S&P cuts some US Airways ratings

Standard & Poor's downgraded some U.S. Airways Inc. ratings to D including its $168.7 million passthrough certificates series 1990A due 2015 and Piedmont Aviation Inc.'s $44.800 million 10% equipment trust certificates series 1988H and 1988I due 2012 and $89.6 billion 10.35% equipment trust certificates series 1988D-G due 2012, all previously at CC. All other ratings remain on CreditWatch with developing implications.

S&P said the action follows U.S. Airways' rejection financings related to its grounded fleets of older planes (none rated), and 10 Boeing aircraft, some in rated equipment trust certificates and enhanced equipment trust certificates. In addition, some payments on rated equipment trust certificates fell due and were not paid since the company's Aug. 11 bankruptcy filing.

S&P commented that U.S. Airways' liquidity, while adequate currently, could prove insufficient if the industry environment worsens materially, due to a U.S. military action against Iraq and possible renewed terrorism, which would depress already weak passenger revenues and raise fuel prices in the short term.

Fitch cuts Mirant to junk

Fitch Ratings downgraded Mirant Corp. and its affiliates to junk. The outlook remains negative. Ratings lowered include Mirant's senior notes and convertible senior notes, cut to BB from BBB-, convertible trust preferred securities, cut to B+ from BB, Mirant Americas Generation, LLC's senior notes and senior bank credit facility, cut to BB from BBB-, and Mirant Mid-Atlantic, LLC's passthrough certificates series A, B, and C, cut to BB+ from BBB.

Fitch said it lowered Mirant because of "a host of problems that overshadow the business environment for all gas and power wholesale merchants in the U.S." and impair Mirant's access to the capital and credit markets.

Mirant and its North American affiliates have been affected by: reduced trading volumes; lower spot and forward market prices; reduced profitability of unhedged merchant power production; the demise of its former auditor Arthur Andersen; an informal SEC investigation regarding Mirant's accounting practices; and ongoing investigations by the Federal Energy Regulatory Commission of Mirant among other western traders and generators, Fitch noted.

The rating also reflects the continuing high consolidated leverage within the Mirant group, Fitch said. Fitch added that it estimates the ratio of adjusted debt and lease obligations relating to core businesses at roughly 10 to 11 times 2002 and estimated 2003 cash flow from operations, a level that is inconsistent with a rating in the investment grade category.

Fitch cuts AES Drax

Fitch Ratings downgraded AES Drax and kept its ratings on Rating Watch Negative. Ratings lowered include AES Drax Holdings Ltd.'s senior secured bonds, cut to CCC from BB, Inpower Ltd.'s senior secured bank loan, cut to CCC from BB and AES Drax Energy Ltd.'s senior notes, cut to CC from CCC.

Fitch said it downgraded the ratings to reflect the lowering to CCC of the rating assigned to TXU Europe Ltd.'s senior unsecured debt and obligations guaranteed by TXU Europe as well as TXU Europe's confirmation that it is in on-going negotiations regarding its long-term contracts including all scheduled payments.

The Drax plant had entered into an off-take agreement with a subsidiary of Eastern Power and Energy Trading, a subsidiary of TXU Europe, that covers a significant portion of the plant's output, Fitch noted.

The cash flows under this agreement provide very material support to the project's financial structure, Fitch added. Given the leverage of the project and the precipitate fall in wholesale prices over the past year, the project would be unlikely to sustain coverage levels were it obliged to recontract on the open market.

Fitch cuts Amerco

Fitch Ratings downgraded Amerco including cutting its senior unsecured debt to B+ from BB+ and preferred stock to B- from BB-. The ratings remain on Rating Watch Negative pending resolution of a bank covenant violation.

Fitch said its action reflects the heightened level of event risk as Amerco seeks alternative sources of funds following its decision to withdraw its proposed $275 million unsecured debt transaction amid limited appetite for funding from traditional unsecured sources.

