S&P says El Paso offerings positive

Standard & Poor's views El Paso Corp.'s (BBB+/stable/A-2) announcement that it will issue the $1.5 billion of equity securities, including $500 million of mandatory convertibles, it outlined in its strategic repositioning plan as supportive of the firm's credit quality.

The offerings, which are in line with El Paso's plan to enhance its financial stability, lends further credibility to the company's ability to quickly accomplish its key financial goals embarked upon in part to maintain its credit ratings.

Moody's cuts Goodyear to Ba1

Moody's downgraded the long-term debt rating of The Goodyear Tire & Rubber Co. to Ba1 from Baa3 and the short-term debt rating to Not-Prime from Prime-3. The downgrade impacts approximately $2.2 billion of senior unsecured debt. The outlook is negative.

The downgrade reflects Moody's expectation that Goodyear's recent weak financial performance will continue through 2002 due to flat overall unit demand and an unfavorable shift in sales mix.

Some improvement in financial performance is anticipated in 2002 due to positive pricing initiatives, cost reductions and improved capacity utilization.

Nevertheless, cash flow generation will remain constrained until global tire volumes return to more normal demand levels.

Consequently, no material improvement in Goodyear's credit metrics is expected until the late 2003 timeframe.

The negative outlook is based on Moody's expectations that Goodyear will continue to face significant challenges through the intermediate term in restoring more appropriate financial measures for the current rating level.

More specifically, the rating could come under pressure if the company is unable to achieve the full level of expected benefits from restructuring initiatives.

Furthermore, the inability to generate top-line growth and increased revenue-per-tire, coupled with a rise in raw materials costs, could also place downward pressure on the rating.

The outlook also reflects concern that increasing cash outlays could result from Goodyear's substantially under-funded pension plan. In addition, the company's potential exposure to ongoing asbestos and product liability litigation will be a factor.

Absent asset sales, Moody's expects that Goodyear will generate significantly less free cash flow in 2002 than the $420 million, excluding $249 million in proceeds from the sale of receivables, achieved in 2001.

The rating agency expects that Goodyear's credit metrics will likely show only modest improvement this fiscal year and anticipates that EBIT/Interest will remain below 2 times, total debt/capitalization will remain near 50% and total debt/EBITDA will exceed 3 times.

Moody's expects free cash flow to be used for debt reduction.

The company's liquidity position is supported by a cash balance of $646 million at March 31.

Goodyear has no outstandings under its $1.525 billion of revolving credit facilities which consist of a 364-day $775 million facility maturing in August of 2002 and a 5-year $750 million facility maturing in August of 2005.

The option to convert the 364-day facility into a two-year term loan provides further financing flexibility.

Both facilities contain no MAC provisions, provide same day borrowing capability and are subject to several covenants including maintaining a minimum interest coverage ratio of 2.75 times through yearend 2002.

Moody's noted that the same covenants are also applicable to the bank term loan maturing in 2004. The company's long-term debt maturity schedule includes $89 million coming due in 2002, $336 million in 2003 and $815 million in 2004.

Goodyear has not identified any ratings triggers that would require significant cash calls on the company's cash flows or current cash position.

S&P cuts Sprint to BBB-

Standard & Poor's lowered the long-term corporate credit rating on Sprint Corp. to BBB- from BBB+ and the short-term corporate credit rating to A-3 from A-2.

As of March 31, the company had total debt outstanding of about $25 billion, including convertibles.

The downgrade was based on the higher business risk profile of the company, especially of the wireless sector.

The higher risk is due to increased competition from other nationwide service providers, the effect on the quality of the subscriber base from a substantial portion of sub-prime customers and the technology risk related to the deployment of 1XRTT for higher-speed data and the uncertainty of the demand for such services.

In addition, S&P perceives a longer-term risk from the significantly weaker Sprint PCS affiliates whose networks cover about 20% of Sprint PCS's total population equivalents.

Although Sprint PCS does not have an obligation to support these affiliates financially, this could be a concern longer term if growth in the wireless industry continues to be negatively impacted.

Furthermore, fundamental weakness in the long-distance industry is expected to continue due.

These negative factors are somewhat offset by the better business risk profile and strong cash flows of Sprint's local exchange carrier segment, which comprises about 20% of revenues and about 40% of EBITDA.

In addition, unlike some of its peers, Sprint benefits from the diversity of being able to offer an integrated package of local, long distance and wireless services.

On Thursday, Sprint announced that it anticipates net subscriber additions for the full year of 2002 to be 10% to 15% lower than previously anticipated because of aggressive competition from other nationwide wireless operators and redefining its credit policies for certain sub-prime wireless customer segments, primarily Clear Pay.

The increase in Clear Pay subscribers over the past year has increased churn, which was 3% in the first quarter of 2002. Churn is expected to remain in the 3% area as the company enhances its credit requirements for this customer class.

PCS presently comprises more than 40% of consolidated Sprint revenues and about 40% of EBITDA.

S&P does not expect wireless data to be a meaningful contributor to overall revenue in the near term.

Sprint also announced Thursday that FON Group revenues, which comprise local, long distance and directories, are expected to decline at a mid-single-digit rate compared with the previous expectation of a low-single-digit rate decline.

This revision is the result of continued weakness in the long-distance and equipment distribution businesses and the impact of the economy on local access line growth.

Debt leverage ratios have been high due to capital expenditures related to PCS growth and investment in the ION network, which Sprint wrote down in the fourth quarter of 2001.

In the first quarter of 2002, debt to EBITDA on an annualized basis was about 3.5 times while EBITDA interest coverage was about 5.6 times.

Regarding liquidity, cash balance was about $2.2 billion as of March 31and $5.0 billion was available under Sprint's unsecured bank facilities. In addition, Sprint recently completed a new $500 million PCS accounts receivable asset securitization program.

