Moody's cuts Aquila to junk

Moody's Investors Service downgraded Aquila, Inc. and Aquila Merchant Services to junk, affecting $4.8 billion of debt. Ratings lowered include Aquila's commercial paper to Not Prime from Prime-3, senior unsecured debt to Ba2 from Baa3, subordinated debt to Ba3 from Ba1 and preferred stock to B1 from Ba2 and Aquila Merchant Services' issuer rating to Ba2 from Baa2. The outlook is stable.

Moody's said it lowered Aquila because it considers that poor returns from investments outside the regulated U.S. utility business have resulted in a significant deterioration of operating cash flows.

These investments, financed almost exclusively with a high level of debt, include international utilities, a telecommunications and utility-related construction company, communications technology, five long-term gas delivery contracts, merchant energy wholesale services and non-related investments, the rating agency noted.

The poor performance of some of these investments resulted in impairment charges of $895 million and restructuring charges of $71.8 million for the financial period ended June 30, 2002, Moody's said.

Market conditions and the results of the company's business segments have forced it to sell assets to meet liquidity pressures. The company relies on asset sales to shore up its liquidity position this year and next, Moody's added.

Aquila's rating incorporates the execution risk associated with completion of the asset sales as the company transitions from a diversified merchant energy company into a mostly regulated utility company with some unregulated generation assets, Moody's said. The new rating also considers the on-going cash impact of gas pre-pay agreements, which will be a substantial drain on cash flow over the next several years.

Moody's cuts Alpharma

Moody's Investors Service downgraded Alpharma Operating Corp. including lowering its $300 million guaranteed senior secured revolving credit facility maturing 2007, $137 million guaranteed senior secured term loan A maturing 2007 and $353 million guaranteed senior secured term loan B maturing 2008 to B2 from B1 and assigned a Caa1 rating to its $200 million guaranteed senior subordinated notes due 2009. The outlook is negative.

Moody's said its action reflects lower operating earnings than were anticipated at the time of the initial rating in August 2001, on-going acquisition integration risks associated with the company's rapid growth from debt and equity financed acquisitions (12 acquisitions were made since 1995, including large acquisitions in each year from 1998 through 2001), and the company's related need to continue to develop and implement an appropriate infrastructure, plant rationalization, and strategic business plan for its global operations in order to stabilize operations and continue to improve profitability.

Moody's is also concerned about the uncertain outcome of the FDA's inspections of the company's Baltimore, Md. manufacturing facility, including the cost to remediate deficiencies and the scope of the related reductions in production and earnings.

Alpharma also has significant working capital requirements including for its high inventory level (five to six months) and its numerous global facilities, foreign exchange fluctuation risk, a weak balance sheet with high leverage, negative tangible book equity, low retained earnings, low return on assets, and modest interest coverage, Moody's said.

Continuing to be factored into the ratings are the relatively low operating margins of the company's human generic products that comprise about 65% of total sales, and the fact that the company's animal health products (that comprised approximately 26% of first half 2002 revenue and 17% of operating income) are affected by cyclical poultry, swine and beef supply and demand factors, Moody's added.

However Alpharma has established market positions in some generic and branded products, a lack of product concentration (no product accounted for more than 5% of pro forma 2001 sales), customer diversification (no customer comprised more that 6% of pro forma 2001 sales), benefits from its active pharmaceutical ingredients division (which contributed first half 2002 sales of $39 million and operating income of $19 million, or 7% of total sales and 36% of operating income, while recognizing that capacity constraints limit further growth in the division), seven new product launches to date in 2002, and a product pipeline, Moody's added.

Moody's lowers CE Casecnan outlook

Moody's Investors Service lowered its outlook on CE Casecnan Water and Energy Inc's to negative and confirmed its $305 million senior secured notes at Ba2.

Moody's said it changed CE Casecnan's outlook because of ongoing uncertainty about the impact of the IPP contract review being carried out by the Philippine Government Inter-Agency Committee.

Moody's said it still expects that any renegotiation of contracts will not be carried out unilaterally by the government but said the contract review process lacks transparency and heightens concerns that unforeseen outcomes may result.

Moves by the government to reopen the terms of CE Casecnan's contract will pressure the rating, Moody's added.

Fitch cuts FertiNitro

Fitch Ratings downgraded FertiNitro Finance Inc.'s $250 million 8.29% secured bonds due 2020 to B- from B+. The rating remains on Rating Watch Negative.

Fitch said it cut FertiNitro because of the company's continued poor operating performance that has further diminished its liquidity position, making it all but certain that external liquidity support will be needed to make the upcoming October debt service payment.

FertiNitro expects to cover its October debt service payment from a combination of operating cash flow through September and external liquidity available particularly from a sponsor equity facility which totals $20 million, Fitch noted.

Even before the latest downgrade, Fitch had been concerned about the company's higher senior debt load, lower-than-expected production levels, and weaker-than-projected fertilizer prices that have all contributed to a tight liquidity position and limited debt service capacity.

While FertiNitro achieved final completion earlier this year, the plant has not yet demonstrated its ability to consistently perform at steady-state production levels close to nameplate capacity, Fitch noted. From January through August 2002, ammonia and urea production averaged 74% and 60%, respectively, of base case projections. Plant operations continue to be inconsistent largely due to numerous fabrication defects that began being detected after the project commenced commercial operations.

S&P puts Borden Chemical on watch

Standard & Poor's put Borden Chemical Inc. on CreditWatch With Negative Implications. Ratings affected include Borden Chemical's $250 million 7.875% debentures due 2023, $200 million 9.20% debentures due 2021, $150 million 9.25% debentures due 2019 and $200 million 8.375% debentures due 2016, all at BB+.

