S&P cuts some Qwest debt, on watch

Standard & Poor's downgraded Qwest Communications International Inc.'s corporate credit rating and Qwest Capital Funding Inc.'s senior unsecured debt and put them on CreditWatch with negative implications. The action affects about half of Qwest's $26 billion of outstanding debt.

S&P also confirmed Qwest Corp.'s corporate credit and senior unsecured debt at B-. Qwest Corp.'s outlook continues to be developing.

S&P said the actions follow Qwest's announcement of a private offer with bondholders at Qwest Capital Funding to exchange their nearly $13 billion of debt for debt at Qwest Communications International and intermediate holding company Qwest Services Corp., at an overall discount of as much as 20% from face value.

The transaction will result in an overall reduction of debt for the combined company of between approximately $2.2 billion to $2.6 billion, S&P said.

S&P said it considers the transaction to be a distressed exchange due to the discounts and extension of maturities involved.

As a result S&P considers it to be tantamount to a default by the company.

On completion of the transaction the senior unsecured debt at Qwest Capital Funding will be lowered to D and the corporate credit rating for guarantor Qwest Communications International will be lowered to SD (selective default). The ratings will subsequently be reassessed under the new capital structure, including the implications of the granting of junior liens and first liens as part of the debt exchange.

Despite the anticipated reduction in debt and lengthening of some maturities, the amounts involved are not that material relative to the company's total financial burden and overall maturities through 2005, S&P added. As such, the corporate credit rating reassigned to Qwest Communications International after the transaction closes in December 2002 is not likely to change from the previous B-.

A high degree of risk continues to surround Qwest Communications International due to the pending Department of Justice criminal and SEC investigations, and the fact that near-term liquidity still remains a source of concern, particularly if the $4.3 billion second phase of the company's directories sales is delayed beyond 2003, S&P said.

S&P added that it also expects to assign a CCC+ rating to the new senior subordinated secured notes to be issued at Qwest Services Corp.

Moody's keeps Qwest on review

Moody's Investors Service said Qwest Communications International, Qwest Capital Funding and Qwest Services Corp remain on review for downgrade. Moody's currently rates Qwest Communications and Qwest Capital Funding's debt at Caa1 and Qwest Corp. at Ba3.

Moody's comments come in response to Qwest's announcement that it will offer qualified institutional investors an opportunity to exchange bonds of Qwest Capital Funding, which total $12.9 billion, for new securities at a structurally senior holding company, Qwest Services Corp.

The ratings will remain on review for downgrade until the exchange is complete and the company's capital structure has been finalized and Moody's can better assess the company's business prospects with a thorough examination of audited financials.

At completion of the exchange, Qwest's consolidated debt will be reduced, which in isolation is a credit positive, although the extent will not be known until the offer expires, Moody's said.

Moody's noted that Qwest is seeking negative concessions, asking existing Qwest Capital Funding bondholders to accept a discount to par, extend the maturities (for those bondholders holding shorter-dated securities), and create more structurally senior debt at Qwest Services, which will rank ahead of the pro-rated tendered bonds that end up at Qwest Communications.

Even after the exchange offer is completed, Moody's said there will still be concerns about continuing pressure on Qwest's businesses, both local exchange and long distance, lack of clarity as to Qwest's restated financials, and completion of the second phase of the Dex sale.

Fitch keeps Qwest on negative outlook

Fitch Ratings said its assessment of Qwest Communications International, Inc. is unchanged and the outlook remains negative after the company launched a private offer to exchange approximately $12.9 billion of senior unsecured debt securities outstanding at Qwest Capital Funding, Inc. for new debt securities issued by Qwest Services Corporation and Qwest Communications. Fitch rates Qwest Communications and Qwest Capital Funding's senior unsecured debt at CCC+ and Qwest Corp.'s senior unsecured debt at B.

Fitch said it expects the exchange offer will reduce the company's debt level and extend near term maturities.

