S&P cuts Dynegy

Standard & Poor's downgraded Dynegy Inc.'s corporate credit rating to junk, cutting it to BB from BBB-. S&P also lowered Dynegy's senior unsecured debt to B+ from BB+, Dynegy Holdings Inc.'s senior unsecured debt to B+ from BBB- and preferred stock to B from BB, Illinova Corp.'s senior unsecured debt to B+ from BB+ and Illinois Power Co.'s senior secured debt to BB from BBB- and preferred stock to B from BB. All ratings remain on CreditWatch with negative implications.

S&P said the separation between the ratings of Dynegy's senior secured and senior unsecured debt reflects the increased use of secured financing that places the unsecured debtholders at a disadvantage.

S&P said it lowered Dynegy because the erosion in its core merchant energy business has become more pronounced.

Despite cutbacks in capital expenditures and costs savings, including a reduction in the common dividend payout, needed incremental cash flow has been slow to materialize, reducing credit protection measures to levels appropriate for a BB corporate credit rating, S&P said

Dynegy's financial plan has not provided the level of sustainable cash flow necessary for investment-grade status, S&P added. Decreased marketing opportunities and lower power prices are two of the factors curtailing cash flow improvement. Dynegy's difficulties in accessing the capital markets also impinge on credit quality.

Dynegy's liquidity position is strained, S&P said. Currently, the firm claims to have access to about $900 million for liquidity needs, which is a 35% decline from the $1.4 billion level in shown April 2002. The sources of these funds are cash on hand, unused bank facilities, and commodity (natural gas) in storage. The company has posted a significant amount of margin payments.

Moody's puts Michaels on upgrade review

Moody's Investors Service put Michaels Stores on review for possible upgrade including its $200 million 9.25% senior notes due 2009.

Moody's said the review is in response to improving credit fundamentals, including consistent improvement in credit measures and consistent operating performance.

Michaels' leverage measures are conservative for the company's current ratings, Moody's commented.

The company has exhibited less volatility in its top line and in its profit margins than most specialty retailers. Michaels has shown continued success in developing its distribution and inventory management systems, the rating agency added.

Cash retention has been modest, however, due to the company's internally financed growth strategy, Moody's said.

Moody's cuts New World Restaurant

Moody's Investors Service downgraded New World Restaurant Group, Inc. including lowering its $140 million increasing rate senior secured notes due June 2003 to Caa2 from B3. The outlook is negative.

Moody's said the downgrade reflects "the immediate liquidity issues" facing New World Restaurant given the imminent maturity of the June 2003 notes.

The rating agency also noted the annualized interest rate on the increasing rate secured note issue is now approaching the 18% cap.

In addition, New World Restaurant must set up a distribution system because the current national distributor has decided to exit the distribution business, Moody's noted. Besides retiring the trade payable balance with this distributor, New World must repay a $5 million investment made by the national distributor at the beginning of the contract.

However, the company currently has approximately $7 million of cash on hand and a $7.5 million undrawn revolving credit facility, Moody's said.

The ratings could reflect scale advantages from the company's position as the clear leader in the bagel segment, possible operating advantages as a vertically integrated producer and seller of bagels, and progress that management has made at achieving certain post-merger operating efficiencies, Moody's added.

The negative outlook reflects the likely rating consequences if the company does not revamp its capital structure in a timely manner. Moody's said total collateral value may not provide for complete repayment of all debt in the event of a default.

However, ratings could improve after the company establishes an appropriate long-term capital structure, sets up an efficient distribution network and improves operating performance measures, Moody's said.

Moody's rates GCI Holdings' loan Ba3, cuts existing loan

Moody's Investors Service rated GCI Holdings Inc.'s proposed $250 million senior secured bank loan at Ba3 and lowered the rating on the existing $133 million credit facility to Ba3 from Ba2. Other ratings are confirmed including senior implied at Ba3 and $180 million 9¾% senior notes due 2007 at B2. The outlook is negative.

The downgrade of the bank loan rating reflects the view that with declining long distance asset value, secured debtholders no longer have the same level of asset coverage that was previously incorporated in the rating, Moody's said.

Ratings are supported by stability and defensibility of the company's cable business within Alaska and by dominant market share in the long distance business.

Moody's said the negative outlook signals its expectation that there will be further spillover of these problems into the Alaskan market place. In addition the negative outlook expresses its concern about the higher debt profile implicit in the upsized bank facility, as well as the overhang relating to the bankruptcy of its largest customer WorldCom.

Fitch cuts WorldCom

Fitch Ratings downgraded WorldCom Inc.'s senior unsecured debt, preferred securities and quarterly income preferred securities to D from C. Intermedia Communications' senior unsecured debt and preferreds were also downgraded to D from C.

The action follows WorldCom's Chapter 11 filing, Fitch said.

