Moody's puts Arrow Electronics on review for downgrade

Moody's placed the long-term and short-term ratings for Arrow Electronics Inc. under review for possible downgrade, including the Baa1 rated 0% convertible due 2021.

The review was prompted by expectations of ongoing revenue and earnings weakness that will likely cause debt protection measures to remain weak for longer than previously anticipated.

The rating has had a negative outlook since February 2001.

Recently reported second quarter results evidence a continuation of weak market conditions.

Combined with seasonal weakness in the third quarter, as well as outlook from many of its suppliers and end equipment manufacturers, it is likely that operating performance will remain weak over at least the next few quarters.

The review will focus on the prospects for improved profitability and returns on capital and assets given the ongoing weak demand for semiconductors and computing products.

Also considered will be the company's funding plans regarding debt maturities in November and October of 2003 of $250 million and $425 million, respectively.

Arrow, as expected, has generated cash as a result of working capital reductions during the worst downturn in the semiconductor history.

Since the downturn began in late 2000, Arrow has reduced debt by $1.1 billion to $2.5 billion and increased cash balances by $853 million. Cash and investments at June 30 totaled $909 million.

Arrow has no commercial paper outstanding and no borrowings under its $625 million bank facility that matures Feb. 21, 2004. Arrow also has access to a $750 million receivables securitization facility, although there is no near term need.

S&P notes Duke probe results

Duke Energy Corp. (A+/negative watch) has completed its investigation of 750,000 trades in accordance with the Securities and Exchange Commission's May 31 informal request for information about round-trip energy transactions.

The new revelations are marginally negative, S&P said.

The final report uncovered five incremental cases over the Intercontinental Exchange.

Furthermore, Duke Energy has identified 61 round-trip transactions completed at the direction of one trader that did not have a legitimate business purpose.

Duke Energy's corrective actions include the dismissal of two employees, restructuring and consolidation of trading activities and a tightening of policies and procedures.

The financial implications are not material, as these revenues represent less than 0.33% of trading revenues, S&P said.

S&P added that it is reviewing Duke Energy's creditworthiness in light of increased industry risk and more stringent capital requirements for merchant generators and energy traders.

S&P notes Kerr-McGee restatement

Standard & Poor's noted today that Kerr-McGee's (BBB/positive/A-2) announcement that it is restating its second-quarter 2002 earnings, which will increase its loss for the quarter, would not have an immediate impact on the company's ratings or outlook.

The restatement of about $50 million stems from the realization of additional costs for activities related to the cleanup of former refinery plant sites and increased dry hole expense.

While portions of the activities in question occurred after June 30, recognition of the activity should have been included in the second quarter financial results.

Continued negative restatements of earnings or a significant escalation in environmentally driven expenditures could cause S&P to take adverse rating actions. However, neither of these events is currently expected.

S&P affirms Dominion ratings

Standard & Poor's affirmed the ratings and outlook on Dominion Resources Inc. (BBB+/stable/A-2), and subsidiaries following Dominion's plans to acquire the Cove Point liquefied natural gas facility from The Williams Companies Inc. for $217 million.

Dominion has addressed the near-term capital needs resulting from the Cove Point acquisition by structuring a $250 million bridge facility with one of its banks to accommodate the new investment.

Ultimately, the purchase will be funded with a combination of corporate debt and equity. Dominion's business risk will not be altered as a result of the acquisition, as the Cove Point facility is already 100% subscribed for the next 20 years with agreed rates approved by the FERC.

An additional 2.5 billion cubic feet of storage capacity is planned and expected to be in service by 2004, which is also subscribed for the next 20 years.

The acquisition complements Dominion's integrated energy strategy.

Nevertheless, Dominion's planned capital investments to further upgrade the Cove Point facility between now and 2004 will outpace the project's net cash flow.

Although access to the capital markets for many firms in this sector has been a challenge due to the current financial and physical market conditions, Dominion has raised more than $2.2 billion in debt and equity year to date.

In addition, among the existing liquidity facilities are bank revolvers consisting of a $1.25 billion 364-day facility with a one-year term out and a $750 million three-year facility.

Currently, $1.26 billion of commercial paper is outstanding, supported by these facilities.

In addition, the company is currently syndicating a $500 million credit facility to provide support for CNG's operations. S&P views the completion of facilities and programs for additional sources of short-term liquidity as an important and positive step toward strengthening liquidity.

Dominion is subject to a rating trigger provision at BBB-, coupled with an equity price trigger provision at a $45.97 per share closing price for 10 consecutive trading days, that could negatively affect the liquidity positions through an off-balance sheet financing at Dominion Fiber Ventures in the amount of $665 million.