However, Fitch expects that the company's interest expense will likely be higher as a result of the exchange, partially offsetting the positive impact of extending the near-term maturities.

From Fitch's perspective the company's ability to manage its maturity schedule and liquidity is a key rating consideration given the company's lack of capital market access to refinance maturities and limited pool of assets available for sale in a timely manner.

Fitch acknowledges that the Dex sale coupled with the amended credit facility provides the company with a level of near-term liquidity stability.

However continued deterioration of the company's core operations pressure the company's credit profile and capacity to generate free cash flow and compromise the company's ability to meet debt service requirements, Fitch said.

Currently the company has approximately $1.2 billion of bonds scheduled to mature in 2003, $2.1 billion of bonds scheduled in 2004 and $950 million in 2005, Fitch noted.

While bondholders will receive less than par value in the exchange offer, Fitch considers the difference a market risk loss. Fitch does not consider the company's proposed exchange offer a distressed debt exchange under its criteria. The exchange offer is private and viewed as a voluntary exchange that contains financial incentives and includes no minimum amount of bonds to be tendered to affect the exchange or that the inability to complete this exchange will result in a near-term bankruptcy.

Moody's cuts Avaya three notches

Moody's Investors Service downgraded Avaya Inc. by three notches, affecting $933 million of debt. Ratings lowered include Avaya's senior secured notes, cut to B2 from Ba2 and senior unsecured LYONs, cut to B3 from Ba3. The outlook is stable apart from the LYONs which have a negative outlook.

Moody's said the downgrade reflects continued weakness in enterprise spending for telecommunications equipment, uncertainties regarding the timing and magnitude of an eventual rebound in revenues, the expectation of continued weak returns until market conditions improve and the company's significant gross debt level.

Positives include Avaya's leading position as a provider of enterprise telecommunications equipment, its substantial progress in reducing its cost base, the benefits to the balance sheet from the issuance of equity and conversion of preferred stock to common equity earlier this year, the company's sizable cash balance and its success in improving cash flow, albeit at very low levels, Moody's added.

The stable outlook reflects Moody's view that Avaya has sufficient cash on hand to weather the next 12 months.

However Moody's said it is concerned that the continued lack of visibility in the market for Avaya's products could result in further declines. This would have a negative impact on operating performance and could lead to further restructuring efforts.

Of greater concern is the LYONs where holders have a put right in October 2004. The outlook for the LYONs is negative because, in Moody's opinion, it is possible that they will be restructured in the future.

Moody's cuts Alcatel three notches

Moody's Investors Service downgraded Alcatel's senior debt to B1 from Ba1, affecting $4.1 billion of debt. The outlook is negative.

Moody's said the downgrade reflects the severe contraction in Alcatel's revenue flow with no material indications of a near-term stabilization, the need for additional downsizing should the current rate of business decline of above 30% extend well into 2003 and increasing constraints on the company's financial flexibility, marked by reduction of its financial investment portfolio and the increasing tightness of covenants in its credit facilities.

Despite Alcatel's success in generating free cash flows and reducing net debt levels to a historical low over recent challenging quarters, Moody's said it remains concerned that the company's primary sources of cash, working capital reductions and disposals of financial investments have been materially reduced and that the full effect of cash consumption from operations will set in.

Moody's added that its B1 rating assumes revenues will stabilize during 2003 materially above the company's operating break-even target level of €3.0 billion per quarter to be achieved by the fourth quarter of 2003.

The negative rating outlook, however, reflects Moody's view that with no indication yet of a slowdown in the rate of revenue decline currently exceeding 30% further rating downgrades would be appropriate if the slide were to continue unabatedly.

S&P says Owens & Minor unchanged

Standard & Poor's said its ratings on Owens & Minor Inc. are unchanged at a BB corporate credit rating with a positive outlook after the company announced it is authorizing the repurchase of up to $50 million of common and preferred stock.