S&P cuts WorldCom

Standard & Poor's downgraded WorldCom Inc.'s debt to D including lowering its senior unsecured debt and preferred stock to D from C and MCI Communications Corp.'s senior unsecured debt to D from C.

S&P said the action follows WorldCom's Chapter 11 filing.

Moody's rates Hollinger's loan Ba2

Moody's Investors Service rated Hollinger International Publishing Inc.'s $350 million senior secured credit facility, consisting of a $50 million revolver, a $50 million term A and a $250 million term B, at Ba2. Furthermore, it confirmed the Ba3 rating for Hollinger's $509 million senior subordinated notes due 2006 and 2007. The outlook is stable.

Proceeds from the proposed bank facilities will be used to refinance senior subordinated notes due 2006, at which point the rating on those notes will be withdrawn, Moody's said.

Ratings reflect diminution of size of the company's size through the sale of Canadian assets, decrease in revenue diversity, decline in cash flow due to the weak advertising market and competitive environments, concentration on two key newspaper assets, initial high leverage, thin fixed charge coverage, potential for acquisitions, sizable management fees, dividend payments, potential share re-purchases, economic cyclicality, volatile paper prices, labor and production costs and potential for long-term decline in circulation, Moody's said.

Ratings also reflect the value of the company's large market newspapers, opportunities for improved financial performance and focus on debt reduction, Moody's said.

The stable outlook considers the likely benefits for improved operating performance as a result of lower paper prices, expense reductions and a less severe advertising environment, Moody's added.

S&P confirms Terex

Standard & Poor's confirmed Terex Corp.'s ratings including its secured bank loan at BB- and subordinated debt at B.

The confirmation follows the announcement that Terex will buy Genie Holdings Inc. for $270 million, consisting of $65 million in Terex common stock, $10 million in cash and the assumption of $195 million of debt, S&P said.

The ratings on Terex reflect the company's leading global positions as a low-cost provider of construction and mining equipment with good geographic and product diversity, offset by highly cyclical and competitive end markets and an aggressive financial profile, S&P added.

The recent announcement that it will acquire Genie diversifies the company's product offering into the aerial work platform segment with a leading brand and market position, S&P said. The acquisition follows the company's recent pending purchase for Demag Mobile Cranes, a leading German producer of lattice boom cranes and telescopic mobile cranes.

The addition of Genie's $575 million revenue and DeMag will help Terex become one of the largest construction equipment companies, S&P noted. Terex has funded these acquisitions with a combination of debt and equity.

S&P notes CMS asset sale

Standard & Poor's said it perceives no immediate effect on CMS Energy Corp.'s credit quality from the sale of CMS Oil and Gas Co. for about $232 million. CMS Energy has a BB corporate credit rating with a negative outlook.

The sale, which comes at a price that is slightly less than original expectations, represents almost one-half of the $500 million of asset sales CMS Energy expects to close by year-end 2002, S&P said.

Proceeds will enable the company to reduce borrowings under its bank facilities, which currently are fully drawn, the rating agency added.

Moody's rates Hanger Orthopedic Group's revolver B1

Moody's Investors Service rated Hanger Orthopedic Group Inc.'s $75 million senior secured revolver at B1. Moody's also confirmed the company's $200 million 10.375% senior notes due 2009 at B2, $150 million 11.25% senior subordinated notes due 2009 at B3, $72 million 7% redeemable preferred stock due 2010 at Caa1, senior implied at B1 and senior unsecured at B2. The outlook is stable.

The ratings reflect high leverage and modest coverage, historically weak cash flow generation, challenges facing the industry, high level of competition, low barriers to entry, high attrition rate for practitioners and past operational issues, Moody's said.

Supporting the ratings is recent improvement in the company's credit profile and financial performance, increased focus on operational improvements, leading market share position and positive demographic trends, Moody's said.

The stable outlook reflects the expectation for modest improvements in the company's credit profile.

Fitch cuts Dynegy

Fitch Ratings downgraded Dynegy Holdings Inc's senior unsecured debt and Dynegy Inc.'s indicative senior unsecured debt to BB- from BB+. Dynegy Capital Trust I's trust preferreds were cut to B= from B+, Illinois Power Co.'s senior secured debt and pollution control bonds to BB from BBB, senior unsecured debt to BB- from BBB- and preferred stock and trust preferreds to B- from BB and Illinova Corp.'s senior unsecured debt was cut to BB- from BB+. All ratings remain on Rating Watch Negative.

Fitch said the downgrade reflects a continued weakening in Dynegy's credit profile.

Dynegy is in the process of executing a restructuring plan designed to reduce consolidated debt and improve liquidity, Fitch noted. However, capital market conditions continue to worsen and the negative over-hang from the SEC's investigation of accounting and trading issues, ongoing FERC inquiries, and potential litigation exposure have not abated.

