S&P cuts Hughes Electronics, PanAmSat, still on watch

Standard & Poor's downgraded Hughes Electronics Corp. and PanAmSat Corp. and kept them on CreditWatch with negative implications. Ratings affected include Hughes' $1.235 billion revolver due 2002 and $577.25 million term bank loan due 2002, cut to BB- from BB, and PanAmSat's $125 million 6.875% debentures due 2028, $150 million 6.375% notes due 2008, $200 million 6% notes due 2003, $250 million 7-year revolver, $275 million 6.125% notes due 2005, $400 million term A loan due 2008 and $600 million term B loan due 2008, all cut to BB- from BB, and $500 million 8.5% senior unsecured notes due 2012, cut to B- from B.

S&P said it took the action in response to concern about continuing discretionary cash flow deficits and refinancing risk at Hughes. The downgrade of PanAmSat reflects the company's majority ownership by Hughes and not PanAmSat's stand-alone operating performance or financial condition, which have been stable.

The ratings remain on watch pending the resolution of the merger transaction with EchoStar Communications Corp.

The FCC decision blocking license transfers needed for the EchoStar/Hughes merger, and civil lawsuits by the U.S. Department of Justice and 23 states to permanently enjoin the proposed deal, make the merger increasingly unlikely, S&P said. As a result the rating agency said it is recognizing the potential risks of a no-merger scenario and weighing an analysis of Hughes on a stand-alone basis.

Hughes will consume nearly $1 billion cash in 2002, excluding PanAmSat, which is not a guarantor of Hughes' credit facility, S&P noted. Cash consumption could still be meaningful in 2003 given potential needs at DirecTV Latin America pay TV unit, Hughes Network Systems, and DirecTV Broadband.

Hughes also needs cash to meet a disputed purchase price adjustment of up to $750 million for the sale of the satellite manufacturing operation to Boeing Co. In addition, the DirecTV Latin America unit may be required to purchase Grupo Clarin SA's 3.98% minority interest in DirecTV Latin America for $195 million cash in November 2003.

Hughes is reducing the size of its bank facility to $1.8 billion from $2 billion and is extending the maturity to the earlier of Aug. 31, 2003 or the completion of an EchoStar merger, S&P noted. Should a merger not occur, the loan could be repaid from EchoStar's obligation to purchase PanAmSat for $2.7 billion and the $600 million breakup fee payable by EchoStar.

However, S&P said it is concerned that a delayed payment from EchoStar or any renegotiation of the termination provisions could squeeze Hughes' liquidity by the August 2003 bank maturity date.

Moody's lowers El Paso Energy outlook

Moody's Investors Service lowered its outlook on El Paso Energy Partners, LP to negative from stable, confirmed its ratings and assigned a B1 rating to its planned $150 million senior subordinated. Ratings confirmed include El Paso Energy Partners' secured bank loan at Ba1 and senior subordinated debt at B1.

Moody's said the negative outlook reflects its concerns about the potential impact on El Paso Energy Partners as a result of any deterioration in the credit profile of El Paso Corp., El Paso Energy Partners' general sponsor; financing risk in the near-term; and the exposure of El Paso Energy Partners' future results to commodity-price sensitive aspects of the San Juan assets being acquired.

Proceeds of the new notes will be used to help finance El Paso Energy Partners' $782 million acquisition of a package consisting of the San Juan Basin midstream system and other assets from El Paso Corp. The rest of the financing will come from $350 million of Series C equity units issued to El Paso Corp. and a $282 million term loan due 2004.

Moody's noted it is currently reviewing El Paso Corp.'s ratings (Baa3 senior unsecured) for possible downgrade. El Paso Corp. owns 26.5% of El Paso Energy Partners and as general partner operates and makes management decisions for El Paso Energy Partners. Although El Paso Corp. and El Paso Energy Partners are separate and distinct by legal and accounting standards, consolidation of El Paso Energy Partners may be a more appropriate approach in analyzing El Paso Corp., since there is a close interrelationship between the two entities.

Moody's noted that there are significant operational relationships that link the two entities. For example, El Paso Energy Partners relies on El Paso Corp. to provide it with management and personnel.

El Paso Energy Partners has been central to El Paso's pursuit of ways to improve its own cash flows and to reduce its debt through asset sales, Moody's added.

