S&P cuts El Paso to junk, still on watch

Standard & Poor's downgraded El Paso Corp. to junk and kept it on CreditWatch with negative implications, affecting $17 billion of debt. Ratings lowered included the senior unsecured debt of El Paso Corp. and El Paso CGP Co., cut to BB- from BBB-, the senior unsecured debt of Tennessee Gas Pipeline Co., El Paso Natural Gas Co., ANR Pipeline Co., Colorado Interstate Gas Co. and Southern Natural Gas Co., cut to BB from BBB.

S&P said the downgrade reflects the decline in El Paso's liquidity position due to its need to draw down $1.5 billion from its $3 billion 364-day credit facility to post cash or other collateral to satisfy certain existing contractual obligations, resultant increases in debt leverage which is already excessive, and the paramount importance of executing planned strategic initiatives to arrest the company's weakened credit quality.

Of concern is the expectation that cash flow (expected at about $2.8 billion for 2003) will continue to be inadequate to meet capital spending ($3 billion) and dividend requirements ($500 million) in 2003, S&P said.

As such, executing planned asset sales (targeted at $2 billion in 2003) will be necessary to meet debt maturities of about $1.8 billion (including the $1 billion of El Paso-guaranteed Limestone Electron notes) in 2003.

Nonetheless, even greater challenges exist for 2004 when the company will need to satisfy about $3.5 billion of debt maturities (assuming the $1.5 billion outstanding under the $3 billion credit facility maturing May 2003 remains unchanged and is termed out for one year), S&P said. El Paso's ability to refinance these maturities is highly dependent on regaining timely access to the volatile capital markets. Absent this access, the firm may be forced to sell more assets and restrict discretionary spending.

El Paso has formed Travis Energy Services LLC in an effort to liquidate the company's energy trading book. Success in eliminating the firm's energy trading exposure may free up cash collateral and parental guarantees, S&P noted. The effect on El Paso's credit profile from exiting trading depends on the duration and the ultimate cost of selling its positions, as well as El Paso's asset and equity contribution into Travis and Travis' final structural and legal architecture.

Resolution of the CreditWatch listing will depend on greater clarity regarding the FERC's ongoing investigation into market manipulation in California, S&P said. Current ratings assume resolution of the FERC matter in a manner that is credit neutral to El Paso.

Moody's rates AMR liquidity SGL-3

Moody's Investors Service assigned an SGL-3 speculative-grade liquidity rating to AMR Corp. and confirmed the B1 senior implied rating of AMR and its primary operating unit, American Airlines, Inc.

The SGL-3 rating reflects the company's negative operating cash flow and the tight covenants in its bank loan agreement offset by high levels of unrestricted cash and short term investments, demonstrated access to the capital markets and unencumbered assets available to support additional secured borrowings, Moody's said.

American, like most U.S. airlines, is experiencing the combined affect of a poor economy and over capacity leading to weak cash flow, Moody's said. EBITDA has been negative every quarter since the first quarter of 2001.

Positive cash flow is not expected to be achieved until the second quarter of 2003 at the earliest.

In June of 2003, a minimum cash flow covenant becomes effective in the company's fully drawn $834 million bank loan agreement, Moody's noted. It is possible that American will not meet the current cash flow test and will be forced to either seek a waiver or repay the outstandings.

Moody's said it believes American will have sufficient liquidity at that time to repay the debt if an agreement on alternative covenant levels cannot be reached.

Moody's confirms Focus Wickes, rated new loan B1

Moody's Investors Service confirmed Focus Wickes Ltd. and assigned a B1 rating to its proposed £525.0 million in new senior secured credit facilities which have DeFacto 1014 Ltd., a subsidiary of Focus

Retail Group Ltd. as principal borrower. Ratings confirmed include Focus Wickes' £125 million 11.0% senior notes due 2010 and £45 million 13.0% senior notes due 2010 at B3 and £345 million senior secured credit facilities at B1. The outlook is stable. The action concludes a review for upgrade begun on June 27.

