Moody's cuts Nortel

Moody's Investors Service downgraded Nortel Networks Corp. and its subsidiaries three notches, affecting $5.0 billion of debt. The outlook is negative. Ratings lowered include Nortel's senior secured debt, cut to B3 from Ba3, preferred stock, cut to Caa3 from B3, and $136.9 million lease pass-through trust certificates series 2001-1 to B3 from Ba3.

Moody's said the downgrade reflects the severity of the decline in Nortel's revenue base, the magnitude of its current and prospective cash burn rate including the cost of restructuring and lack of clarity regarding the nature and timing of a rebound in revenue.

Also incorporated in the downgrade is the diminished financial flexibility as the company expects to allow its $1.5 billion in credit facilities to lapse in December.

However Moody's said its rating also takes into account Nortel's substantial $4.6 billion cash position, which includes $420 million in restricted cash; the progress Nortel has made in reducing its costs; its broad product offering including enterprise networks and modest near-term debt maturities.

The negative outlook reflects the company's continuing cash burn as well as the potential for future asset impairment charges, Moody's added.

The company's sizable cash position should support its cash consumption for the next 12 months. However, further downgrades could occur if cash erodes to $1 billion.

Cash burn including the cost of restructuring has been significant, Moody's noted. Net cash used in operations in for the first nine months of 2002 was about $1.3 billion, when adjusted for the positive impact of approximately $700 million in tax recoveries.

The sale of $1.5 billion in equity in June 2002 allowed the company to increase its unrestricted cash to $4.2 billion by the end of September 2002. However, the repayment of $300 million of debt in early October, the continued cash costs of restructuring and operating cash burn will result in a significant decline in cash by the end of the year, Moody's said.

S&P cuts Broadwing preferreds to D

Standard & Poor's downgraded Broadwing Communications Inc.'s 12.5% junior exchangeable preferred stock to D from B.

S&P said the action follows Broadwing Communications' statement that it intends to defer cash dividends on this issue.

Broadwing Inc. and Broadwing Communications' corporate credit ratings remain at BB and are still on CreditWatch with negative implications.

S&P says Phelps Dodge unchanged

Standard & Poor's said Phelps Dodge Corp. ratings remain unchanged at BBB- with a negative outlook.

S&P's comments follow Phelps Dodge's third-quarter earnings announcement.

With the company highly leveraged to the price of copper, a critical factor for maintaining the current ratings continues to be the direction and timing of a recovery in copper prices (currently at 70 cents per pound) as well as the company's progress made in its "Quest for Zero" initiative, which targets $400 million of sustainable cost reductions by the end of 2003, S&P said.

To date, the company has had success in this initiative, with reductions of approximately $200 million annualized run rate but will continue to be challenged in meeting its ultimate target.

Phelps financial profile has benefited from $481 million of debt retired during the third quarter, primarily through proceeds from its recent equity offering, S&P added.

Nevertheless, Phelps' financial profile remains weak given the low copper price, soft economic conditions, and weakness at its Phelps Dodge Industries subsidiary, S&P said. The EBITDA to interest ratio for the third quarter was a weak 2.7x at an average realized copper price of 69 cents per pound. Still, despite these concerns, ratings are supported by unused availability under its $1 billion revolving credit facility that matures in 2005, $420 million in cash, a manageable debt maturity profile, and the ability of Phelps to still generate free cash flow during the quarter.

Moody's cuts Lucent

Moody's Investors Service downgraded Lucent Technologies Inc., affecting $7 billion of debt. Ratings lowered include Lucent's senior unsecured debt, cut to Caa1from B2, trust preferred stock, cut to Caa3 from Caa1, and preferred stock, cut to Ca from Caa2. The outlook is negative.

Moody's said the downgrade concludes a review begun on Sept. 13 and reflects the severity of the decline in Lucent's revenue base, the magnitude of its current and prospective cash burn rate, lack of clarity regarding the nature and timing of a rebound in revenue and the reduced liquidity sources following the cancellation of the $1.5 billion bank facility and $500 million accounts receivable securitization vehicle.