S&P cuts Nuevo Energy

Standard & Poor's downgraded Nuevo Energy Co. and removed it from CreditWatch with negative implications. The outlook is stable. Ratings lowered include Nuevo Energy's $115 million 5.75% term convertible securities series A, cut to B- from B, and $150 million 9.375% senior subordinated notes due 2010 and $257.31 million 9.5% senior subordinated notes due 2008, cut to B from B+.

S&P said it lowered Nuevo Energy because of the company's continuing inability to meaningfully delever during an extended period of unusually high oil and gas prices.

The ratings action also reflects the vulnerability of the company's challenging asset base and highly leveraged balance sheet to downward movements in oil prices, S&P added.

Entering 2002, S&P said it had expected Nuevo Energy to take material action to strengthen the company's financial profile and reverse asset declines. Although the company has made small strides toward deleveraging in 2002 with cost reductions, marginal assets sales and modest debt reduction with free cash flow in 2002, the recent acquisition of Athanor Resources Inc. increased debt levels.

While the acquisition of Athanor strengthens Nuevo Energy's reserve base and provides decent growth opportunities and a measure of commodity diversification, the significant reliance on debt to fund this transaction further heightens S&P's concerns about Nuevo Energy's ability to achieve credit measures commensurate with a BB corporate credit rating over the intermediate term.

Although credit protection measures have improved in 2002, credit protection measures remain weak with last 12 month EBITDAX/interest coverage of about 2.9 times and total debt/EBITDAX of approximately 3.4x times as of Sept. 30, 2002, S&P said.

S&P added that it expects Nuevo Energy to demonstrate mediocre near-term cash flow protection, with earnings before interest, taxes, depreciation, amortization, and exploration (EBITDAX) expense less planned capital spending ($70-80 million) interest coverage of between 1 time and 1.5x. Various overhead and capital cost reductions could provide additional support.

S&P cuts CanWest

Standard & Poor's downgraded CanWest Media Inc. The outlook is now stable. Ratings lowered include Can West's $425 million 10.625% notes series B due 2011, cut to B- from B, and C$1.05 billion tranche A bank loan due 2006, C$442.2 million tranche C bank loan due 2009, C$600 million revolving credit facility due 2006 and C$707.8 million tranche B bank loan due 2008, all cut to B+ from BB-.

S&P said the downgrade reflects CanWest's continued relatively weak financial profile, which was not in line with the BB rating category.

The positive impact of asset sales of C$470 million in fiscal 2002, used to lower debt levels, has been largely offset by lower-than-anticipated EBITDA generation for the past two years, due to the economic environment and the company's acquisition of the National Post, S&P said.

In addition, reductions in CanWest Media's senior debt have been partially offset by accretion in holding company indebtedness, which, at the company's option, pays interest by issuing additional notes, S&P noted.

As a result, although total debt to adjusted EBITDA has improved to 6.4 times in 2002 from 7.8x in 2001, pro forma acquisitions (including the acquisition of the National Post), the ratio remains significantly weaker than the 5.7x level S&P said it initially expected for 2002.

Total debt as calculated above includes the holding-company notes and adjusted EBITDA includes cash distributions from Network Ten. In addition, while further asset sales are anticipated in 2003, which should increase EBITDA interest coverage (excluding pay in kind interest) to 2.5x for 2003 from 2.1x at the end of 2002, gross EBITDA interest coverage is expected to remain below 2.0x in the medium term, S&P said.

S&P says Genesis Health's financing changes won't affect ratings

Standard & Poor's said that Genesis Health Ventures Inc.'s ratings will not impacted despite the changes to financing plan for the acquisition of NCS Healthcare.

On Oct. 3, S&P rated Genesis Health's proposed $200 million senior unsecured term loan B due 2007 at B+. Currently, under the revised plan, the company intends to lower the term loan B to $100 million, shorten the maturity to 18 months and revise other components of the financing, including a use of a revolver.

"This adjustment does not alter Standard & Poor's view that full principal recovery of the total amount of bank debt under a default scenario would not be assured for even the reduced amount of the loan," S&P explained.

The company's ratings remain on CreditWatch due to the uncertainty of the NCS acquisition and to sell its ElderCare nursing home and assisted-living division.

S&P cuts Acceptance Insurance

Standard & Poor's downgraded Acceptance Insurance Companies, Inc. and kept it on CreditWatch with negative implications. Ratings lowered include AICI Capital Trust's $94.875 million 9% preferred securities due 2027, cut to CC from CCC+.

