Fitch revises Williams watch to evolving

Fitch Ratings revised the watch status for The Williams Cos. Inc. to evolving from negative following news that Williams completed a series of transactions that significantly bolster its near-term liquidity position.

Specifically, Williams obtained cash and/or available credit totaling $3.4 billion through $2 billion of secured credit facilities and net cash proceeds of $1.4 billion from delivered from asset sales.

In addition, Williams announced that it has reached an agreement to sell the Cove Point LNG facility in a $217 million cash transaction which could close within 45 days.

Moreover, the recent plan of reorganization filed by Williams Communications Group could provide Williams with additional cash proceeds of another $225 million later this year.

The transactions announced today are clearly positive and mitigate the near-term financial hurdles faced by Williams, including its ability to meet upcoming debt maturities and ongoing cash collateral calls from energy trading activities, Fitch said.

However, the ongoing business, credit, and cash flow profile of Williams continues to evolve.

In particular, the announced divestitures, which include key energy assets such as NGL pipelines and E&P properties, have historically been solid cash flow generators for Williams.

In addition, the pledged collateral for the new secured credit facilities, which includes substantially all of the oil and gas reserves of Barrett Resources, structurally subordinates outstanding senior unsecured debt obligations, Fitch noted.

Critical to the direction of the ratings will be its ability to execute upon its ongoing efforts to sell, monetize, or joint venture its energy marketing and risk management portfolio especially given the significant amount of liquidity and capital being consumed by this business segment, Fitch said.

In Fitch's view any potential transaction or arrangement which would assume Williams' contractual obligations under long-term tolling arrangements could have significant positive credit implications.

Fitch noted that both the recent agreement in principle related to California power market issues and FERC's acknowledgement that Williams has adequately addressed issues raised in a June 30 show-cause order could expedite this process.

Moody's confirms St. Paul ratings

Moody's confirmed the ratings of The St. Paul Cos. Inc. including the new mandatory convertible at A2. The ratings have a stable outlook.

Moody's said the confirmation mark the conclusion of a review initiated on May 20, 2002 when St. Paul disclosed that it intended to more aggressively seek early resolutions of certain asbestos and environmental related litigation.

Shortly thereafter, St. Paul entered into a definitive agreement to settle ongoing litigation with Western MacArthur that led to an after-tax charge to earnings of about $380 million, net of expected reinsurance recoveries.

Moody's said the charge, together with the subsequent downward revisions in Platinum Re's valuation, fell outside the bounds of its near-term expectations for St. Paul's earnings, capitalization and financial leverage.

According to Moody's, St. Paul's successful recapitalization through the convertible and stock offerings, with about $842 million in net proceeds, was key to the confirmation. Some $750 million of proceeds from are expected to be contributed to St. Paul Fire & Marine in order to strengthen capitalization.

Moody's said the recapitalization has offset the combined capital impact of the Western MacArthur claim and Moody's reduced expectations on gains from the Platinum Re divestiture, which had been significant concerns weighing on St. Paul's ratings.

Also, Moody's said it expects St. Paul's core earnings performance will continue to strengthen and financial leverage moderate and debt service coverage measures improve near- to intermediate-term.

The stable outlook reflects the expectation that St. Paul will continue to pursue its exit strategy for the reinsurance business consistent with its stated intentions and without material adverse consequences for. Moody's continues to view the reinsurance divestiture as a mildly favorable credit event and as one that should help to mitigate prospective earnings volatility.

Moody's noted, however, that a significant deviation from these expectations would lead the rating agency to reconsider its rating opinions on St. Paul.

S&P affirms Anthem ratings

Standard & Poor's affirms Anthem Inc.'s ratings, and raised its counterparty credit rating to BBB+ from BBB to reflect enhanced financial flexibility and debt service capacity after acquiring Trigon Insurance Co. The outlook is stable.

Anthem's diversity of earnings is expected to increase over time as it continues to grow by acquisition and realigns other subsidiaries, said S&P credit analyst Shellie Stoddard.

The ratings reflects S&P's belief that under Anthem management, Trigon will not remain capitalized at extremely strong capital levels.

Furthermore, Anthem's extremely strong consolidated operating performance and very strong statutory capitalization are offset by the integration risks associated with Anthem's acquisition strategy.

Membership is expected to grow organically by about 3% to 4% in 2002.

S&P projects Anthem's EBIT to be about $750 million to $800 million for 2002, including contributions from Trigon.