S&P noted Owens & Minor continues to extend its favorable operating performance. This has contributed to an increase in its financial strength that limits the effect of such a repurchase program on Owens & Minor's credit profile.

Fitch cuts Protection One

Fitch Ratings downgraded Protection One, Inc. including cutting its senior unsecured notes to CCC+ from B and senior subordinated notes to CCC- from CCC+. The outlook remains negative.

Fitch said it lowered Protection One because of its declining credit metrics, potential liquidity constraints, and weakened but stabilizing operating performance.

The negative outlook reflects uncertainties about Protection One's ability to refinance the revolving credit facility, restrictions associated with the Kansas Corporation Commission Order and the recent Securities and Exchange Commission inquiry.

Protection One's leverage, measured by total debt-to-EBITDA, has increased to 5.7 times for the 12 months ending Sept. 30, 2002, compared to 5.4x at the end of 2001, and has not met Fitch's expectations.

This is primarily attributable to a decline in Protection One's customer base which has led to EBITDA declining to $97 million for the 12 months to ending Sept. 30, 2002 from $109 million for 2001, Fitch said.

Although interest coverage has improved slightly to 2.2x from 2.1x for the same period, this is partially due to lower debt levels, $557 million as of Sept. 30, 2002 from $585 million at year-end 2001.

In addition, the company has shifted its debt structure from longer term fixed-rate debt to shorter term floating-rate borrowings under Protection One's revolving credit facility, increasing short-term refinancing risks, Fitch said. Borrowings under Protection One's revolving credit facility have increased to $214 million as of September 30, 2002 from $138 million at year-end 2001.

Moody's puts AmeriGas on review

Moody's Investors Service put AmeriGas Partners LP on review for downgrade affecting $385 million of debt including the company's senior unsecured notes at Ba3.

Moody's said it began the review in order to assess the degree of structural subordination of Amerigas's senior unsecured debt at the master limited partership (MLP) level to a substantial amount of senior secured obligations at the operating partnership (OLP) level.

Recalibration of Amerigas's ratings may result from the evaluation of the relative claims of and expected recovery on the MLP debt versus the OLP's secured and unsecured debt, leases, and trade and other liabilities, Moody's said.

The rating agency added that it will also assess the prospects for Amerigas's financial position (the company is highly leveraged, with debt adjusted for leases-to-EBITDA in the 4-5x range); the appropriateness of its leverage vis-a-vis its risks stemming from its seasonal and weather-dependent cash flows and its high payout rates.

Moody's lowers Hanover Compressor outlook

Moody's Investors Service lowered its outlook on Hanover Compressor to negative from stable and confirmed its ratings. Affected debt includes Hanover Compressor's $192 million of 4.50% non-guaranteed senior convertible notes at B1 and $86 million non-guaranteed convertible preferreds at B2 and Hanover Equipment Trust 2001A's $300 million of 8.50% partly secured senior notes due 2008 and Hanover Equipment Trust 2001B's $250 million of 8.75% partly secured senior notes due 2011, both at B1.

Moody's said the action is in response to its reduced outlook for the pace at which Hanover Compressor will reduce its high leverage in 2003 and the ongoing uncertainty from the now-formalized SEC inquiry into Hanover Compressor's past accounting practices.

The outlook could stabilize if there is significant progress in the first half of 2003 in reducing leverage and the SEC outcome is relatively benign, Moody's said.

The ratings may suffer if Hanover Compressor cannot show an ability in the first half of 2003 to materially reduce leverage and/or if the SEC imposes material penalties.

Moody's estimates 2002 cash flow before capital spending to be in the range of $135 million to $150 million and expects 2003 capital spending (including $40 million to $50 million for maintenance) to roughly match 2003 cash flow.

Thus, planned asset sales of $50 million to $100 million, if executed, would be needed to fund meaningful debt reduction, Moody's said.

S&P cuts Milacron bank debt

Standard & Poor's downgraded Milacron Inc.'s corporate credit rating and $110 million revolving credit agreement due 2004 to B+ from BB- and confirmed its senior unsecured debt at B. The outlook is negative.