Under the terms and conditions of its $205 million bank revolver, Amerco was required to raise at least $150 million of new capital by Sept. 30, Fitch added. Amerco is currently in violation of this loan covenant, however, to date has received waivers from its bank group.

Given the limited appetite for Amerco's unsecured debt, the current ratings reflect Fitch's view of where unsecured creditors would fall in the capital structure if the company is successful in raising funds to cure this violation and meet current maturities through secured financings. Specifically, Fitch believes that the bank group could ask for security in exchange for a permanent waiver of this covenant, which could disadvantage unsecured creditors.

Fitch rates Starwood Hotels' loan BB+

Fitch Ratings rated Starwood Hotels & Resorts Worldwide, Inc.'s $1.3 billion credit facility at BB+. The loan consists of a $1 billion revolver and a $300 million senior term loan. The outlook remains negative.

The rating reflects the company's strong brand name, high-quality established assets, global diversity of cash flows and continued access to capital markets, Fitch said. However, offsetting these factors is the lodging industry's dramatic decline in revenues per available room, room rates and occupancy. Starwood has responded to the economic condition by cutting costs and capital expenditures. Leverage is relatively high and debt reduction from excess cash flow will remain moderate over the near-term.

Furthermore, debt maturities are a major factor in the rating. Concerns over 2002 maturities have been reduced through the April $1.5 billion bond issue and the completed refinancing of the credit facility. However, after the refinancing, there is still $847 million in maturities in 2003 including $250 million of public debt at Sheraton Holdings and an 18-month €450 million loan at Starwood Hotels Italia, each due in the fourth quarter of 2003, Fitch said.

Forecasts for 2002 include the expectation that RevPAR will be down approximately 6% for the year after falling 13% in the first half. At June 30, leverage as measured by Debt/EBITDA increased to approximately 5.2 times from below 5 times at Dec. 31, 2001 and debt levels remained stable standing at $5.497 billion.

Moody's cuts Bayou Steel

Moody's Investors Service downgraded Bayou Steel Corp. including cutting its $120 million 9.5% guaranteed first mortgage notes due 2008 to Caa2 from B3. The outlook remains negative.

Moody's said the action is in response to Bayou Steel's ongoing losses and limited financial flexibility.

Over the last two years, weak prices and demand for Bayou's merchant bar products have impacted its sales, margins and productivity, and have resulted in recurring operating losses and negative free cash flow, Moody's said.

Bayou has a $5.7 million bond interest payment due November 15. Moody's said it expects Bayou will have very little availability under its asset-backed credit facility once it makes the coupon payment, assuming the terms of the credit facility are not amended. Liquidity will also be strained by seasonally lower shipments of merchant bar products during the winter months due to reduced construction activity.

S&P cuts Cummins to junk

Standard & Poor's downgraded Cummins Inc. to junk and removed it from CreditWatch with negative implications. Ratings lowered include Cummins' $120 million 6.75% debentures due 2027, $125 million 6.25% notes due 2003, $225 million 6.45% notes due 2005, $250 million 7.125% debentures due 2028 and $165 million 5.65% debentures due 2098, all cut to BB+ from BBB-, and Cummins Capital Trust I's $200 million convertible preferred stock, cut to B+ from BB. The outlook is negative.

S&P said it lowered Cummins because it expects that continued weak demand in the North American truck and power generation markets will result in sub-par financial performance.

Total debt to EBITDA is around 3.9 times and funds from operations to total debt is about 14%, well below S&P's prior expectation of total debt to EBITDA of 2.5x and funds from operations to total debt in 25%-30% range.

Although, in the near term, financial results are expected to show a temporary improvement related to the "pre-buy" of truck engines resulting from the Oct. 1, 2002, emission standard deadline, sustained improvement is not expected until late 2003, S&P said. Additionally, power generation sales continue to soften due to weak industry fundamentals.

Cummins has adequate liquidity with almost full availability of its $500 million revolving facility and approximately $101 million in cash as of June 30, 2002, S&P added. The company's $500 million bank facility matures in the very near term, which heightens refinancing risk.

