S&P puts Lucent on watch

Standard & Poor's put Lucent Technologies Inc. on CreditWatch negative including its notes and B-, convertible senior debt at B- and preferred stock at CCC-.

S&P said the action follows Lucent's announcement that it expects to report a revenue shortfall in its June 2003 quarter.

Because of continued market uncertainty, Lucent no longer expects to return to profitability in the September quarter, as had previously been planned. Variations in product mix could also affect profitability.

This development reflects limited marketplace visibility and the considerable ongoing operating challenges facing Lucent, which have made business planning extremely difficult over the past two years, S&P said.

Lucent now expects to report June 2003 quarterly sales of $1.97 billion, well below its prior expectations, as certain wireless customers deferred previously anticipated purchases, S&P noted. It is expected to report a net loss for the quarter of about $250 million, about the same as its net loss from operations in the March 2003 quarter. Lucent will report June quarterly results on July 23, 2003.

Lucent had reported sales of $2.4 billion in the March 2003 quarter, up from $2.1 billion in the December 2002 quarter, and had been trimming its operating losses.

Lucent continues to maintain sufficient liquidity to meet operational needs, with $3.4 billion cash at March 31, 2003; the cash burn in the March quarter was about $300 million, S&P said. Intermediate-term liquidity will not be materially affected by a $1.63 billion senior debenture issue in May 2003, as Lucent expects to apply the proceeds toward the repayment or possible repurchase of certain short- and medium-term obligations.

S&P cuts Shaw, on watch

Standard & Poor's downgraded Shaw Group Inc. including cutting its $250 million senior secured revolving credit facility to BB from BB+ and $250 million senior unsecured notes due 2010 and $790 million 2.25% LYONs due 2021 to BB- from BB and put it on CreditWatch negative.

S&P said the actions follow Shaw's announcement that it has again lowered 2003 earnings and cash flow guidance, as well as lowering its 2004 earnings guidance, because of weaker-than-expected profitability from its pipe fabrication business, continued poor demand in the domestic power market and the inability to generate funds from a few troubled projects with financially distressed clients.

Although Shaw kept its 2004 free cash flow guidance in the $90 million-$110 million range, guidance is now highly contingent ($56 million-$63 million) on asset sales.

Shaw's comments imply that it will come close to breaking at least two financial covenants under its bank credit agreement for at least the next five quarters, as well as being in a weaker position to manage the expected put on its remaining LYON note issue in May 2004 (which the company has estimated at $268 million), S&P said.

With regard to bank covenants, Shaw has a minimum EBITDA test of $135 million, compared to 2003 guidance of $140 million-$145 million, and 2004 EBITDA expectations of $140 million-$150 million. Although the bank calculation includes gross margin reserves in Shaw's calculation of EBITDA, S&P estimated that this non-cash GAAP accounting convention may account for approximately 20% of total EBITDA in 2003. Shaw also has a minimum liquidity test, which is defined as $75 million of unrestricted cash plus $50 million of revolving bank capacity after the May 2004 put. In the company's 8-K filing dated Feb. 28, 2003, it had anticipated having $408 million of cash available to satisfy the probable put, as well as $120 million of availability under its bank line after the put.

Now, given the new forecasts, it looks like the company might barely be able to meet the test. But, more likely than not, will need to obtain funds from the capital markets to at least maintain a more reasonable level of financial flexibility appropriate for a multibillion-dollar global construction company, S&P said. Obtaining additional resources may prove challenging and costly, given Shaw's reduced near- and intermediate-term outlook, the 11% yield on its unsecured notes issuance rated in February 2003, and its low stock price.

Moody's rates IMC Global notes B1

Moody's Investors Service assigned a B1 rating to IMC Global, Inc.'s new $310 million guaranteed senior unsecured notes due 2013 and confirmed its existing ratings including its guaranteed senior unsecured notes at B1, senior unsecured notes and debentures at B2, guaranteed senior secured credit facility at Ba3 and mandatory convertible preferred shares at Caa1. The outlook is stable.

Moody's' said the ratings reflect IMC Global's high leverage, weak coverage of interest expense, weaker than expected domestic fertilizer demand and higher average feedstock costs.

The ratings also reflect Moody's opinion that a protracted recovery in the global supply/demand balance and elevated manufacturing costs will limit the company's ability to improve free cash flow, implying the potential for weak credit metrics over the intermediate-term.

The ratings are supported by the company's improved liquidity following recent asset sales and issuance of mandatory convertible preferred shares, strength in diammonium phosphate pricing, actions taken to reduce costs and balance the market and the prospect for limited global DAP capacity additions in the near-term. The ratings also derive support from the company's leading position as the largest global supplier of phosphate and potash fertilizers and the relative stability of the potash business.

Issuance of the new unsecured notes is part of IMC's financing plan to address 2005 debt maturities. Assuming all of the proceeds from the new notes are applied to the tendered bonds, the company would only have $150 million of remaining notes due 2005 versus a pro forma cash balance, adjusted for the Potash credit facility and mandatory convertible preferred shares, of $140 million and no amounts outstanding under the revolver. Moody's noted the company needs to refinance all the 2005 maturities before Oct. 15, 2004 to avoid an acceleration of the maturity of the credit facility to that date from 2006.

The ratings derive support from recent steps IMC Global has taken to improve liquidity such as the sale of its minority interest in Compass Minerals Group, Inc. and its SOP business line to Compass for approximately $60 million combined and the issuance of $137 million of mandatory convertible preferred shares, Moody's added. Furthermore, the company has also announced restructuring actions and productivity initiatives, which are expected to yield significant cost savings over the next several years.

Nevertheless, Moody's said it is concerned that the company may need additional covenant relief in 2004. Additionally, higher production costs and significant maintenance capital expenditures will constrain the company's ability to expand free cash flow, which was negative in 2002.