S&P said it lowered Milacron because of the impact of weak end markets on the company's financial profile, despite significant asset sales to reduce debt.

Confirmation of the senior unsecured rating reflects the substantial reduction in secured debt.

Milacron's ratings reflect a now less diverse business profile due to asset sales and an aggressive financial profile, S&P said.

Milacron's profitability has declined materially because of the sharp downturn in North American demand for plastics machinery, the rating agency added. The timing and extent of market recovery remains highly uncertain, although some improvement in order rates occurred in the third quarter of 2002 compared with the same period in 2001 and also sequentially from the second quarter of 2002.

In 2002, the company sold its U.S. metalworking tools operation to Sweden-based Sandvik A/S for about $175 million and its European and Indian operation to Kennametal Inc. for about $184 million. Most of the sale proceeds were used to reduce bank debt.

Over the past year, inventories have been worked down and capital expenditures slashed, but lease-adjusted funds from operations dropped to 4.3% in 2001 from the low-20% area in recent years due to the challenging economic environment and will be lower in 2002.

The net loss from continuing operations in the third quarter of 2002 was $4.5 million (including $1.9 million in restructuring charges) compared with a loss from continuing operations of $10.5 million (including charges of $2.8 million) in the same quarter of 2001, S&P said. For the current rating, funds from operations to total debt (an important financial protection measure) would be expected to recover into the low double-digit range.

S&P cuts Petroleum Geo-Services

Standard & Poor's downgraded Petroleum Geo-Services ASA. The outlook is negative. Ratings lowered include Petroleum Geo-Services' $200 million 6.625% senior notes due 2008, $200 million 8.15% senior notes due 2029, $250 million 6.25% senior notes due 2003, $360 million 7.5% notes due 2007 and $450 million 7.125% senior notes due 2028, all cut to CCC from B-, PGS Trust I's $125 million trust preferred securities, cut to CC from CCC and Oslo Seismic Services, Inc.'s $165.7 million 8.28% first preferred mortgage notes due 2011, cut to CCC+ from B.

S&P said the downgrade follows the Petroleum Geo-Services' announcement that it would record non-cash impairment charges of up to $1.2 billion in the third quarter of 2002.

S&P said it had been expecting a charge upon completion of a review of Petroleum Geo-Services' accounts by external auditors but added that the magnitude of the charge is larger than expected.

The charge causes the company to be in violation of financial covenants in its bank credit agreements and puts it in the awkward position of seeking waivers from its bank creditors.

While the charge will not directly reduce Petroleum Geo-Services' cash balances, fees paid to creditors to obtain waivers could reduce them.

The charge also may further challenge Petroleum Geo-Services to refinance approximately $1 billion of maturing debt in 2003 and could limit its flexibility with respect to tapping external financing through the pledging of collateral, S&P said.

S&P says AmeriGas unchanged

Standard & Poor's said AmeriGas Partners LP's ratings are unchanged at BB+ for the corporate credit rating with a stable outlook after its 2002 earnings report.

Earnings were lower than expected, due mostly to higher-than-anticipated operating expenses associated with the Columbia Propane merger, S&P noted. Surprisingly, the synergies implied in previous quarterly performance were not realized on an annual basis.

With lower earnings, credit protection measures for the period were also weak, as cash contributed from operations was less than expected, S&P said. With a new heating season beginning, it is important for AmeriGas to perform strongly as its current credit protection measures are not satisfactory for the rating - this should not be such a concern presuming a return to more normal weather.

S&P cuts New World Pasta, on watch

Standard & Poor's downgraded New World Pasta Co. and put it on CreditWatch with negative implications. Ratings lowered include New World Pasta's $110 million 9.25% senior subordinated notes due 2009, cut to CCC- from B-, $150 million term B loan due 2006, $50 million revolving credit facility due 2005 and $50 million term A loan due 2005, cut to CCC+ from B+.