S&P said the outlook is negative because ratings could be lowered if market conditions remain depressed beyond current expectations, further stretching the company's financial profile.

Moody's cuts TXU Europe, still on review

Moody's Investors Service downgraded TXU Europe Ltd. to junk, cutting its senior unsecured debt to Caa2 from Baa3 and its trust preferreds to Caa3 from Ba2. Moody's also cut Energy Group Overseas BV's senior unsecured debt to Caa3 from Ba2. All ratings remain on review for further downgrade.

Moody's said its action follows TXU Corp.'s announcement that it will not be providing the previously announced equity injection of $700 million into its European subsidiaries.

In addition, following the rating downgrades below investment grade, a number of rating triggers have been activated, and the company has severe liquidity problems that it needs to address, Moody's said.

Moody's said it understands that the company will attempt to shore up its immediate liquidity position in a number of ways. Firstly, it is attempting to minimize the actual call on its liquidity through the activation of the various rating triggers. Secondly, the company is looking to solutions to reduce its cost of purchased power. Thirdly, it will be looking to its lenders to exercise forbearance not to put the company into administration through requiring immediate repayment of credit facilities. Banks and bondholders may enter into collective standstill arrangements if they feel that the value of their assets is thereby maximized.

S&P cuts TXU Europe to junk

Standard & Poor's downgraded TXU Europe Ltd. and its European subsidiaries to junk including cutting its £800 million bank loan due 2006 to B+ from BBB-, TXU Eastern Funding Co.'s $1.5 billion bonds due 2009 and £275 million 7.25% notes series 1 due 2030 to B+ from BBB- and TXU Europe Capital I's $150 million preferred stock to B- from BB-. TXU Europe remains on CreditWatch with negative implications.

S&P also cut TXU Corp. and its U.S. and Australian subsidiaries to BBB from BBB+. The outlook on TXU remains negative.

S&P said the downgraded of TXU Europe is a direct result of the actions taken by TXU Corp. in recent days to protect its own creditworthiness.

Management has stated that it will not, as it previously anticipated, infuse additional equity into TXU Europe, S&P noted. The lack of this equity infusion of up to $700 million, combined with the contingent liquidity requirements triggered by the non-investment-grade rating, makes TXU Europe's liquidity position "extremely tenuous," the rating agency added.

TXU Europe has cash reserves of about £200 million ($312 million), an undrawn bank facility of £300 million, and no debt maturities within the next three years. The non-investment-grade rating, however, makes drawing on the bank facility unlikely, and TXU Europe is now required to post collateral for trading counterparties currently estimated at £110 million and, possibly, collateral for energy distribution and transmission purposes of about £75 million, S&P said. Several other debt and trading instruments also have rating triggers, although it remains to be seen whether these will be exercised and how TXU Europe will deal with them.

The action on TXU Corp. follows a material deterioration in the company's credit quality in 2002, due primarily to weak performance in the U.K. business, which has never provided any dividends to the parent, S&P said.

S&P cuts AES Drax

Standard & Poor's downgraded AES Drax and kept it on CreditWatch with negative implications. Ratings affected include AES Drax Energy Ltd.'s £135 million 11.25% bonds due 2010 and $200 million 11.5% bonds due 2010, cut to CC from CCC, AES Drax Holdings's £200 million 9.07% bonds due 2025 and $302.4 million 10.41% bonds due 2020, cut to B from BBB- and InPower Ltd.'s £905 million bank loan due 2015, cut to B from BBB-.

S&P said the action reflects the increased likelihood of default on the senior and subordinated debt obligations following the lowering of the ratings on TXU Europe Ltd. and its related European subsidiaries to B+.

The ratings downgrade reflects the increased uncertainty surrounding its energy sales contract with TXU Europe Energy Trading Ltd., following deterioration in the credit quality of its parent company and contract guarantor, TXU Europe.

The 15-year energy sales contract forms the primary support for the Drax senior debt ratings and there is a strong likelihood that this support may come to an end very soon, S&P said.