However, S&P believes Dominion and its main subsidiaries maintain adequate access to bank facilities and capital markets to mitigate liquidity risks arising from its ratings triggers.

In the unlikely event of significant credit deterioration, Dominion can create additional liquidity by restructuring its capital expenditure program.

S&P keeps Tyco on negative watch

Standard & Poor's said it is keeping Tyco International Ltd. and its subsidiaries on negative watch following the resignations of the chief financial officer and general counsel.

Both executives are expected to continue in their positions until replacements are found. After last week's appointment of a new chief executive officer, this development is not unexpected. S&P does not believe the resignations should impede debt refinancing.

Tyco has total debt of about $26 billion.

Tyco began the quarter with more than $7 billion in cash, following the recent IPO of its commercial finance subsidiary, The CIT Group. Management intends to use a significant portion of this to reduce debt.

The company has recently repurchased $300 million of public debt in the open market and plans to repurchase an additional $2 billion in the current quarter.

Removing the ratings from CreditWatch will depend on management's addressing the gap between cash balances plus free cash flow, which is now expected to total about $2.5 billion in the current fiscal year, and obligations coming due in the next 18 months.

This gap could be bridged through a combination of successful negotiation of new bank credit facilities, selling additional assets, and accessing the public capital markets.

Ratings could be lowered if debt is not reduced meaningfully in the near term, the company does not address in a timely manner obligations coming due late in calendar-year 2003 or there are further negative developments in connection with regulatory or law enforcement agency investigations.

Tyco should have sufficient liquidity to repay amounts outstanding under accounts receivable securitizations, currently about $540 million, which might become due as a result of recent rating downgrades.

Depending on the company's future capital structure, including the possibility that security could be granted or other developments could cause structural subordination, the ratings on debt obligations that S&P currently rates in the investment-grade category could be lowered even if the corporate credit rating remains unchanged.

Moody's rates new Conseco notes Caa2, downgrades old notes

Moody's Investors Service assigned a Caa2 rating to a series of six guaranteed senior notes issued by Conseco, Inc. in a recently concluded voluntary par-for-par exchange for six existing Conseco senior unsecured notes and downgraded the old notes not exchanged to Caa3 from Caa1. It also downgraded the trust preferred stock to Ca from Caa3. The outlook is negative.

The new longer maturity senior unsecured notes are subordinated to existing bank loans and structurally senior to the old senior unsecured notes, Moody's noted, adding that they are guaranteed by CIHC, Inc. - a wholly owned subsidiary of Conseco, Inc., which owns the stock of the company's operating entities.

Moody's said the actions reflect:

--The loss of certain critical claims-paying ratings of operating insurance subsidiaries, which are widely monitored and used by retail distribution channels. Loss of those ratings may make it more difficult to sell new business and to maintain stable levels of surrender and lapse activity.

--Continued uncertainty surrounding the company's cash raising initiatives. Moody's believes Conseco may not be in a position to have all of the cash resources needed to make its Oct. 15, 2002 principal payment until approximately the end of September. If any, or all, of certain cash raising initiatives cannot be completed before Oct. 15, it is unclear whether Conseco will be able to avoid a payment default on its 8.5% senior unsecured notes.

Moody's added that it continues to believe that Conseco's future beyond October 2002 rests on a radical change in the company's capital structure.

Such a restructuring needs to address the current imbalance between holding company sources of cash and its debt service needs, Moody's said.

The company's strategy of selling or reinsuring blocks of insurance business is unsustainable over the medium term, the rating agency added.

S&P cuts Conseco

Standard & Poor's downgraded Conseco Inc. including cutting its senior notes and notes to CCC+ from B and trust preferreds and Feline Prides to CC from CCC. The outlook is negative.

S&P said it cut Conseco because of the "immense pressure" on Conseco and its subsidiaries to meet the substantial debt and interest payment obligations due over the next two years.

Through June 30, 2002, Conseco has about $650 million principal and interest payment remaining for the balance of 2002 and about $1 billion per year for 2003 and 2004, S&P said.

Conseco will be severely stretched to meet its obligations over the next two years because of the continuing pressure on operational earnings associated with the weak economy and the uncertainty surrounding ongoing asset dispositions, S&P said.

As a result, S&P said it is revising its expectation of the insurance operations' GAAP pretax earnings to significantly less than the earlier expectation of $800 million per year.

The company has disposed of or is in the process of disposing of several non-core operations, which will contribute nearly $300 million for the remainder of 2002, the rating agency noted.

S&P said it believes the disposal of operations will have to continue to support the debt repayment.

Although the debt holders that exchanged their bonds in early 2002 are senior to the holders that did not extend, S&P said it has not distinguished between these two classes because of the significant level of bank debt that is senior to both these classes.

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