Moody's lowers Technical Olympic outlook

Moody's Investors Service lowered its outlook on Technical Olympic USA, Inc. to negative from stable and confirmed its ratings including its senior notes at Ba3 and subordinated notes at B2.

Moody's said the former stable ratings outlook was assigned in June 2002 based on Moody's expectation that debt leverage would trend towards 50% (debt/capitalization) and to well under 3x (debt/EBITDA) by year-end 2003.

Since that time, the company has added more debt than contemplated, which has weakened its metrics, largely to fund four acquisitions.

The negative ratings outlook reflects Moody's concern that capital structure discipline may be sacrificed in order to finance additional acquisitions, given the company's avowed expansion strategy.

Should the company push debt leverage up beyond current levels, the ratings could be lowered, Moody's said.

As of March 31, 2003, Technical Olympic USA's total debt/capitalization, including financial services debt (which the company guarantees), was 55.7%. Debt/EBITDA was 3.0x (excluding the pro forma contributions from acquisitions) and 2.6x (including pro forma contributions from acquisitions), in both cases inclusive of financial services debt, Moody's said. Going forward, Moody's added that it would expect debt leverage to be reduced. Failure by the company to do so could cause a change in the ratings.

Moody's puts Invensys on downgrade review

Moody's Investors Service put Invensys plc's debt at Ba1 on review for possible downgrade, affecting $4 billion of securities.

Moody's said the review was prompted by its concerns following Invensys' announcement that it intends to embark upon further asset disposals in order to simplify its group structure, improve liquidity and stabilize its financial position which may result in adjusted debt levels (including contingent liabilities) that may not be adequately supported by cash flow levels.

Moody's noted the company remains within its banking covenants and full year trading is expected to be within the company's Feb. 14 guidance.

Moody's rates Alrosa bond B3

Moody's Investors Service assigned a B3 rating to the proposed $300 million bond of Alrosa Finance SA, an indirect finance subsidiary of Alrosa Co. Ltd. The outlook is stable.

The rating reflects Alrosa's leading position in the world diamond market (global no. 2), its high-quality gems production and significant diamond reserves, the company's strong technical mining expertise as well as the consolidated market structure and the longstanding relationship with De Beers (export agreements subject to E.U. approval), Moody's said.

The company's position is strengthened by its significant export share of sales and U.S. dollar cash flow generation as well as by its new five-year export quota, which allows for a broader buyer base. Although no material rating uplift has been factored into the rating based on federal and state ownership, this has provided continuity in the past.

However, the rating, also considers Alrosa's challenging operating environment in Russia, its reliance on medium-term state licences and export quotas, the group's elevated leverage and high investment needs over the next few years as well as its significant export dependence on a single customer, De Beers, Moody's said.

In addition, operating challenges - including the start-up of new mining production and the growing importance of technically more difficult and more expensive underground mining as well as the potential for environmental liabilities - pose additional risks.

Furthermore, Alrosa's ruble cost base and dollar-linked revenues (diamond prices are quoted in dollars) expose the company to fluctuations in the ruble/dollar exchange rate.

Moody's cuts Vitro

Moody's Investors Service downgraded Vitro SA de CV including cutting its $250 million 11.375% senior unsecured notes due 2007 issued by Vicap SA de CV to B2 from B1. The outlook is stable.

Moody's said the action reflects the cumulative effects of adverse currency movements in Mexico and weakened demand on certain products throughout its global markets, increased competition - specifically from imports - and the resulting decline in Vitro's profitability.

The stable ratings outlook expresses Moody's anticipation of limited fluctuations in financial performance based upon the current run-rate EBIT, which is lower than original expectations, yet within the tolerance of the revised ratings categories.

At fiscal year end Dec. 31, 2002, the balance sheet was weak as evidenced by high financial leverage. Total debt to EBITDA, adjusted to include accounts receivable securitizations of approximately $100 million, was almost 4 times (adjusted debt to EBITA was close to 8 times), Moody's said. The accumulated deficit was approximately the $117 million equivalent. The ratio of debt to total revenue was relatively high at approximately 62%. EBITDA less capital expenditures covered interest expense approximately 1.9 times. Cash on hand was approximately $214 million.

S&P cuts Elwood, still on watch

Standard & Poor's downgraded Elwood Energy LLC including cutting its $382.2 million bonds due 2026 to BB from BB+ and kept it on CreditWatch with negative implications.

S&P said the action reflects its recent downgrade of Aquila Inc. rating to B/Negative from B+/Watch Neg.

Under a power sales agreement, Aquila provides about 48% of Elwood's contractual net operating cash flow through 2012 and thereafter 100% of contractual cash flow until 2017.

Under the agreement, Aquila is required to provide Elwood with 12 months of capacity payments, or about $37 million, as collateral to back up its offtake obligations following recent rating downgrades.

Following its downgrade in November 2002, Aquila posted LOCs totaling $18.7 million as collateral. Following its subsequent downgrade in February 2003, Aquila posted another $18.7 million as collateral, but in the form of an escrow account held at JP Morgan.

While Elwood has a lien on the funds in the escrow account, S&P said it Poor's is concerned that these funds may be treated as a preferential payment from Aquila if Aquila were to file for bankruptcy within the 90-day preference period. Were a bankruptcy court to treat the funds as a preference, the escrow account balance would likely be collapsed into the Aquila bankruptcy estate and not be available to Elwood.

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