Fitch cuts IMC, rates notes B+

Fitch Ratings downgraded IMC Global Inc. and Phosphate Resource Partners LP including cutting its senior secured credit facility to BB- from BB+, senior unsecured notes with subsidiary guarantees to B+ from BB, senior unsecured notes with no subsidiary guarantees to B from B+ and Phosphate Resource's notes to B from BB+. Fitch assigned a BB- rating to IMC USA Inc.'s new $55 million borrowing base revolver, a CCC+ rating to IMC's new mandatory convertible preferred securities and a B+ rating to its new $310 million guaranteed senior unsecured notes. The outlook remains negative.

Fitch said it cut IMC's ratings because of continued weak profitability, primarily in the phosphates business, and weak credit statistics, particularly leverage.

IMC's costs have increased in 2003 due to higher average natural gas prices and higher average sulfur prices. Despite improvement in phosphate pricing, margins remain under pressure.

The negative outlook reflects the uncertainty in margin recovery in the near-term. Higher average natural gas prices are expected to continue to support higher ammonia prices, an important raw material for phosphate production, Fitch said.

S&P raises Newfield outlook

Standard & Poor's raised its outlook on Newfield Exploration Co. to stable from negative and confirmed its ratings including its senior unsecured debt at BB+, subordinated debt at BB- and preferred stock at B+.

S&P said the outlook revision reflects Newfield's decision to issue new common equity and use the proceeds to reduce debt leverage by redeeming subordinated debt securities.

The transaction will reduce total debt by about 15% and fixed charges by $0.05 per thousand cubic feet equivalent of production.

The outlook revision also reflects the expectation that Newfield's financial profile will continue to strengthen materially in 2003 as strong commodity prices drive deleveraging through increased retained earnings and the application of free cash flow to debt reduction. S&P said it believes that Newfield could generate more than $150 million of free cash flow in 2003 and drive its debt leverage into the low-30% range.

Although Newfield could post financial metrics in 2003 and beyond that are much stronger than the BB median, S&P said it is unlikely to raise its ratings on Newfield in the near term because of the expectation that Newfield's leverage eventually will rise as the company invests for growth. In addition, Newfield's cash flows today are supported by cyclically high prices and are likely to fall as the hydrocarbon pricing cycle inevitably turns.

Furthermore, the ratings on Newfield remain constrained by a very short reserve life and a relatively high cost structure. Like much of the U.S. exploration and production industry, Newfield's cost structure has deteriorated in recent years although increases in commodity prices have compensated for rising costs.

Moody's raises Emmis outlook

Moody's Investors Service raised its outlook on Emmis Communications Corp. to stable from negative and confirmed its ratings including its $287 million 12.5% senior discount notes due 2011 at B3 and $143.8 million 6.25% cumulative convertible preferred stock at Caa1 and Emmis Operating Co.'s $220 million senior secured revolving credit facility due 2009, $205 million senior secured tranche A term loan due 2009 and $500 million senior secured tranche B term loan due 2009 at Ba2 and $300 million 8.125% senior subordinated notes due 2009 at B2.

Despite Emmis' mostly debt-financed acquisition strategy, the improved operating environment and opportunities for cost savings should contribute to greater stability in the company's financial performance and ultimately result in stronger credit metrics, Moody's said.

However, Emmis' ratings continue to reflect the company's high financial leverage (albeit notably lower than last year) and modest cash flow coverage of interest and capital expenditures. In addition, given its aggressive acquisition strategy, the company faces integration risks associated with its most recently announced and potential future acquisitions.

Moody's said it believes Emmis will continue to pursue radio and television acquisitions and continue to contemplate a means for spinning off the company's television assets. As a result, event risk for Emmis remains significant. This is demonstrated by the company's interest in certain NewsCorp television stations and partial ownership of the Dodgers. Emmis' recent acquisition of a 50% stake in an Austin radio cluster reflects a high 21 times acquisition multiple (including a stick). The acquisition modestly re-levers the company, although it adds geographic diversification.

The ratings also consider the risks associated with the company's somewhat concentrated exposure to the New York and Los Angeles economic environments, as they represent 12% and 11% of total revenue, respectively, and an even greater percent of broadcast cash flow (35% cumulatively); the highly competitive nature of the company's radio markets; and exposure to the cyclical advertising environment, particularly national advertising which has proven to be more volatile, Moody's said. In addition, Emmis' television and radio EBITDA margins remain below that of the company's peer group, due to a strategy of acquiring "turn-around" properties and the existence of high corporate expenses.

However, the ratings also consider expectations of credit metrics with greater stability as the advertising environment has strengthened, and acquisitions should have a smaller impact on the company's overall performance. Total debt leverage has declined from over 9 times to about 7 times between year end 2002 and 2003, pro forma for acquisitions, and is expected to remain in that range over the near term, Moody's said. In addition, the ratings are supported by the substantial underlying asset value of the company's portfolio of radio and television stations. Emmis owns radio stations in the largest markets in the country, including New York, Los Angeles, and Chicago.

S&P says Dynegy unchanged

Standard & Poor's said Dynegy Inc.'s ratings are unchanged including its corporate credit at B with a negative outlook after the company announced proposed refinancing and restructuring transactions.

S&P said it views the proposed transactions as an enhancement to credit quality because it provides clarity regarding the $1.5 billion convertible preferred security due in November 2003.

Furthermore, the proposed tender offer, if successful, could relieve some near-term refinancing risk associated with debt maturing over the next few years.

This mitigates some concern regarding Dynegy's near-term liquidity position, which currently stands at about $1.6 billion in cash and availability under its credit facility, but does not facilitate a change in credit quality.

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