Moody's said its confirmation follows the announcement of a recapitalization of the company in conjunction with the acquisition of a 28.9% stake in the business by Apax Partners.

Under the terms of the existing bond indenture and the existing bank facilities, the leveraged recapitalization will be in breach of existing covenants and will require a re-financing of the existing debt.

As a result, the company is putting in place £525 million in new senior secured credit facilities (including a £90 million revolver) to re-finance the existing £345 million facilities.

Focus Wickes has also announced its intention to tender for its existing senior notes.

The ratings confirmation reflects the fact that the recapitalization will lead to a substantial re-leveraging of the business, Moody's said. Pro forma for the transaction, Moody's anticipates that adjusted cash-pay debt/EBITDAR (i.e. leverage adjusted for rent expense and operating leases, and excluding integration and exceptional costs) will be approximately 6.0x (compared to approximately 5.2x as of April 2002); similarly EBITDAR/(cash interest + 1/3 rents) is expected to fall from approximately 3.4x as of April 2002 to approximately 2.7x. These leverage and coverage measures are similar to those exhibited at the time of the initial rating in July 2001.

S&P rates Turning Stone notes B+

Standard & Poor's assigned a B+ rating to Turning Stone Casino Resort Enterprise's proposed $125 million senior unsecured note offering due 2010. The outlook is stable.

Proceeds, together with borrowings under a senior secured credit facility, cash flow from operations, and expected tax-exempt bonds, will be used to help fund the construction of the enterprises' ongoing expansion project, to repay existing indebtedness, and for general corporate purposes.

The ratings reflect the solid operating performance of the company's existing facility, the favorable demographics, the current limited competitive situation in its surrounding market, and the potential for EBITDA growth post-construction, S&P said. These factors are mitigated by the enterprises' narrow business focus, construction risks associated with the planned expansion, challenges in managing a larger facility, and the potential for increased competition in the future.

Performance of the Turning Stone Casino since its opening in 1993 has been solid, as EBITDA in its first full year of operations exceeded $26 million, S&P noted.

The property has undergone several expansions since that time, and for the fiscal year ended Sept. 30, 2002, EBITDA is expected to exceed $85 million. Operating margins are running at more than 40%, which is very good relative to the industry overall, due to low-cost structure and a favorable compact structure with the State of New York.

The success of this property has been due, in large part, to the current limited competitive situation in the upstate New York area, S&P said. The Turning Stone is located more than 140 miles from the nearest Native American casino, operated by the St. Regis Mohawk's, and considering most of Turning Stone's customers come from within 50 miles, these operations have no direct effect. However, the October 2001 decision to expand gaming in New York will likely increase the competitive environment in the future, but the timing remains uncertain given ongoing negotiations and legal challenges.

Pro forma for the proposed note offering, EBITDA coverage of interest expense is more than 5 times and total debt to EBITDA under 2x, S&P said. Despite the company's planned expansion project increasing debt levels during the next few years, S&P expects the company's overall financial profile to remain good for the rating.

S&P keeps United on developing watch after downgrade

Standard & Poor's said UAL Corp. and United Air Lines Inc. remain on CreditWatch with developing implications following news that it reached a slightly revised agreement on contract concessions with its mechanics' union leadership.

"The quick agreement and apparently modest changes to the original contract proposal indicate that United and the mechanics' union leaders believe that the previous close vote represented in part a protest, which could be reversed in a new poll," S&P said.

"United still faces a difficult task in avoiding bankruptcy, but the second mechanics' vote provides the airline with a glimmer of hope."

S&P downgraded UAL and United on Friday after the mechanics rejected proposed concessions.

Ratings lowered include the corporate credit of UAL and United, cut to CCC- from CCC, United's senior secured debt, cut to CCC- from CCC and United's equipment trust certificates, lowered one notch.

On Friday, S&P commented: "The mechanics' vote makes bankruptcy virtually inevitable for United and UAL."

