

Upon execution of AES' short-term plan, there is a possibility that the ratings will return to their previous levels. We understand that AES is currently in discussions with the banks regarding the refinancing of its revolver. AES has also publicly stated its intention to pay down additional debt over the longer term (two to four years) and stabilize its revenue base, which would further improve credit quality.

Moody's rates Agere convertible at B2

Moody's assigned a first time B2 rating to the proposed $200 million convertible subordinated debt to be issued by Agere Systems.

Concurrently, the issuer rating of Ba3 is affirmed although the rating outlook is changed to negative from stable.

The B2 rating reflects the subordinated nature of the proposed convertible offering and the two notch differential from Agere's issuer rating of Ba3.

The revised outlook reflects concerns that prolonged weakness in overall revenues could persist for longer than previously expected, and that Agere may consequently continue to consume cash on an operating basis beyond this fiscal year ending September, in spite of its progress in reducing fixed and variable costs.

To the extent that ongoing cost reduction efforts, including plant closures, consolidations, and headcount reduction, and asset sales do not lead to reduced operating losses, or if already weak revenues show signs of not improving, the ratings could come under pressure.

Moodys said that Agere had $1.6 billion of cash as of March and $1.1 billion of total debt, which included $960 million of senior secured bank borrowings that were assumed from its spinoff from Lucent.

Effective June 3, Lucent Technologies completed the tax free spin-off of Agere, distributing 37 million shares of Agere Class A common stock and 908.1 million shares of Agere Class B common stock to holders of Lucent common stock, thereby making Agere a fully independent company.

The $960 million of secured bank debt is scheduled to mature Sept. 30. The company is in compliance with all terms of the debt.

Should Agere raise more than $500 million in capital, however, the bank debt will automatically extend to September 2004, with no more than $750 million outstanding at September 2002 and no more than $500 million outstanding at September 2003.

In any case, 50% of the proceeds from the proposed offering, and 100% of any asset sales and asset securitizations must be used to pay down the bank debt.

The company also has about $135 million of borrowings through an asset securitization financing that matures in January 2003, the proceeds of which were used to repay bank borrowings.

In the March 2002 quarter, Agere reported revenues of $551 million, which represented the first sequential increase, albeit slight at 3%, after five sequential declines. On a year over year basis, revenues fell nearly 54%, illustrating the severe contraction or ongoing weakness in the end markets overall.

The company's cost reduction activities are targeting a breakeven cost structure at about $700 million of revenues.

Notwithstanding some signs of potential bottoming of demand at very weak levels, the overall demand outlook remain very weak and uncertain, particularly for the infrastructure side of its business.

If the pace of cost reductions and revenue levels indicate a prolongation of a return to profitability and positive operating cash flow, or if the company's bank facility is not extended beyond September 2002, the credit ratings would likely be placed under review for downgrade.

S&P keeps Foster Wheeler on negative watch

Standard & Poor's is keeping the B+ corporate credit rating on Foster Wheeler Ltd. on watch with negative implications, as well as the B+- rating on the 6.5% convertible subordinated notes due 200, following the company's announcement that it has signed a term sheet with its senior bank-lending group.

The $289.9 million bank facility will mature in 2005, and consists of a revolving credit, term loan and letter of credit facility.

The ratings will remain on watch until the bank, lease and account receivable facility negotiations are completed and the company's financial flexibility assessed.

S&P will review what, if any, erosion has taken place with the firm's business position during this time of financial stress.

Also, S&P will review the collateral package granted to the senior bank lenders, a first priority lien on Foster Wheeler's domestic assets, to determine if the bank facility and the senior unsecured notes will be notched relative to the corporate credit rating.

S&P puts L-3 on positive watch

Standard & Poor's placed the BB long-term corporate credit rating on L-3 Communications Corp. on watch with positive implications, as well as the B+ ratings for the 5.25% and 4% convertible notes, on L-3's plans to issue 14 million shares of common stock and $750 million in senior subordinated debt securities due 2012.

L-3 Communications had approximately $2.2 billion in debt outstanding at March 31.

The equity issuance will enable L-3 Communications to restore its capital structure after its recent $1.1 billion debt-financed acquisition of Raytheon Co.'s Aircraft Integration Systems division.

The $900 million proceeds from the equity issuance are to be used to repay debt, as well as for general corporate purposes, including potential acquisitions.

Proceeds from the debt issuance are to be used to refinance the $500 million senior subordinated bridge loan related to the acquisition and to repurchase or redeem the $225 million of outstanding 10 3/8% senior subordinated notes due 2007.

The company's debt to total capital will be reduced to below 50% proforma for the securities issuance, from almost 66% at March 31.

S&P puts Parker Drilling on negative watch

Standard & Poor's placed its ratings on Parker Drilling Co. on negative watch following its announcement that it intends to bid for international land drilling contractor Australian Oil & Gas Corp. Ltd. of $108 million - $88 million in cash plus the assumption of about $20 million in debt.

Parker has stated that it intends to fund the cash acquisition price with equity, and S&P noted that AOG is the object of numerous takeover offers and no agreement has been reached between Parker and AOG.

S&P believes the acquisition, if consummated, ultimately could prove beneficial to Parker's credit quality by deleveraging it and strengthening it in its core business lines.

Nevertheless, S&P has concerns about the company's ability to execute the proposed equity financing. If Parker is able to issue sufficient common equity to ensure its financial profile is not adversely affected, S&P would affirm Parker's ratings.

If the transaction is financed with a high percentage of common equity, Parker's credit statistics would improve.

As of Dec. 31, Parker's total debt to total capitalization was about 59%, EBITDA interest coverage run-rate was about 2.1 times and total debt to EBITDA averaged 5.2 times.

Based on AOG's results for the first six months of fiscal 2002, which was near a cyclical trough, the acquisition would improve Parker's total debt to total capitalization ratio to about 56% but proforma EBITDA interest coverage and total debt to EBITDA would be largely unchanged.

However, if financed entirely with debt, which is not the company's intention at this time, Parker's leverage ratio would deteriorate to about 63% and total debt to EBITDA would rise to about 6.5 times.

In a midcycle or better environment, which appears to be developing based on contracts AOG is reported to have signed for new work, Parker's credit ratios would be better than the aforementioned levels.

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