S&P cuts Siebel outlook to stable

Standard & Poor's affirmed Siebel Systems Inc.'s BB corporate credit and B+ subordinated ratings, including the 5.5% convertible notes due 2006 at B+, but revised the outlook to stable from positive, reflecting lowered expectations for enterprise software spending.

The ratings reflect a narrow product and revenue base and very competitive industry conditions, offset by a leading niche market position, good cash flow and adequate financial flexibility, S&P said.

Although Siebel has developed a leadership position in its market, the company faces technology risks and competitive threats from entrenched and larger competitors, as well as the challenges of integrating ongoing acquisitions.

However, product introductions, further penetration of its installed customer base and strategic alliances with system integrators and key software and hardware providers may restore growth, albeit at more moderate rates than in the past, S&P added.

For the June quarter, Siebel's software license revenues fell 41%, to $170 million, from $287 million in the prior-year period, and total revenues fell 28%, to $406 million from $560 million.

The decline in total revenues was buffered somewhat by recurring professional services and maintenance revenues. Still, S&P said it expects that lower overall enterprise software spending levels are likely to limit improvements in operating margins over the near term, despite the planned 16% headcount reduction and facilities consolidations.

Profitability measures remain adequate, with operating margins falling below 20% in the June quarter from more than 25% over the past two years.

Despite lower profitability levels, Siebel increased cash balances almost $120 million in the June quarter. A growing installed base, coupled with cash and investments of $2 billion as of June that exceed the $1.2 billion in lease-adjusted debt, provide sufficient ratings support.

Constrained enterprise software spending levels limit ratings upside for now, while the leading market position, good cash flow and liquidity provide credit support.

S&P cuts Kulicke & Soffa

Standard & Poor's lowered Kulicke & Soffa Industries Inc.'s subordinated debt rating to CCC+ from B-, including the 4.75% and 5.25% convertible notes due 2006. S&P cut the corporate credit and senior unsecured ratings to B from B+.

Kulicke & Soffa has about $340 million in lease-adjusted debt and no debt maturities before 2006.

The downgrade reflects continued declines in the company's cash position, along with expectations that recovery in the semiconductor packaging equipment industry is likely to be slower than previously expected.

Very volatile sales, and negative profitability and cash flow are offset by a leading market position and adequate liquidity for the new ratings level.

While S&P still expects slow improvements in market conditions over the near term, a protracted downturn in semiconductor packaging equipment and materials demand, along with earlier cost cuts that have proven to be insufficient for resizing the company's expense structure, are likely to delay Kulicke & Soffa's return to profitability and positive cash flow.

Specifically, the company is experiencing pricing pressures related to disappointing sales of its new premium-price equipment, difficulties integrating recent acquisitions and excess costs related to a facilities transition to China, S&P said.

While last year's debt-funded acquisitions of two semiconductor test-equipment components providers, both consumables businesses, smoothed steep declines in equipment sales, the test segment experienced $15 million in operating losses over the nine months ended June.

Although the company's total-solutions strategy of providing equipment, materials, and technology to its customer base may ultimately achieve sustained profitability, market conditions remain challenging.

Operating profits and EBITDA levels for the 12 months ended June were negative and cash usage accelerated to $33 million in the June quarter.

Planned cost reductions and modest sequential sales improvements should reduce losses over the near term and cash balances of $132 million as of June provide adequate liquidity to fund near-term operating losses.

S&P said it expects that cost cuts and modest sales improvements are likely to stem cash usage rates over the near term. As such, cash balances should provide adequate liquidity to support the ratings.

Moody's rates SPX bank loans at Ba2

Moody's assigned Ba2 ratings to SPX Corp.'s proposed $450 million senior secured Term Loan B due September 2009 and proposed $750 million senior secured Term Loan C due March 2010. Also, Moody's confirmed its existing ratings, including the two 0% convertible notes due 2021 issues totaling $847 million at Ba3. The outlook remains positive.

The ratings reflect strong market position and increasing diversification, good track record of executing large-scale acquisitions, solid performance during the recent economic downturn, relatively stable and growing cash flow generation, and strong management, Moody's said.

However, the ratings also reflect its moderate debt leverage, substantial goodwill and negative tangible net worth, acquisitive growth strategy and associated integration challenges, and uncertainty in its future acquisition finance structure.