Moody's said it recognizes that despite these difficulties Lucent remains a leading vendor to the telecom sector with broad product offerings, a substantial $4.4 billion cash position and a materially reduced cost structure.

Moody's added that it expects telecom spending will eventually rebound as wireline traffic, particularly data, and wireless traffic continue to grow and the company's cash position provides significant support of the cash burn for at least the next 12 months.

However, Moody's believes most wireline and wireless telecom carriers will continue to cut back on capital expenditures in 2003 to absorb some of the excess capacity and to focus on their own cash flow.

The negative outlook reflects the potential for a further downgrade to the extent that continuing cash consumption erodes Lucent's formidable cash base to $1 billion, Moody's said.

Cash burn including the cost of restructuring has been significant. Net cash used in operations in 2002 was nearly $1.5 billion, when adjusted for the positive impact of a $700 million tax refund. In addition to the tax refund, Lucent's cash benefited from $2.5 billion in asset sales and a $1.75 billion preferred stock issue. As a result, Lucent had a cash balance of $4.4 billion at the end of September.

According to the company, the cash costs of the restructuring and operating losses could absorb $2 billion or more in the next 12 months, leaving the company with a minimum cash balance of $2 billion by September 2003. Given the lack of visibility across the industry, there can be no assurance that Lucent will be able to contain its cash burn to the announced level, Moody's said.

Furthermore, while working capital contraction has been a significant source of cash, Moody's believes that most of this benefit has already been received and that once carrier spending reverses, working capital will become a cash drain.

Moody's confirms Cox

Moody's Investors Service confirmed Cox Enterprises, Inc. and its majority-owned subsidiary, Cox Communications, Inc. concluding a review for downgrade begun on Feb. 13. Ratings affected include Cox Enterprises' senior unsecured debt at Baa1 and Cox Communications' senior unsecured debt at Baa2 and subordinated debt at Baa3. The outlook for Cox Enterprises is stable and the outlook for Cox Communications is negative.

Moody's began the review because of concerns about high debt leverage. The review also focused on concerns over continuing acquisition-related event risk in cable, TV, and newspaper businesses and a more challenging economic environment, both of which could hamper the companies' ability to reduce debt leverage within the near-term to levels that Moody's regards as more commensurate with the group's current ratings.

Moody's said it confirmed the ratings because it believes credit metrics for both companies should return to levels in line with their respective ratings by 2004.

Currently, both companies are performing well, but weakly positioned for their ratings, Moody's said.

The rating agency said it believes there is both the ability and increased desire by Cox Enterprises and Cox Communications management to focus on strengthening their balance sheets. In addition market pressure to reduce leverage is likely to remain significant for the near-term.

Moody's said it expects Cox Enterprises' businesses will continue to face cyclical economic pressures for the near-term given waning consumer confidence and global unrest, though advertising is currently gaining back some momentum. The rating agency anticipates EBITDA to increase from 2001 levels through 2004 and free cashflow (EBITDA less cash taxes, taxes, capex, working capital, dividends, and acquisitions net of divestments) for debt reduction will be meaningful. The net result is improving credit measures, with our expectations of debt (including its trust preferred securities, the tax liability associated with its Sprint PCS share monetization securities and the companies exposure under its Manheim Auto Finance Service business securitization program) to EBITDA and debt to free cashflow comfortably under 3.0 times and 10.0 times, respectively by the end of 2004.

Moody's said Cox Communications' weaker credit metrics, which have resulted from past debt-financed acquisitions still remain. However, the rating agency said it believes that debt to EBITDA leverage, and free cashflow generation could improve without any medium-term debt financed acquisitions, and move in line with its Baa2 rating by 2004 to comfortably under 3.5 times, and therefore, the confirmation should be considered highly prospective.

The negative outlook is due to the company's weak debt-to-free-cashflow (EBITDA less interest, taxes, capex, and working capital) metric, and lack of any relative financial flexibility considering the significant continuing investment into the company's cable plant in order to compete effectively with direct broadcast satellite service providers and launch significant new products, Moody's said.