Anthem's capital adequacy ratio is expected to improve from the currently very strong level because of the Trigon acquisition but is expected to return to historical levels as dividends are taken from the new subsidiary in 2003.

S&P affirms Emmis ratings

Standard & Poor's affirmed Emmis Operating Co. and Emmis Communications Corp. ratings, and assigned a B+ bank loan rating to the $500 million senior secured term loan B of Emmis Operating Co.

Proceeds from the new facility were used to repay the debt under the old term loan B. The new facility features a lower interest rate and less restrictive covenants in later periods, in exchange for tighter near term covenants.

Radio and TV advertising softness over the past 18 months has weakened Emmis' balance sheet and has diminished its bank covenant compliance cushion, S&P said.

To reduce debt, the company issued new public equity and sold its Denver radio stations earlier this year. Some of the company's radio and TV stations are showing year over year revenue improvement. Political advertising has also provided an important revenue boost to Emmis' TV operations.

Despite these positive trends, Emmis is only releasing quarterly guidance, reflecting uncertain prospects for a sustained recovery. For the quarter ending Aug. 31, the company expects a 3.4% year-over-year pro forma EBITDA decline.

Emmis continues to face competitive challenges in its New York City radio operations, which represent about 14% of total revenue, S&P added.

Ratings continue to reflect strength from Emmis' large-market radio operations, good discretionary cash flow generating potential of the business, a measure of cash flow diversity provided by middle-market TV stations and station asset values, particularly in larger markets.

Offsetting factors include high financial risk from debt-financed acquisitions, the soft, competitive advertising environment, and the presence of much larger operators in key markets.

Since the onset of the advertising recession in late 2000, Emmis' EBITDA margin after noncash compensation expense has slipped to a subpar level of less than 30%.

Proforma for station sales, equity issuance and debt repayment, total interest and cash preferred dividend coverage for the 12 months ended May 31 is modest at roughly 1.5 times, S&P said.

Total interest coverage is between 1.5 times and 2 times, and cash interest coverage is above 2 times. Total debt to EBITDA is high at more than 8 times.

Emmis produces healthy discretionary cash flow and faces moderate required bank loan amortization over the next five years, S&P said.

The bank loan rating is the same level as the corporate credit rating. The facility consists of a $220 million revolving credit facility due 2009, a $204.8 million amortizing term loan facility A due 2009, and a $500 million amortizing term loan facility B due 2009.

The credit facility is secured by substantially all the company's assets, including the stock of broadcast license holding subsidiaries. Although the licenses cannot be used as collateral, S&P believes the security provided in the form of broadcasting subsidiary stock is significant, particularly given broadcast spectrum scarcity in larger markets.

The loans include initial covenants requiring minimum 1.5 times interest coverage and maximum 7 times total leverage, exclusive of holding company debt. These tests become progressively more restrictive beginning Sept. 1 until maturity. The covenants should provide lenders significant negotiating clout before substantial credit impairment takes place.

S&P's simulated default scenario assumed that the revolving loan facility was fully drawn, and both cash flow and resale multiples were at distressed levels. Elements of a default scenario could include an inability to generate sufficient advertising revenue due to competitive weakness, an extended severe advertising recession or further debt financed acquisitions.

Because the facilities are secured, lenders will likely recover much of their principal.

However, because of the large size of the facilities relative to the overall debt structure, it is not clear that a distressed enterprise value would be sufficient to cover the fully drawn facility.

could destabilize the ratings.

Moody's confirms Sealed Air ratings

Moody's confirmed the ratings of Sealed Air Corp., including the convertible preferred at Ba2, but maintained a negative outlook following a recent ruling by the bankruptcy court overseeing the W.R. Grace proceedings regarding asbestos claims.

As part of the examination of a claim of fraudulent conveyance against Sealed Air, the court has defined a method of calculation of solvency of W.R. Grace applied to its 1998 balance sheet that, if followed, would increase the likelihood of a finding of fraudulent conveyance adverse to Sealed Air.

The confirmation reflects Moody's view that this ruling, while unfavorable to Sealed Air, does not have final effect, that Sealed Air is likely to request review of it on appeal, and that the outcome of this request, if it is accepted, can potentially have a decisive effect, negative or positive, on the credit more than the ruling itself.

The outlook remains negative.

Fraudulent conveyance claims made against Sealed Air by W.R. Grace asbestos creditors continue to represent a source of potentially significant litigation risk, Moody's said.