UAL's liquidity is very constrained. United is due to make a $375 million debt payment on its 1997-1 enhanced equipment trust certificates Dec. 2, but may well take advantage of a 10-business-day grace period that runs to Dec. 16 while it attempts to salvage its loan guaranty application and avoid bankruptcy, S&P added. Meanwhile, the airline is consuming about $7 million daily in cash operating losses, reducing cash reserves that were described as over $1 billion by UAL executive Glenn Tilton on Nov. 21.

Fitch confirms Premcor

Fitch Ratings confirmed Premcor Inc. including Premcor USA's senior subordinated notes at B, Premcor Refining Group's $650 million secured credit facility at BB, senior floating-rate unsecured term loan and senior notes at BB- and senior subordinated notes at B, and Port Arthur Finance Corp.'s senior secured notes at BB. The outlook remains positive.

Fitch's confirmation comes in response to Premcor's announcement that it has entered into an agreement with the Williams Companies to acquire the 170,000 barrel per day Memphis refinery from Williams for $315 million plus the value of inventory. The agreement also includes potential earn-out payments for Williams of up to $75 million if industry margins exceed certain levels during the next seven years.

Premcor plans to finance the acquisition with roughly 50% debt and 50% equity. Premcor's two principal shareholders, the Blackstone Group and Occidental Petroleum Corporation, will each participate in the equity offering.

The conservative financing supports management's strategy of growing the company's operating base while working towards investment grade debt ratings, Fitch said.

The Memphis refinery has a niche position, processing light sweet crudes into refined products for local markets and delivery via barge on the Mississippi River, Fitch added. The refinery, however, has been unable to process up to its full 190,000-bpd crude capacity due to constraints with downstream units in the plant. Due to the light crude slate, the refinery converts almost 100% of its feed into light products.

The addition of Memphis will provide needed stability for Premcor's operations since the company closed the Hartford, Ill. refinery in September, Fitch said. Premcor currently operates only two refineries.

Like other refiners, Premcor has suffered through four successive quarters at the bottom of the industry cycle. Premcor, however, significantly improved its capital structure earlier this year and completed an initial public offering which raised $482 million, Fitch said. Total consolidated debt for Premcor Inc. has been reduced by $650 million this year to $925 million at Sept. 30, 2002.

S&P rates MDC notes BB+

Standard & Poor's assigned a BB+ rating to MDC Holdings Inc.'s new $150 million 7% senior unsecured notes due 2012.

S&P cuts Genuity

Standard & Poor's downgraded Genuity Inc. to D, including its $2 billion revolving credit facility due 2005 previously at CC.

S&P said the downgrade is in response to Genuity's Chapter 11 filing.

Moody's rates Vanguard Health loan Ba3

Moody's Investors Service assigned a Ba3 rating to Vanguard Health Systems, Inc.'s new $150 million senior secured term loan B due 2009 and confirmed its existing ratings including its $125 million senior secured revolving credit facility due 2006 at Ba3 and $300 million 9.75% senior subordinated notes due 2011 at B3. The outlook is stable.

The rating assignment and confirmation follows Vanguard's proposed acquisition of five hospitals in San Antonio, Texas, from Baptist Health Systems, Moody's said. The partially debt financed transaction will further stress the company's credit profile, leaving the ratings weakly positioned within the rating category.

Moody's said Vanguard's ratings reflect its high leverage, its modest operating margins relative to the industry, the competitive nature of its markets, the concentration of revenues at certain facilities and in a few markets and its short operating history.

The ratings also recognize the risks associated with acquiring troubled facilities, and concerns that the company's aggressive growth strategy will limit its ability to delever, Moody's said.

Positive factors include a seasoned management team, the company's track record at improving acquired facilities, the significant opportunity for operational improvements and the substantial equity contribution from the sponsor, Morgan Stanley Capital Partners, the rating agency added.