Furthermore, given general business conditions, particularly as it relates to confidence-sensitive energy marketing and trading, and Dynegy's weak credit profile, the group's ability to generate sustainable cash flow from core operations is less assured, Fitch said.

Moody's review on Solutia now direction uncertain

Moody's Investors Service changed its review on Solutia Inc. to direction uncertain from a review for downgrade. The action affects $1.2 billion of debt including Solutia's secured credit facility at B1, senior unsecured notes and debentures at B3, Solutia Europe SA/NV's guaranteed senior unsecured euro notes at B3 and SOI Funding Corp.'s senior secured notes at (P)B2.

Moody's said the change follows Solutia's announcement that it has negotiated an agreement in principle for the extension and amendment of its existing credit facility, which will be reduced by $200 million to $600 million.

Moody's said it believes that a successful completion of the extension and amendment could enable improvement in the company's debt ratings.

However, failure to amend or refinance the existing facility by August 9 will further constrain the company's liquidity and likely result in another negative rating action, Moody's added.

The review continues to reflect concern over Solutia's liquidity and is not related to concerns over the company's future financial performance, the rating agency said.

Fitch cuts Williams to junk

Fitch Ratings downgraded The Williams Cos., Inc. including lowering its senior unsecured debt to BB+ from BBB and its short-term rating to B from F2. Fitch also lowered the senior unsecured debt rating for Williams' three pipeline issuing subsidiaries, Northwest Pipeline Corp., Texas Gas Transmission Corp., and Transcontinental Gas Pipe Line Corp., to BBB- from BBB+. All ratings were placed on Rating Watch Negative.

Fitch said its action follows Williams' announcement it has entered into negotiations to arrange a new secured bank financing to replace its existing unsecured credit facilities which consist of a $2.2 billion 364-day unsecured revolving credit facility expiring on July 23, 2002 and a $700 million three-year line due July 2005.

Based on prior discussions with Williams management, Fitch said it had expected the company to renew the maturing 364 day revolver on an unsecured basis at the $1-1.5 billion range.

The pledged collateral, which Williams has initially indicated will consist of interests in its domestic oil and gas reserves, will potentially secure more than $1 billion of borrowing capacity that will become structurally senior to Williams' outstanding senior unsecured debt obligations, Fitch said.

Moreover, the inability of Williams to access the bank market on an unsecured basis is indicative of a level of financial flexibility that is not consistent with an investment grade credit profile, the rating agency added.

S&P notes Solectron tender

Standard & Poor's said Solectron Corp.'s (BB/negative) ratings will not be affected by the completed tender offer for $1.5 billion of its 0% convertibles due 2020.

The tender offer will be funded by $900 million in cash and reduces total debt by about $919 million, or almost 20%.

Ratings incorporate concerns associated with the leveraged financial profile, S&P said, which remains high for the rating, with total debt, pro forma for the tender offer, to EBITDA for the 12 months ended May 31 of more than 6 times.

This is only somewhat offset by solid cash flow generation of more than $2.5 billion over the 12 months ended May 31 and a cash and short-term investments balance exceeding $2 billion after the tender offer.

Fitch puts Petrobras on watch

Fitch Ratinsg put Petroleo Brasileiro SA (Petrobras) on Rating Watch Evolving including its B+ international foreign currency rating. Pecom Energia SA's senior unsecured foreign and local currency ratings remain unchanged at C and continue on Rating Watch Negative.

Fitch said the actions follow the announcement that Petrobras has agreed to acquire a 58.6% equity interest in Pecom for approximately $755 million in cash and a $371 million note to be issued to the sellers.

The transaction is conditioned on Pecom successfully completing its recently announced debt exchange offer due to expire at the end of this month.

Following the acquisition, Pecom will be held as a consolidated subsidiary of Petrobras and Pecom's debt obligations will be non-recourse to Petrobras.

Fitch said it views the transaction as having long term positives to the foreign currency creditors of both entities. The transaction is expected to increase Petrobras' daily production volumes from 1.6 barrels of oil equivalent (BOE) million per day to approximately 1.8 million BOE per day, representing an approximate 10% increase. In addition, the acquisition will boost Petrobras' proven reserves from 9.3 billion BOE to 10.3 billion BOE, an approximate 10% increase, as well as increase the level of international diversification to its asset portfolio.

In the short term, Petrobras' financial position will be moderately pressured by adding roughly $3.1 billion in net debt from the consolidation of the more highly leveraged Pecom, Fitch added.

Credit protection measures are expected to remain consistent with the B+ rating level, which is currently constrained by the sovereign rating of Brazil, the rating agency added. Pro forma debt to capitalization is expected to be approximately 43% well above existing levels.

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