Adverse developments in these claims that would clearly point to a high likelihood of eventual payment or reversal of the 1998 Cryovac transaction would place pressure on the ratings, Moody's added.

The ruling issued by the bankruptcy court refers to the method to be used in order to determine whether W.R. Grace was insolvent or not in 1998. In a nutshell, the court has found that post-1998 asbestos claims may be considered when determining 1998 solvency.

Sealed Air's argument is that claims should be fairly valued based on what W.R. Grace knew or reasonably should have known at the time of the transaction without the benefit of hindsight. Sealed Air is likely to request a review on appeal of this ruling on an emergency basis to a higher court of appeals.

Moody's believes that there are three possible outcomes to this request.

First, the request for emergency review of the ruling might be denied by the bankruptcy court or the appeals court, which could put further pressure on the credit.

Second, the higher court might affirm the bankruptcy court's ruling, which would increase downward pressure on the ratings.

Third, the higher court might reverse the bankruptcy court's ruling, which would lower the risk of an eventual finding of fraudulent conveyance, though not eliminate it.

Moody's said that the lack of jurisprudence on fraudulent conveyance issues in a mass tort context in the district where the bankruptcy court operates makes it difficult to anticipate what the higher court's ruling will be if the request for emergency review is accepted.

Fitch affirms Alltel ratings

Fitch Ratings affirmed the ratings of Alltel Corp., including long-term debt at A, on the closing of the Verizon wireline and the CenturyTel wireless acquisitions. The outlook is stable.

Alltel's ratings reflect a strong focus as a leading rural telecom operator with solid margins and stable cash flows particularly from the rural wireline markets.

The ratings also recognize risks associated with increased leverage resulting from acquisitions in an increasingly competitive telecom environment, which has been impacted by a slowing economy.

Pro forma debt-to-EBITDA at the time of closing is expected in the range of 1.7 times to 1.8 times, taking into account a significant level of equity consideration for the$1.4 billion convertible offering in May.

Actual net debt-to-trailing 12-month EBITDA at the end of the second quarter was about 1.2 times.

The Verizon and CenturyTel transactions are valued at around $3.5 billion and ALLTEL had about $3 billion in cash at the end of second quarter.

Fitch expects the additional funding requirements for the transactions of about $400 million to $500 million to be met in the commercial paper market.

Fitch anticipates the credit protection measures to improve to historical ranges, absent an acquisition, over the next 12-18 months as Alltel uses free cash flow and operating synergies to reduce debt by $500 million to $750 million by the end of 2003.

Management also provided capital spending guidance of $1.3 billion to $1.4 billion for 2002, which was less than initial expectations and consistent with prudent management of capital requirements versus its peers.

Alltel benefits from limited competition in its rural incumbent local exchange carrier markets along with good geographical diversity and favorable customer demographics, which have shielded the company from some of the issues experienced by the urban based regional Bell operating companies in this current environment, Fitch said.

Access line growth year over year was essentially flat with 5,200 lines added, for a total of 2.61 million lines. Sequentially, lines were down by 10,000, owing primarily to the impact of the discontinued CLEC operations.

These results compare to the low single digit declines experienced by the RBOCs.

Further benefits include less stringent regulation of the rural operators and a business mix more dependent on residential customers, which provides for a more stable customer segment.

The RBOCs, which have a greater emphasis on business lines, have been more impacted by stronger competition in the urban cores by CLEC and cable operators, technology substitution and the slowing economy.

S&P confirms Metaldyne

Standard & Poor's confirmed Metaldyne Corp.'s ratings and removed them from CreditWatch with positive implications. Ratings confirmed include Metaldyne's $345 million 4.5% convertible subordinated debentures due 2003 at B, $250 million revolving credit facility due 2007 and $400 million term D bank loan due 2009 at BB- and $250 million 11% senior subordinated notes due 2012 at B. The outlook is stable.

S&P said the confirmation follows the completion of the sale of a 66% stake in Metaldyne's formerly wholly-owned subsidiary TriMas Corp. for $840 million in cash and debt reductions. Proceeds were used to reduce debt, which improved Metaldyne's previously stretched financial profile.

Total debt to EBITDA declined to about 4.3 times from 5.3x and pro forma EBITDA interest coverage improved to 2.8x from 2.2x, S&P said.

Although Metaldyne's credit statistics have improved, its debt burden remains heavy, S&P added. The company intends to pursue strategic acquisitions and joint ventures which will likely result in continued heavy debt use.

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