The stable outlook anticipates that operating trends will remain positive as the company integrates the new Texas facilities and continues to improve existing operations, Moody's said.

Following the proposed acquisition, pro forma leverage (as measured by Debt/EBITDA) at Sept. 30, 2002 will stand at roughly 4.5 times (without assumed synergies, leverage would approach 5.0 times), Moody's said. This is up from 3.2 times and 4.3 times at FYE2001 and FYE2002, respectively. Pro forma interest coverage will be weak at roughly 2.8 times. The metrics exclude roughly $50 million in PIK preferred.

Going forward, the company has indicated that it will target a leverage ratio of 3.75 times (the new credit facility covenant will permit leverage up to 5.5 times). However, Moody's said it is concerned that Vanguard will not achieve this target in the near-to-intermediate term unless the company raises additional equity or it slows down the pace of acquisitions.

S&P cuts Trenwick

Standard & Poor's downgraded Trenwick Group Ltd. to D. Ratings lowered include LaSalle Re Holdings Ltd.'s $75 million perpetual preferred shares series A and Trenwick Capital Trust I's $110 million 8.82% subordinated capital income securities (SKIS), both previously at CC.

S&P said the downgrade follows the announced non-payment of the preferred dividend on Lasalle Re Holdings Ltd.'s Series A preferred stock, which had a declared dividend due Monday.

Trenwick has also suspended dividends and distributions payable on all other outstanding preferred securities, including Trenwick Group Ltd.'s Series B cumulative convertible perpetual preferred shares and Trenwick Capital Trust I's 8.82% exchange subordinated capital income securities, S&P added.

S&P cuts Titanium Metals preferreds

Standard & Poor's downgraded Titanium Metals Corp.'s $150 million 6.625% beneficial unsecured convertible securities due 2026 to D from C and confirmed its corporate credit rating at B-.

S&P said the downgrade follows Titanium Metals' deferral of the dividend on its $201.2 million convertible trust preferred securities.

S&P added that the ratings reflect Titanium Metals' position as an integrated producer of titanium sponge and mill products, as well as weak profitability and cash flow protection measures stemming from very soft end market conditions.

The aerospace industry was materially affected by the terrorist attacks on Sept. 11, 2001, which led to dramatic capacity reductions, deferrals of aircraft deliveries, and aircraft order cancellations. The aerospace industry, which accounts for 50% of overall titanium demand and 55% of Titanium Metals' shipments, is expected to gradually begin recovering in 2004 but will not reach healthier levels until 2006, S&P said. Typically, aircraft deliveries tend to lag titanium shipments to the commercial aerospace industry by about one year.

Titanium Metals' financial position has been severely weakened and will remain very weak in light of difficult aerospace conditions. Indeed, the company's 2002 revenues are projected to decline about 25% to approximately $365 million, down from $487 million in 2001. Combined with a decline in capacity utilization rates to 45% in 2002 from 85% in 2001, which has caused unit costs to increase, operating margins have become severely compressed to 6% for the trailing 12 month period ending Sept. 30, 2002, from about 11% at year-end 2002, S&P said.

Moody's cuts Tricom

Moody's Investors Service downgraded Tricom SA including cutting its 11.375% guaranteed senior notes due 2004 to Caa2 from B3.

Moody's said the action reflects its heightened concern about Tricom's operating performance, which continues to fall short of Moody's expectations, and constrained liquidity that is exacerbated by the requirements of a heavy debt amortization schedule.

Tricom has relied, in part, upon short term funding to support its plant expansion. However this has created a basic funding mismatch and a debt service capability that relies upon management's success in rolling forward or extending the maturities of an assortment of short-term bank credit facilities, Moody's said.

The revised ratings incorporate Moody's view that a significant level of debt restructuring will be necessary to address the company's liquidity and capital structure issues.

During the past year, Tricom has incurred a substantial level of capital investments, however these investments have yet to show signs of revitalizing its business growth which remains stalled under the pressure of lowered international settlement rates, declining toll pricing and customer churn, Moody's said.