S&P said the action follows New World Pasta's announcement that it is not in compliance with certain covenants under its senior secured credit facility.

In addition, New World was unable to complete its financial statements for the period ended Sept. 28, 2002, and so was unable to file its Form 10-Q quarterly report with the Securities and Exchange Commission on time.

The company's covenant violation and inability to file its 10-Q stemmed from incorrectly stated financial statements, primarily accounts receivables and inventory balances, that resulted from inadequate system design, integration, and implementation, S&P said. As a result, the company will likely need to restate financial statements for the quarterly periods in 2002 and all of fiscal 2001.

Currently, New World is in the process of obtaining a waiver on its bank covenants, but there is no assurance that the waiver will be obtained, S&P said. Consequently, the company's future liquidity position is unclear.

S&P cuts Grant Prideco, rates new notes BB-

Standard & Poor's downgraded Grant Prideco Inc. and removed it from CreditWatch with negative implications. The outlook is stable. Ratings lowered include Grant Prideco's $200 million 9.625% notes due 2007, cut to BB- from BB. S&P also assigned a BB- rating to the company's planned $175 million senior notes due 2009.

S&P said the downgrade reflects Grant Prideco's significantly increased debt levels and aggressive pro forma leverage incurred to complete the acquisition of Reed-Hycalog.

This heightens S&P's concern about the company's ability, during challenging and uncertain drilling market conditions, to generate financial measures that would support a BB corporate credit rating.

Although the acquisition diversifies the company's product lines and lowers the volatility of Grant Prideco's cash flow, the scope and significant reliance on debt to fund this transaction heightens Grant Prideco's financial risk, S&P said.

The recent acquisition of Reed-Hycalog should improve Grant Prideco's business risk profile by adding a business with profitability throughout the drilling cycle, in contrast to the company's current businesses, which rank among the most volatile in the oilfield services sector, S&P said.

Nonetheless, the acquisition will be funded though an aggressive use of debt. Grant Prideco effectively is adding Reed-Hycalog at a 5.0 times debt to EBITDA transaction multiple, which will stretch the company's pro forma debt leverage to about 45% from 30% and raise total debt to EBITDA to about 2.8x from 1.8x, S&P said. As a result of higher debt levels, pro forma EBITDA interest coverage (for the quarter ending Sept. 30, 2002) will fall to about 3.5x from 4.7x.

Moody's puts Paiton Energy on upgrade review

Moody's Investors Service put Paiton Energy Funding BV's Caa2 rating on review for upgrade.

Moody's said the review is in response to significant accomplishments achieved to date in the company's restructuring, including the signing of the PPA Amendment between Paiton and PLN.

Moody's noted the whole restructuring process involves various events, including the signing of the PPA Amendment with PLN in June 2002, restructuring of the coal supply chain agreement and summary terms and conditions agreed between Paiton, sponsors and export credit agencies in September 2002.

Moody's puts Quezon Power on review

Moody's Investors Service put Quezon Power (Philippines) Limited Co.'s Ba2 rating on review for possible downgrade.

Moody's said the action is in response to increased concerns about the financial creditworthiness of Meralco, the offtaker for the power from the Quezon project.

Meralco was recently ordered by Supreme Court to partially repay customers rates previously charged in view of Supreme Court's latest ruling over the return on rate base calculation, Moody's noted. The repayment could potentially be significant in the context of Meralco's revenue base.

S&P cuts TXU Europe

Standard & Poor's downgraded TXU Europe Group plc including cutting TXU Europe Ltd.'s £800 million bank loan due 2006 to D from CC, TXU Europe Capital I's $150 million preferred stock to D from C and TXU Eastern Funding Co.'s $1.5 billion bonds due 2009 and £275 million 7.25% notes due 2030 to D from CC.

S&P said the action follows TXU Europe's filing for administration.

Although bond payments on this debt have not been missed yet, S&P said the filing for administration constitutes an event of default under its rating criteria.

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