The rating recognizes a diversified revenue mix and assumes some stabilization in the business risk profile over the next 12 to 18 months.

It also incorporates S&P's expectation that the $3 billion revolving credit facility that expires in August 2002 will be renegotiated successfully.

S&P rates Barnes & Noble bank revolver at BB

Standard & Poor's assigned a BB to Barnes & Noble Inc.'s $500 million senior secured revolving credit facility that matures in May 2005.

The B+ rating on the 5.25% convertible subordinated notes due 2009 was affirmed, as was the BB corporate credit rating.

Barnes & Noble's bank facility is secured by contracts, accounts receivable, patents, trademarks, other intellectual property rights and capital stock of certain subsidiaries such as GameStop, which may provide some measure of protection to lenders.

However, based on S&P's simulated default scenario, it is not certain that a distressed enterprise value would be sufficient to cover the entire loan facility.

Financial covenants include a fixed-charge coverage ratio of not less than 1.6 to 1.0, maximum total funded debt to total capitalization of not more than 2.5 to 1.0, and limitations on capital expenditures, cash dividends and unsecured indebtedness.

The ratings reflect the fiercely competitive book retailing industry and significant capital requirements resulting from the company's store expansion strategy.

These factors are offset, somewhat, by the company's leadership position in book retailing and the success of its superstore format.

Credit protection measures are good, with EBITDA coverage of interest of 3 times and funds from operations to total debt about 27%.

The company is moderately leveraged, with total debt to EBITDA of 2.5 times.

Liquidity is provided by a $500 million revolving credit facility and cash equivalents of $183.3 million as of May 4, 2002. The company had $55 million outstanding under its $850 million credit facility as of May 4, 2002. The $850 million facility was replaced with the $500 million facility on May 22, 2002.

Barnes & Noble's leading position in the retail book industry provides support to the ratings.

The ratings could be raised if the company demonstrates success with its game business and its share of losses at Barnes & Noble.com stabilizes or declines.

Moody's cuts Hewlett-Packard ratings

Moody's lowered Hewlett-Packard Co.'s senior unsecured to A3 from A2.

The credit ratings of Compaq Computer Corp. (senior unsecured at Baa2) remain under review for possible upgrade pending clarification on whether Hewlett-Packard will guarantee Compaq's debt.

The rating outlook is negative.

The downgrade reflects challenges and uncertainties regarding the integration of the combined operations of Hewlett-Packard and Compaq so that cost synergies are achieved while growing revenues in a very difficult economic and competitive environment.

Other pressures include ongoing operating losses in two segments that account for 55% of consolidated revenue and expectations that the weak demand environment will continue to pressure revenues and profitability.

At the same time, Moody's recognizes the strong printer franchise that generates solid and consistent profitability and cash flow, consistent profitability of the overall services business, as well as Hewlett-Packard's solid liquidity and lowly leveraged balance sheet.

The negative outlook reflects the likelihood of prolonged and deeper weakness in overall corporate and consumer demand, which has negative operating leverage implications that could offset near term cost savings, thus delaying a return to improved levels of profitability.

Illustrating continued weak market conditions and poor visibility, management recently revised revenue expectations to negative 5%, from 2-3% growth in the second half of fiscal 2002, with intermediate term market growth less robust than earlier anticipated.

Also, Moody's remains concerned that full and consistent execution of the scale-based cost synergies could prove more challenging than expected, thereby limiting the cost reductions that are critical to improving operating profitability, particularly in the personal systems and enterprise systems areas.

Hewlett-Packard continues to maintain a liquid balance sheet.

Cash and short-term investments total $12.9 billion as of April and the company has a $2.67 billion committed credit facility maturing March 2003 with a non-conditional one year term out option and a $1.33 billion credit facility maturing March 2005, both of which are unused.

Having built cash over the last two quarters, notably from working capital reductions, Moody's expects that Hewlett-Packard will consume some cash over the next few quarters due to restructuring actions and product introductions, although financial flexibility will remain robust.

Restructuring actions, which include headcount reduction of about 15,000, facilities consolidation and lease cancellations are expected to require around $2 billion of cash over the next year.

Moody's expects the capital structure will remain conservative.

While the only direct debt issued by HP Finance Co. is a $150 million note due November, about 80% of total debt relates to its financing business, whose notional capital structure is a modest 4 times debt to equity.

Excluding finance operations, core debt is about $2 billion, which compares with over $3 billion of free cash flow , after capital expenditures and dividends, over the last 12 months.

Consequently, Moody's believes that financial risk remains very low, however, the heightened business risk posed by the merger, combined with significant competitive and market challenges drives the rating action.

Moody's cuts Aames senior debt

Moody's Investors Service downgraded Aames Financial Corp.'s senior debt to Caa3 from Caa2 and confirmed its subordinated debentures at Ca. The outlook remains negative.

Moody's said it cut the senior debt because it believes holders of these securities will potentially suffer a more severe loss following the company's commencement of its previously announced exchange offer for its outstanding 5.5% convertible subordinated debentures due 2006.

The exchange includes a mandatory sinking fund payment to subordinated debt holders on Dec. 15, 2002 for 30% of the amount of new debentures issued in the offer.

Moody's said it believes this provision weakens the position of the senior unsecured debt holders in Aames' capital structure because it will allow cash to be paid out to subordinated debt holders ahead of the retirement of the senior unsecured notes.

In addition, Moody's said Aames' liquidity and financial flexibility remain severely constrained.

The company has $150 million of unsecured senior debt maturing on Nov. 15, 2003 and at this time it appears that the company may have difficulty obtaining sufficient financial resources, Moody's said.

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