Owing to the depressed U.K. wholesale power market, it is unlikely that Drax could replace this contract with a similarly priced one, which would leave it fully exposed to merchant risk. Under such circumstances, it is unlikely that Drax would be able to market 4-gigawatt of daily power and U.K energy market prices could worsen if Drax tries to place its capacity in the spot market.

Currently, there is no market for the volume of output produced by Drax at the necessary prices in the short term to support a BBB- senior debt rating, S&P said.

S&P cuts Energy Group

Standard & Poor's downgraded The Energy Group Ltd. and kept it on CreditWatch with negative implications.

Ratings affected include Energy Group's $200 million 7.375% guaranteed notes due 2017 and $300 million 7.5% guaranteed notes due 2027, cut to B+ from BBB-.

S&P cuts GenTek to D

Standard & Poor's downgraded GenTek Inc. to D including its $300 million revolver due 2005, $150 million term A loan due 2005, $200 million term C loan due 2007 and Noma Acquisition Corp.'s $150 million term bank loan due 2007, all previously at CC. GenTek's $200 million 11% subordinated notes due 2009 were already rated D.

S&P said the action follows GenTek's announcement it has filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

GenTek's challenges are due to very weak end-market demand, severe pricing pressures, a high cost structure and poor working capital management, S&P said. These issues, combined with a very aggressive financial profile, led to financial distress, and ultimately, the bankruptcy filing.

S&P lowers Ubiquitel, on watch

Standard & Poor's downgraded UbiquiTel Inc. and put it on CreditWatch with negative implications. Ratings affected include UbiquiTel Operating Co.'s $55 million revolving credit facility due 2007, $120 million term A loan due 2007 and $125 million term B loan due 2008, cut to CCC+ from B-, and its $150 million senior subordinated discount notes due 2010, cut to CCC- from CCC.

S&P said the downgrade reflects the continued impact of the Clear Pay customers on churn rate and cash flow measures in the near term, together with S&P's expectations of overall slower subscriber growth.

Although the company's bank covenants were modified in July 2002, the CreditWatch placement reflects the potential for the company's not meeting the minimum subscribers covenant over the next six months due to high churn and lower net customer additions, S&P added.

Bad debt expense is expected to remain relatively high as the no-deposit account spending limit (ASL) customers are cleared out. In addition, challenges remain from increased competitive pricing from national service providers and execution risk related to the recent deployment of the next generation (3G) network, S&P said. This tenuous business risk position is somewhat tempered by the company's relationship with Sprint PCS and its spectrum capacity position.

Churn rate increased to the 4% area in 2002 compared with the high 2% area in 2001. In addition, cost per gross add increased to a high $456, S&P said. In May 2002, UbiquiTel reinstated the $125 deposit for its ASL/Clear Pay service, which is expected to weed out delinquent paying customers. Although the proportion of sub-prime customers is declining, this segment represents about 40% of the company's customer base.

Management has affirmed third quarter 2002 net adds in the range of 17,000 to 27,000; however, given industry trends, the actual figure could be near the lower end of the range, S&P said.

S&P takes Hornbeck Offshore off positive watch

Standard & Poor's removed Hornbeck Offshore Services Inc. from CreditWatch with positive implications including its $175 million 10.625% senior unsecured notes due 2008 rated B+. The outlook is stable.

S&P said the action follows the postponement of Hornbeck Offshore's IPO.

The stable outlook reflects Hornbeck's limited near-term need for external financing and adequate liquidity, S&P said.

No positive rating actions are likely until the company reduces its contract renewal risk, makes further progress on its construction program, and ameliorates its high debt leverage, S&P continued. If Hornbeck finds contract work at favorable rates for its new vessels in 2003 and deleverages through an IPO or other means, a positive revision to its outlook or rating could occur.

S&P said Hornbeck's credit measures in 2002 likely will exceed its initial expectations. At this time, EBITDA interest coverage is likely to average around 3x, supported by long-term contracts on much of the current (2001/2002) new vessel program and earnings from its tug and tank barge division.