The outlook could be changed to stable if the company were to reduce debt more quickly with meaningful asset sales or exceed Moody's expectations for free cashflow generation.

Moody's lowers Weatherfood outlook

Moody's Investors Service lowered its outlook on Weatherford International Inc. to negative from stable. The company is rated Baa1.

Moody's said the outlook revision is in response to Weatherford's continued high financial leverage combined with low levels of operating cashflow relative to its debt and the lack of free cashflow over the last several years.

Weatherford's total adjusted debt has been steadily increasing over the last couple of years, mainly as a result of several debt financed acquisitions, and currently stands at approximately $2.1 billion (including the A/R securitization, the amount of the convertible debentures at the first put date in 2005, and operating leases).

As a result, total debt-to-capitalization is approximately 50%, which is moderately higher than its Baa1 peers who are generally in the upper 30%'s to 40% (maximum), Moody's said. Weatherford's leverage has been above these levels since 2000 and given the cyclical nature of the oil and gas drilling sector, at the Baa1 rating level Moody's expects Weatherford to maintain a relatively conservative capital structure throughout the cycles to preserve an adequate level of financial flexibility.

In addition, Weatherford is likely to continue pursuing strategic acquisitions, thereby increasing event risk and placing more importance on financial flexibility, the rating agency added.

Moody's also pointed out that Weatherford has a significant amount of goodwill on its balance sheet, approximately $1.4 billion. If the value of the goodwill is deemed to be impaired going forward, that may be another source of negative ratings pressure.

S&P rates Allergan convertibles A

Standard & Poor's assigned an A rating to Allergan Inc.'s new issue of zero-coupon convertible senior notes due 2022. The outlook is stable.

With the completion of the zero coupon convertible offering, Allergan has roughly $1.15 billion in debt outstanding.

Allergan's ratings are based on the company's solid position in specialty pharmaceutical markets, its strong cash flows, and its moderate use of debt financing to fund growth, S&P said.

The company's pharmaceutical business competes in three therapeutic categories - eye care, neuromuscular, and skin care. These are anchored by two franchises: the Alphagan/Alphagan P glaucoma treatments and Botox, a purified neurotoxin complex for muscular spasms. These products collectively account for 50% of the company's sales base.

Allergan's franchise is one of the best-selling glaucoma treatments in the world, and sales continue to grow, S&P said. The company's focus on the eye-care pharmaceuticals market enables Allergan to devote more resources than its competitors to marketing and promoting its products.

Generic competition against the original version of Alphagan is expected in the near future. Consequently, Allergan is quickly converting Alphagan users to its newer patented formulation Alphagan P, and it is estimated that 93% of new prescriptions have been converted to this new formulation. Alphagan is not substitutable for Alphagan P.

Sales of Allergan's neurotoxin Botox, which holds a dominant share of the neurotoxin market, also continue to grow, especially after the recent FDA approval for the drug's cosmetic use, S&P continued. Potential additional indications for lower back pain and migraine headaches should further contribute to the drug's continued sales growth. Other key products, such as Refresh Tears (artificial tears), Acular (a nonsteroidal anti-inflammatory), Tazorac (an acne treatment), and Lumigan (glaucoma therapy), are also growing revenue contributors.

Allergan's near-term financial measures are expected to remain very strong, with funds from operations to total debt of roughly 60%, total debt to EBITDA at about 1.3 times, and EBITDA operating margins of more than 25%, S&P said. EBITDA interest coverage typically approximates 20x.

The company has no significant debt maturities in the intermediate term, S&P said. However, Allergan's existing convertible subordinated notes ($417 million at June 30, 2002) can be put to the company in November 2003. Also, beginning in April 2003, the company has the option to acquire Bardeen Sciences Co. LLC. Bardeen holds the rights to several of Allergan's current products and promising pipeline prospects. Nevertheless, given Allergan's significant on-hand cash, borrowing capacity under its credit facility, and expected strong funds from operations, liquidity is expected to remain significant.

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