The outlook reflects Moody's expectation of continuing operational and cost structure improvements and a more favorable operating environment over the medium term.

Factors that could cause Moody's to consider a positive rating action include sustained improvements in operating margins and free cash flow generation, lower debt level and leverage, and an improved economic environment.

Factors that could cause Moody's to consider a negative rating action include major debt-financed acquisitions that result in higher debt and leverage, and protracted weakness in its key-end markets.

The company generates relatively strong and increasingly stable earnings and cash flows.

Financial performance through the recent economic downturn was solid, helped by both cost-cutting efforts and increasing diversification.

On a pro forma basis, the company generated revenues of about $5 billion and operating margin of 10.5% in 2001, at about the same level as 2000, despite a challenging economic environment.

In first quarter 2002, SPX reported notable improvement in its operating margin to 11.8% from 8.8% from a year ago, as it continued to reap the benefits of cost-cutting efforts and the integration of UDI.

Moody's said it expects further operational and cost structure improvements and stronger earnings and cash flow generation for 2002.

Moody's noted, however, that the company's growth strategy is acquisitive and may continue to make large-scale as well as bolt-on acquisitions in order to grow its business.

Over the past two years, the company has completed several acquisitions, adding about $2.6 billion in revenues and doubling its size. The company's active acquisition activities cause concerns over integration risks, as well as an increased debt load and substantial negative tangible equity.

At the end of March, total debt amounted to $2.54 billion, while intangible assets were nearly $2.9 billion, resulting in negative tangible equity of $1.2 billion.

Subsequent to this refinancing, SPX will remain moderately leveraged.

For the last 12 months ended March, total debt of $2.5 billion would be 3.4 times LTM EBITDA of $745 million, or 4 times LTM EBITA of $632 million, both excluding $91 million of restructuring charges.

Adjusted LTM EBITDA and EBITA would cover interest expenses about 5.1 times and 4.3 times.

The company's liquidity condition is good.

At the end of March, the company had about $375 million cash on hand and no outstandings under its $600 million revolving facility.

The amended credit agreement gives the company more leeway in incurring additional debt and making acquisitions, among other changes.

Moody's raises CKE outlook

Moody's revised the rating outlook for CKE Restaurants Inc. to stable from negative and confirmed all ratings, including the $148.1 million of convertible subordinated notes due 2004 at Caa2.

The ratings reflect financial leverage relative to higher rated restaurant peers, intense competition in the quick service restaurant industry and relatively slow growth of the hamburger segment, Mooydy's said.

However, the ratings recognize that CKE is the fourth largest quick service hamburger concept and management's progress at reducing the debt balance.

The stable outlook reflects an expectation that the company will continue improving operations and reducing leverage.

Moody's said it expects that cash flow from operations will cover capital expenditures and debt service obligations.

Over the medium term, ratings could move upward as the company improves free cash flow, the 2004 convertible notes are successfully refinanced and the system profitably expands.

However, ratings may be negatively impacted if the recent performance improvements at Hardee's were to reverse, liquidity resources proved insufficient, or a significant proportion of franchisees experienced financial difficulties.

Fitch lowers Duke outlook

Fitch Ratings changed the rating outlook of Duke Energy Corp. and subsidiaries to negative from stable.

Fitch also lowered Duke Energy's commercial paper rating to F1 from F1+, reflecting uncertainties arising from the company's response to the Securities and Exchange Commission request for information about round trip energy trades.

Ratings of A+ for senior debt and A for preferreds were affirmed.

In its response to the SEC, Duke identified 46 round trip trades that had the apparent purpose of increasing volumes on the Intercontinental Exchange electronic trading platform, of which Duke is one of 13 equity owners.

The trades inflated revenues by $126 million, but had no impact on earnings.

The company also indicated it was still investigating 3,000 additional trades.

Duke had previously disclosed $1.1 billion of revenue associated with round trip trades in the western market in response to a Federal Energy Regulatory Commission inquiry.

While the revenue associated with the matched trades is immaterial in comparison to consolidated revenue of $51 billion, the negative outlook reflects the potential for further disclosures and the impact on capital market access.

The previous stable outlook assumed Duke would issue about $1 billion of equity or equity hybrids in 2002 to provide permanent funding of its acquisition of Westcoast Energy, Fitch said.

Fitch will continue to monitor Duke's ability to execute its financial plan as well as the credit impact of its substantial capital program.

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