Nevertheless, Hornbeck will face significant contract renewal risk in its OSV operations during 2003 and beyond, and the company's finances could be strained by the construction of four new OSVs at a time when many other participants in the offshore vessel industry are planning additions to their fleets, S&P said.

Fitch cuts TXU Europe, on watch

Fitch Ratings downgraded TXU Europe Ltd.'s senior unsecured debt to CCC from BB and put it on Rating Watch Negative.

Fitch said the action follows the announcement that TXU Corp. is now offering for sale "all or portions of its business" and that equity injections from TXU Corp. to TXU Europe to effect contractual restructuring and debt reduction, which previously had been expected to total up to $700 million, will now be kept to "minimal levels".

This severely reduced monetary commitment to TXU Europe is material not only relative to the previously anticipated financial profile but also because of the greater likelihood of immediate cash claims arising from a variety of rating triggers, Fitch said.

In particular, the retraction of significant parent support increases the likelihood of further downgrades by other rating agencies, which in turn are likely to activate further credit-related liquidity triggers, Fitch said.

Moody's cuts Land O'Lakes

Moody's Investors Service downgraded Land O'Lakes, Inc., affecting $1.3 billion of debt. Ratings lowered include Land O'Lakes' $250 million senior secured bank facility due 2004, $291 million senior secured term loan A due 2006 and $234 million senior secured term loan B due 2008, cut to B1 from Ba2, $350 million 8.75% senior unsecured guaranteed notes due 2011, cut to B2 from Ba3, and $191 million 7.45% trust preferred securities, cut to B3 from Ba3.

Moody's said it lowered Land O'Lakes because of the company's weaker-than-expected operating performance, which has resulted in a deterioration in its debt protection measures and reduced financial flexibility.

Operating disappointments have been widespread, and impacted a number of Land O'Lakes' operating segments. Moody's said it recognizes that cyclical factors are responsible for some of Land O'Lakes soft performance.

More troubling from a credit perspective, however, is that Land O'Lakes continues to be negatively impacted by several longer term issues - such as overcapacity in its expensive Upper Midwest dairy foods region, as well as losses in its swine operation, Moody's said.

The rating action also incorporates the material degree of event risk associated with Land O'Lakes' long-term strategic direction as its business portfolio continues to evolve in the face of continuing difficult agricultural environment, Moody's added. This is complicated by the highly political nature of agricultural cooperatives, in which consensus building is key, and which can sometimes result in delays in decision making and necessary restructurings.

S&P lowers Wiser Oil outlook

Standard & Poor's lowered its outlook on Wiser Oil Co. to negative from stable and confirmed its ratings including its subordinated debt at CCC+.

S&P said the revision follows a review of anticipated results for the remainder of 2002 and 2003.

Ratings reflect Wiser's high operating costs, very limited internal growth prospects, and significant financial leverage, S&P added. The ratings also reflect an improving business profile characterized by efforts to increase its exposure to exploration activities through relatively low-risk methods.

The negative outlook reflects the shrinking liquidity brought on by aggressive levels of capital spending at a time of reduced cash flows, S&P said. If Wiser fails to generate increased cash flows for the remainder of 2002 and in 2003 to repay debt, fund capital expenditures, and cover debt-service charges, ratings would likely be negatively affected.

Weaker realized commodity prices for 2002 will likely lead to weakened cash flow protection measures, S&P added. EBITDAX interest coverage is likely to be near 2 times, and funds from operations (FFO) to total debt is expected to be below 10% for 2002. If current commodity price levels remain or strengthen in 2003, S&P said it expects much improved metrics, as some unprofitable hedges from 2002 expire and Wiser would be able to take full advantage of robust pricing. A reduced capital expenditure program in 2003 should be funded through internally generated cash flows and allow for repayment of debt, although leverage will remain aggressive, in the mid-60% area.