The company has indicated that its recent initiative to disconnect marginal customers may further depress sales in the near-term.

At the end of September 2002, Tricom recorded liquidity of approximately $42 million, including $7 million in cash, $13 million of marketable investments, and $22 million available under its credit facilities. In addition the company had $8 million unused under its local commercial paper program.

This level of liquidity would sustain operations for approximately three quarters based upon Tricom's actual cash burn rate over the past nine months.

Nevertheless, Moody's said it believes Tricom will be unable to generate sufficient cash to meet its debt repayment schedule which, as of Sept. 30, 2002, included $110 million that matures in less than one year, plus $353 million (including the $200 million senior notes) that matures between one to three years.

Moody's cuts British Energy

Moody's Investors Service downgraded British Energy, including cutting its senior unsecured bonds to Ca from Caa1, kept it on negative outlook.

Moody's downgrade follows the company's announcement of a restructuring proposal that would lead to a forced exchange and significant losses for par bondholders.

Failure by creditors to agree to the restructuring may lead to insolvency, which Moody's believes could lead to even greater losses.

The restructuring proposal, which would be implemented from mid 2004, has a number of components. These include (a) a revision of the contractual arrangements with BNFL for the supply of fuel and the processing of future spent fuel; (b) the establishment of a Nuclear Liability Fund, whereby the Government would underwrite all the company's historic spent fuel liabilities, and future uncontracted backend liabilities and decommissioning costs; and (c) a restructuring of the company's capital structure.

Under this capital restructuring involving the other major creditors, namely the bondholders, the bank lenders to the Eggborough plant and certain PPA counterparties, the company is proposing to issue £700 million of long-dated bonds, Moody's noted. Of this, up to £275 million will be issued to the Nuclear Liability Fund, and up to £425 million will be issued to certain financial creditors in return for their existing claims.

On this basis, Moody's estimates that the loss of these par creditors is likely to be about 60-70% taken as a whole, although there are likely to be differences between the different creditor classes.

In addition, creditors may receive new ordinary shares, although any value that may be ascribed to these is likely to be limited and highly speculative.

S&P cuts British Energy

Standard & Poor's downgraded British Energy plc and changed the CreditWatch to negative from developing. Ratings lowered include British Energy's £109.86 million 5.949% bonds due 2003, £134.59 million 6.202% bonds due 2016 and £163.44 million 6.077% bonds due 2006, all cut to C from CCC+.

S&P said the action follows British Energy's announcement that it intends to pursue a solvent restructuring with the support of the U.K. government.

Under S&P's default criteria, a default under the bonds is almost certain - either upon acceptance by the creditors of British Energy of the restructuring plan, or prior to that if the company goes into administration.

The restructuring plan includes a proposal to swap the existing bonds for a combination of new bonds and new shares, although recovery is expected to be significantly less than par, S&P said.

Fitch cuts British Energy

Fitch Ratings downgraded British Energy plc senior unsecured debt to C from B- and changed the Rating Watch to Negative from Evolving.

Fitch said the action follows British Energy's announcement of restructuring plans, which include the issue of new bonds up to a maximum £425 million in exchange for existing obligations totaling £1.3 billion.

According to Fitch's methodology, the exchange offer is considered coercive and its terms impose a considerable loss of original principal. Fitch considers the exchange to be a distressed debt exchange and as such a de facto event of default.

The C rating reflects the fact that the restructuring plans are subject to approval by a number of parties, including bondholders and the European Commission, and are not expected to be fully implemented until mid 2004, Fitch added. The ratings will remain on Rating Watch Negative pending the approval of formal standstill arrangements necessary for the restructuring to proceed, no later than Feb. 14, 2003.

Following the conclusion of the restructuring plan, BE's ratings would be downgraded to D (indicating a recovery rate of less than 50%) and maintained at that level for a period of at least 30 days, Fitch said.

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