S&P said the action follows the company's Nov. 15 announcement that it was postponing filing its 10-Q report for the third quarter of 2002, citing a very significant estimated loss for the quarter at American Growers Insurance Co.

The CreditWatch resulted from the company's postponement of its third-quarter earnings conference call, originally scheduled on Nov. 15; its concomitant announcement that it intended to extend the date for filing its 10-Q quarterly report to the Securities and Exchange Commission; unusual trading activity in its common stock and a steep decline in the market value of that stock; and management's noting when it postponed the earnings call that it was "in active discussions regarding possible strategic transactions" (a fact known to Standard & Poor's), S&P said.

S&P cuts Alestra

Standard & Poor's downgraded Alestra S de RL de CV including cuttings its $270 million 12.125% notes due 2006 and $300 million 12.625% notes due 2009 to D from CC.

S&P said the downgrade follows missed interest payments on Alestra's $300 million 12.625% senior notes due May 15, 2009 and $270 million 12.125% senior notes due May 15, 2006.

Alestra has 30 days to make the interest payments but S&P said it does not expect that the company will make the payments in the grace period.

Alestra filed a registration statement with the Securities & Exchange Commission on Sept. 23 for a repurchase and exchange offer of its bonds.

S&P said it expects, that if successful, the exchange offer will represent a deep discount to the liquidation preference of the existing bonds. Subsequent to completion of the exchange offer, the corporate credit rating will be reassessed and the final determination will depend on the amount and terms of debt repurchased and the tenor of its existing debt. Still, S&P said it expects that weak market conditions and a heavy debt burden for the company will prevail.

S&P cuts Pac-West Telecomm

Standard & Poor's downgraded Pac-West Telecomm Inc.'s corporate credit rating to CC from CCC- and removed it from CreditWatch with negative implications. The outlook is negative. Pac-West Telecomm's $150 million 13.5% senior notes due 2009 remain at C.

S&P said the downgrade is due to the company's recent cash tender offer to exchange its 13.5% senior notes due 2009 at a significant discount to par value. Upon completion of the debt exchange, both the corporate credit and the senior unsecured debt ratings will be lowered to D as S&P would view such an exchange as coercive and tantamount to a default on the original terms of the notes.

S&P puts XM Satellite on watch

Standard & Poor's put XM Satellite Radio Inc. on CreditWatch with negative implications. Ratings affected include XM Satellite Radio Holdings Inc.'s $125 million 7.75% convertible subordinated notes due 2006 at CCC- and XM Satellite Radio Inc.'s $325 million 14% senior secured notes due 2010 at CCC+.

S&P said the watch placement is in response to unmet near-term funding needs.

XM's cash needs remain significant, and current liquid assets are only expected to fund XM's operations through the first quarter of 2003, S&P said. The company's near-term funding needs are a growing concern, and failure to obtain a binding commitment for a significant amount of new capital by mid-December will result in a downgrade.

Operationally, XM continues to hit its targets, and leads its primary competitor, Sirius Satellite Radio Inc., in all phases of execution, S&P noted. The company also appears to have strong support from General Motors Corp, a shareholder and key business partner.

GM's factory installation program for satellite radio equipment ramps up considerably in the fourth quarter. GM is also providing support through a cross-promotional advertising campaign, dealer training, and promotional programs.

Separately, GM may help XM lower its near-term funding needs by allowing XM to defer up to $200 million in payments to GM in exchange for debt or convertible securities, or for stock under certain circumstances, S&P said. This potential agreement would require XM to raise at least $200 million in additional capital and make certain modifications to its capital structure. XM is in discussions with various existing and potential investors to satisfy GM's requirements and expects to reach final agreements by mid-December. Any material change to the original terms promised to debt holders would be viewed as tantamount to a default and result in an immediate downgrade.

S&P cuts Oakwood Homes

Standard & Poor's downgraded Oakwood Homes Corp. including cutting its $10 million 8% reset debentures series A due 2007, $125 million 7 7/8% senior unsecured notes due 2004, $175 million 8.125% senior unsecured notes due 2009 and $7 million 8% reset debentures series B due 2007, all cut to D from CCC.

S&P said the downgrade follows Oakwood Homes' filing for Chapter 11 bankruptcy protection.