S&P cuts Encompass Services

Standard & Poor's downgraded Encompass Services Corp. to D including cutting its $300 million revolving credit facility due 2005, $130 million term A loan due 2006, $170 million term B loan due 2006 and $100 million term C loan due 2007, all previously at CCC-, and $135 million 10.5% senior subordinated notes due 2009, previously at CC.

Moody's cuts AES Drax

Moody's Investors Service downgraded AES Drax and kept it on review for further downgrade. Ratings lowered include AES Drax Holdings Ltd.'s £200 million and $302.4 million senior secured bonds, cut to Caa1 from Ba2, InPower Ltd.'s £905 million senior secured bank debt, cut to Caa1 from Ba2, and AES Drax Energy Ltd.'s £135 million and $200 million notes, cut to Ca from Caa2.

Moody's said the actions reflect the weakened credit profile of TXU Europe, which is the counterparty under the hedging agreement that underpins the cashflows of Drax. Moody's has downgraded the ratings of TXU Europe to low speculative grade levels following the withdrawal of support for TXU Europe from its parent, TXU Corp.

Moody's said it assumes that the hedging contract will soon no longer be in existence in its current form.

In the absence of this contract, taking into account the current conditions in the U.K. electricity market that Drax would be forced to sell its output into, Moody's said it considers it unlikely that Drax will be able to service its debt on an ongoing basis.

Moody's noted that should the hedging contract be terminated or amended Drax may be an unsecured creditor of TXU Europe Group plc for the amount of approximately £270 million. It is possible that any amount received from TXU Europe may be applied solely for the repayment of the senior secured bank debt, and not shared with the senior secured bondholders at AES Drax Holdings Limited.

Moody's believes that, in current market conditions, the unencumbered asset value of the Drax assets is considerably below book value.

S&P withdraws TI Automotive ratings

Standard & Poor's withdrew its ratings on TI Automotive Ltd. including its senior unsecured debt at B. S&P said the action follows the indefinite postponement of the company's planned $300 million bond issue.

S&P cuts Sirius Satellite

Standard & Poor's downgraded Sirius Satellite Radio Inc. The senior secured ratings remain on CreditWatch with negative implications. Ratings lowered include Sirius' corporate credit rating, cut to D from CCC, $116 million 15% senior discount notes due 2007 and $200 million 14.5% senior secured notes due 2009, cut to CCC- from CCC, and $125 million 8.75% convertible subordinated notes due 2009, cut to D from CC.

S&P said the action follows Sirius' failure to make the scheduled interest payment on its 8.75% convertible subordinated notes.

S&P said it views Sirius' failure to make the interest payment on these notes as scheduled as an event of default, regardless of any technical grace period.

The rating agency added that it recognizes that Sirius currently has ample cash to make this payment but believes that the company does not have the capacity to support its current capital structure.

Accordingly, Sirius has been in negotiations with key debtholders to exchange a significant portion of its debt for equity and is also seeking additional equity to fund its considerable cash needs, S&P said. The successful completion of such negotiations could improve the company's capital structure, near-term liquidity and interest burden.

However, S&P said it remains concerned that such negotiations could be detrimental to debtholders and would view an exchange at less than par value as tantamount to a default.

Moody's cuts TXU Europe unit

Moody's Investors Service downgraded to Caa2 from Baa3 the €500 million secured 7% notes due 2005 issued by TXU Europe Funding Ltd., and placed the notes on review for further downgrade.

The action results from the downgrade of the underlying bonds issued by TXU Eastern Funding Co. (Caa2, under review for further downgrade), which are unconditionally and irrevocably guaranteed by TXU Europe Ltd. (also Caa2, under review for further downgrade).

TXU Europe Funding benefited from two currency swaps provided by Morgan Stanley Capital Services Inc. with a guarantee by Morgan Stanley and UBS Warburg.

However, Moody's noted the structure provides for a transfer of the swaps to TXU Europe Ltd. if the underlying bonds issued by TXU Eastern Funding Co. were to be downgraded below Baa3.

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