S&P downgrades Level 3 bonds two notches, still on watch

Standard & Poor's downgraded Level 3 Communications Inc. - including lowering its bonds two notches - and kept the ratings on CreditWatch with negative implications. Ratings affected include Level 3's corporate credit, cut to CCC+ from B-, its $2 billion 9.125% senior notes due 2008, $834 million (principal) 10.5% maturity value senior discount notes due 2008, $800 million 11% senior notes due 2008, $250 million 11.25% senior notes due 2010, $675 million 10.75% senior discount notes due 2010, €500 million 10.75% senior notes due 2008, and €300 million 11.25% senior notes due 2010, all lowered to CCC- from CCC+; and its $823 million 6% convertible subordinated notes due 2009 and $863 million 6% convertible subordinated notes due 2010, both lowered to CCC- from CCC.

S&P said it lowered Level 3 because of "continued weak industry fundamentals, the company's leveraged balance sheet, potential covenant violations, and the continued decline in asset values in the long-haul sector."

The downgrade in the company's bonds was two notches because of the deterioration in asset value and the level of bank debt in its capital structure, S&P explained.

While Level 3's fourth quarter and year end results demonstrated progress operationally, industry conditions remain challenging, new sales growth is being largely offset by customer disconnects, and the company has indicated that a percentage of its recurring revenue base is still at risk, S&P said.

"More immediately, management has indicated that it may violate a minimum revenue covenant as early as the second quarter of 2002, and is in discussions with its bank group," the rating agency added.

Resolution of the CreditWatch will depend on Level 3 meeting or renegotiating its covenants.

S&P affirms Terayon ratings, revises outlook to stable

Standard & Poor's revised its outlook on Terayon Communications Systems Inc. to stable from negative and affirmed its B- corporate credit and CCC subordinated debt ratings. The outlook revision reflects sustained improvement in the company's liquidity position following a yearlong program where Terayon repurchased $326 million of its convertible debt issue at a substantial discount to par, S&P said.

The ratings on the company reflect significant industry competition, the company's concentrated customer base, and long-term uncertainties regarding technology evolution and customer adoption in the broadband communications equipment market. Although Terayon is not expected to achieve positive cash flow over the near term, capital-spending needs are moderate and liquidity is adequate to fund both operating losses and expenditures. Cash balances provide downside protection for the ratings, whereas very competitive conditions and the early stage of the market limit upside ratings potential, S&P said.

Fitch rates Continental Airlines convertible at B-

Fitch Ratings assigned a B- rating to the $175 million 4.5% convertible notes of Continental Airlines Inc. All ratings for Continental remain on negative rating watch. The rating reflects the high level of financial risk that Continental continues to face in the post-Sept.11 air travel demand environment, Fitch said. Although Continental's financial results for fourth quarter suggest that a rebound in revenue per available seat mile is underway, business travel demand remains weak and passenger yields have still not recovered to the point where the company can generate positive operating cash flow. Moreover, Continental's high debt levels ($4.6 billion as of Dec. 31) and significant off-balance sheet aircraft lease commitments will keep fixed financing obligations high for the foreseeable future.

Continental's push to maintain an adequate liquidity position in the months since September has also been largely successful. Including the $175 million raised in the convertible note issue, $172 million in net proceeds from a common stock offering completed in November and $264 million in proceeds from the government assistance program, management expects the cash balance at the end of this quarter to lie somewhere in the range of $925 million to $975 million. Given the company's expectation that operating cash flow generation will resume in the second and third quarters as a result of a more robust traffic environment, the liquidity picture appears brighter, Fitch said.

Moody's confirms Anadarko Pete at Baa, revises outlook to stable

Moody's Investors Service confirmed Anadarko Petroleum Corp.'s Baa1 long-term and Prime-2 commercial paper ratings following the company's announcement that it would take an additional $1.08 billion write-down to correct errors in its third quarter ceiling test calculation and restate third quarter 2001 earnings. The error relates to U.S. properties acquired in 2000 as part of Union Pacific Resources Group. At the same time, Moody's changed Anadarko's rating outlook to stable from positive, reflecting the impact of a more subdued pricing outlook in 2002 on cash flow, capital spending and production growth. The company announced earlier in January that it will cut capital spending in 2002 by one-third to about $2 billion and, in a lower price environment, focus on exploration and reserve growth rather than development spending, helping to maintain debt at its current level. Anadarko also remains committed to share repurchases as a use of its discretionary cash flow.

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