S&P said the watch placement reflects heightened concerns about Borden's credit profile, which has deteriorated due to a sizable debt burden, still challenging conditions in the chemical sector, and the disclosure that the completion of the company's new credit facilities has been delayed beyond earlier expectations.

The CreditWatch placement highlights the risk of a downgrade if new credit agreements are not finalized during September as announced, S&P said. The new facilities, which will be secured by Borden assets, are believed to be substantially committed and in the final stages of negotiation with a group of banks.

Accordingly, Borden Chemical's borrowing capacity is currently limited to arrangements with its affiliate, Borden Foods Holdings. S&P said it believes current sources of capital and cash on the balance sheet will be sufficient to meet the near-term requirements of the business but these arrangements are limited in terms of the ongoing transparency necessary to support the current ratings.

Operating margins have reflected a number of persistent challenges, including higher raw material and energy costs in 2001 and soft demand stemming from the slowdown in the U.S. economy, S&P added. These conditions are expected to persist throughout 2002, and may limit opportunities to substantially improve an already subpar financial profile. As of June 30, 2002, Borden Chemical's financial profile reflected total debt to EBITDA above 4 times and EBITDA interest coverage of approximately 2.5x.

As a result, ratings could be lowered modestly even if Borden is able to complete its financing plans as anticipated, S&P added.

S&P cuts Jefferson Smurfit to junk

Standard & Poor's downgraded Jefferson Smurfit Group plc three notches to junk and kept it on CreditWatch with negative implications.

Ratings lowered include Smurfit Capital Funding plc's $250 million 6.75% guaranteed notes due 2005 and $350 million 7.5% guaranteed debentures due 2025, both cut to BB+ from BBB+.

Fitch cuts GenTek notes to D

Fitch Ratings downgraded GenTek Inc.'s 11% senior subordinated notes to D from C and confirmed its senior secured credit facility at CC.

Fitch said the downgrade is in response to GenTek's default on its scheduled Aug. 1 interest payment on the notes.

GenTek's senior lenders issued a payment blockage notice pursuant to the senior credit facility preventing GenTek from paying interest due to the senior subordinated noteholders. GenTek was not permitted to make the scheduled interest payment during the grace period, which ended Aug. 31, thus defaulting on the senior subordinated notes, Fitch said.

S&P cuts Avaya

Standard & Poor's downgraded Avaya Inc., removed it from CreditWatch with negative implications and assigned a negative outlook. Ratings lowered include Avaya's $943 million zero coupon LYONS due 2021, cut to B from BB-, and its $440 million 11.125% senior secured subordinated notes due 2009, cut to B+ from BB-.

S&P said the action reflects its concern that profitability pressures could continue along with reduced financial flexibility stemming from diminished liquidity.

Profitability pressures, driven by a significant tightening in customer spending activity, have eroded debt-protection measures, S&P said. While revenues derived from services have remained relatively stable, Avaya's sales of new systems and applications, 46% of total revenues for the 12 months ended June 30, 2002, have eroded significantly in recent quarters. Systems and applications revenues declined 28% to $2.4 billion in the 12 months ended June 30, 2002, from the 12 months ended Sept. 30, 2001. Quarterly EBITDA has fallen to $50 million-$60 million over the past three quarters from $120 million-$200 million in fiscal 2001.

Risks remain that Avaya's actions to reduce costs will not be sufficient in terms of size and timing to stem further declines in EBITDA and that debt-protection measures will remain high for the rating level, S&P said.

Avaya has responded to declining revenues by lowering its fixed-cost base through head count reductions, real estate consolidation, and lease termination. Annualized cost savings from actions announced July 26, 2002, are estimated by Avaya at $300 million annually and follow $250 million of cost reductions taken in March 2002.

Total debt to EBITDA levels have steadily increased in recent quarters, however, reaching 5.2 times in the quarter ended June 30, 2002, S&P noted. Given that revenues are likely to remain depressed over the intermediate term, EBITDA improvements are dependent on cost reduction actions. EBITDA recovery is necessary to restore debt protection metrics that are more consistent with the current rating level.

Moody's cuts Teck Cominco notes

Moody's Investors Service downgraded Teck Cominco Ltd. including cuttings its 3.75% convertible subordinated debentures to Ba1 from Baa3 and 3% subordinated debentures exchangeable for Inco Shares due 2021 to Ba1 from Baa3. Moody's also assigned a (P)Baa3 rating to Teck Cominco's

$500 million shelf for senior unsecured debt securities.

Moody's said the downgrade of the subordinated rating reflects the weakened position of the subordinated debt instruments in Teck Cominco's capital structure due to the increased debt obligations at the parent company level and structural enhancements provided to some senior unsecured debt instruments.

The downgrade also reflects the earnings pressure on the operations that directly support the subordinated debt instruments, Moody's added.

Teck Cominco was formed by the acquisition of the former Cominco Ltd., now known as Teck Cominco Metals Ltd. by Teck Corp., which subsequently changed its name to Teck Cominco Ltd. Under the new corporate structure, the company intends to migrate debt issuance, over time, to the parent level, Teck Cominco Ltd., Moody's said. In the interim, the company has taken various actions to create parity between senior debt obligations at Teck Cominco and Cominco. Most notably, these include the providing of a downstream guarantee to the Teck Cominco Metals Ltd.'s 6.875% debentures due in February 2006 and the providing of an upstream guarantee from Cominco for Teck Cominco's $425 million bank credit facility. Moody's estimates that approximately 50% of total debt at June 30, 2002 (including the convertible and subordinated exchangeable debentures as debt) is senior debt and benefits from access to the consolidated assets and cash flows. However, Moody's noted that the subordinated debt instruments of Teck Cominco do not benefit from any cross guarantees or other structural enhancements.

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