One of the largest producers and retailers of manufactured housing in the country, Oakwood has been struggling for more than three years to downsize its manufacturing and distribution capacity to match a severe contraction in demand, S&P noted. At the same time, the company has been battling much weaker-than-expected performance within its originated and serviced loan portfolio.

While Oakwood's manufacturing operations have been improving throughout the past year, this has been more than offset by the continued drag within its retail operations and the sharply lower servicing earnings from the finance unit, as the company has had to absorb losses from poorly performing securitizations, S&P said.

Moody's lowers Pathmark outlook

Moody's Investors Service lowered its outlook on Pathmark Stores, Inc. to negative from stable and confirmed its ratings including its $200 million 8.75% senior subordinated notes due 2012 at B2.

Moody's said the action is in response to the increased challenges (as measured by cash flow and same store sales) currently facing Pathmark.

Moody's said it now expects the company will not substantially reduce leverage this year or next and sees the practical necessity to conserve operational liquidity by reducing capital investment.

The ratings may decline if operating results are further adversely affected by the heavy promotional activity around the New York Metro area, leverage increases, or the company loses market share, Moody's added. While the company currently has sufficient liquidity (assuming the necessary amendment to the credit agreement), the requirement to make significant incremental drawings on the credit facility or the inability to continue the renovation program also would impact Moody's view of the risks facing the company.

However, continued market share increases combined with the ability to meaningfully improve leverage and resume the capital investment program on the necessary scale could eventually prompt an upgrade, Moody's added.

Moody's cuts Abitibi-Consolidated to junk

Moody's Investors Service downgraded Abitibi-Consolidated Inc. to junk, affecting $4.3 billion of debt. Ratings lowered include Abitibi-Consolidated's senior unsecured debt, cut to Ba1 from Baa3. The outlook is stable.

Moody's said it cut Abitibi because of the company's inability to materially reduce debt following the 2000 acquisition of Donohue, a relatively weak near-term outlook for the company's core products, and Moody's expectation that debt protection measurements will remain much weaker over the near and intermediate term than previously envisioned.

Abitibi significantly increased leverage for the Donohue acquisition, in 2000. The Baa3 ratings had assumed that Abitibi would utilize free cash flow during the ensuing 18 to 24 month period to reduce leverage and restore debt protection measurements to levels consistent with an investment-grade rating, Moody's said.

However, higher capital spending (on the Sheldon and Lufkin mills) and an opportunistic acquisition (incremental ownership in Pan Asia Paper Co.) prevented the company from materially reducing leverage when cash flow was high, the rating agency said. And now that company's core newsprint and lumber markets have weakened, cash flow is no longer sufficient to support meaningful debt reduction.

Moody's cuts Bowater to junk

Moody's Investors Service downgraded Bowater Inc. to junk, affecting $1.9 billion of debt. Ratings lowered include Bowater's senior unsecured notes, debentures, revolving credit facility, industrial and pollution control revenue bonds, cut to Ba1 from Baa3. The outlook is stable.

Moody's said it lowered Bowater because of the company's high financial leverage and weakened financial metrics, the prolonged downturn for most of Bowater's products (particularly newsprint), and Moody's concern that debt protection measurements will be weaker over the medium term than had been previously expected.

The increase in Bowater's debt results primarily from a series of acquisitions, ending with the 2001 purchase of Alliance Forest Products Inc. Although the acquisitions allowed Bowater to capture substantial synergies and positioned it as an industry leader in newsprint, it left the company with high debt levels as the newsprint prices declined to cyclical lows, Moody's said.

Although the major newsprint producers recently initiated a price increase and have shown greater production discipline than in past cycles, with capacity utilization rates below 90%, Moody's considers there to be limited potential for a sustained recovery in the near-term.

Continued weakness in Bowater's other products, including market pulp, coated and specialty papers, and lumber, are also a consideration in this downgrade, Moody's said.

Further, Moody's said it considers Bowater's debt leverage to be substantially in excess of levels appropriate for an investment-grade rating, and would look to see a significant reduction before consideration of a higher rating.

For 2002, Moody's forecasts Bowater to be free cash flow negative, and its ratio of retained cash flow to total debt to fall below 5%; well below levels considered sufficient to support an investment grade rating. At current prices for newsprint, Moody's forecasts 2003 retained cash flow to total debt in the

10-15% range.

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