Moody's cuts Goodyear

Moody's Investors Service downgraded Goodyear Tire & Rubber Co., affecting $2.3 billion of debt. Ratings lowered include Goodyear's senior unsecured long-term notes and debentures, cut to Ba2 from Ba1. The outlook is negative.

Moody's said the downgrade is in response to Goodyear's sub-par financial results in 2002, particularly in the critical North American tire market, and the outlook for a continued challenging business environment.

Goodyear has initiated actions to increase its market share, improve average tire selling prices, reduce operating costs and contain capital expenditure requirements, Moody's noted. These initiatives should contribute to an improved operating performance in 2003.

Nevertheless, absent a marked improvement in the business environment, Goodyear's profitability is likely to remain at depressed levels and the company is unlikely to generate significant levels of free cash flow during the next several years due to contributions that will need to be made to the company's pension plans, the rating agency added.

Consequently, the company will need to refinance the majority of near-term debt maturities, delaying any material improvement in its overall financial condition, Moody's said.

The negative outlook reflects Moody's concerns that despite the initiatives being pursued by management, rising raw material, labor, health and pension costs in 2003 could constrain earnings and cash flow generation. As a result, improvement in debtholder protection measures could be prolonged and bank financial covenant compliance may prove challenging.

Moody's raises Freeport McMoRan

Moody's Investors Service upgraded Freeport McMoRan Copper & Gold's senior unsecured debt to B2 from B3. The outlook is stable.

Moody's said the upgrade reflects the strong production and operating fundamentals, low cost, and longevity of reserves at Freeport's 90.6% owned subsidiary PT Freeport Indonesia.

The rating action considers the dividend stream available to Freeport from Freeport Indonesia but reflects the subordinated position of debt holders at the Freeport holding company level to creditors at the operating company, Moody's said.

The rating also incorporates the improving capital structure at Freeport as focus on debt reduction continues, as evidenced by improving coverage ratios and reducing leverage ratios.

The rating reflects improved stability within the Indonesian operating environment, but continues to incorporate the still challenging conditions and risk of political and economic uncertainty associated with Indonesia, Moody's said. Although the rating is no longer viewed as technically constrained by Indonesia's country ceiling, given the dependence upon the dividend stream from its Indonesian operating subsidiary, the Indonesian economic and political issues remain critical factors in Freeport's rating.

The improved operating performance contributed to strengthening in the EBITDA/interest plus preferred dividends ratio to 4.1x while the application of free cash flow to debt reduction allowed for moderation in leverage as measured by the debt (inclusive of redeemable preferred stock)/EBITDA ratio of 2.5x, Moody's said.

Moody's rates Premcor notes Ba3, loan Ba2

Moody's Investors Service assigned a Ba2 rating to Premcor Refining Group's proposed amended and restated $750 million senior secured three-year working capital bank facilities and a Ba3 rating to its proposed $400 million senior unsecured notes due 2010 and 2013. Moody's also confirmed all ratings of Premcor USA, Premcor Refining and Port Arthur Finance. The action ends a review for upgrade begun on Nov. 27.

The ratings are supported by a number of factors, Moody's said. Though vulnerable, and softening again in the first quarter of 2003, sector margin drivers firmed in the fourth quarter of 2002 after a four-quarter bottom and still point to far firmer 2003 results. Also, the Memphis refinery acquisition and debt and equity fundings put Premcor's asset and funding base in the soundest condition in its history.

In addition, management has a long history of executing realistic, compatible growth and funding strategies, and assimilating acquisitions.

The Memphis refinery, Premcor's early 2002 IPO, the Port Arthur coker project, and its other acquisitions, divestitures, and refinery closures in 1995 through 2002 replaced a relatively weak and highly leveraged asset base (a marginal retail system and two small marginal refineries, all divested) with one world-scale deep conversion refinery at Port Arthur, Texas, the two large Memphis, Tennessee and Lima, Ohio refineries, and a reasonable capital and liquidity base, Moody's added.

However, still-high effective leverage and other factors delay an upgrade, Moody's said. Sustained up-cycle results are needed to internally fund a heavy capital budget and reduce leverage. Ever-volatile margins softened in the first quarter of 2003, the shut-in of Venezuelan mostly heavy oil production restrains crude oil differentials, Premcor faces a high $700 million of low sulfur fuels and MACT capital spending through 2007 (up to $1.5 billion of total capex), high oil prices drive high letter of credit and working capital needs, and acquisition event risk (though in historically quite able hands) is high.

S&P cuts Cable & Wireless to junk

Standard & Poor's downgraded Cable & Wireless plc to junk including cutting its $2 billion 1% exchangeable bonds due 2003 to B+ from BBB+ and Cable & Wireless International Finance BV's £200 million 8.625% bonds due 2019 to B+ from BBB+. The ratings were removed from CreditWatch with negative implications. The outlook is negative.

S&P said the downgrade follows the significant weakening in Cable & Wireless' liquidity due to recently disclosed additional obligations and up to £800 million ($1.295 billion) in additional cash restructuring costs.

The downgrade also reflects the continuing poor performance of the company's C&W Global division and the resultant significant negative free cash flow at Cable & Wireless, which further weakens the company's liquidity, S&P said.

Although C&W is expected to stagger its restructuring costs to delay the cash impact and will, as a result of restructuring, reduce its negative free cash flow, the company has negligible headroom to fund further unanticipated cash outflows assuming no further measures are taken to boost liquidity, S&P commented. It is critical, therefore, that Cable & Wireless improves its access to capital and reaches free cash flow breakeven in the next year.

S&P confirms Consolidated Container

Standard & Poor's confirmed Consolidated Container Co. LLC and removed it from CreditWatch with negative implications. The outlook is stable. Ratings affected include Consolidated Container Co. LLC's $150 million term A loan due 2005, $235 million term B loan due 2007 and $90 million revolving credit facility due 2005 at B- and $185 million 10.125% senior subordinated notes due 2009 at CCC.

S&P said the confirmation follows Consolidated Container's announcement that it has obtained an amendment to its credit agreement, which provides a measure of relief from liquidity and financial covenant pressures, as well as onerous debt maturities.

The amendment included a significant reduction in the bank amortization schedule until June 2005, and modified financial covenants. In addition, the company's equity sponsors lent financial support through a $35 million term loan due 2007.

Ratings reflect the company's very aggressive financial leverage and limited financial flexibility, which overshadows its below-average business position in relatively stable beverage and consumer product markets, S&P said.

Consolidated has faced significant operating challenges related to new capital projects for key customers (since the third quarter of 2001), which adversely affected profitability levels, S&P noted. Operating results in 2002 reflect increased plant labor, repairs and maintenance costs, and lower than expected volumes from new projects and certain key customers; partially offset by the benefits of ongoing restructuring efforts. Volatility in plastic resin prices, the key raw material could lead to temporary margin compression until the company passes through higher resin costs under contractual relationships with customers.

Financial risk remains high with EBITDA interest coverage (adjusted for capitalized operating leases) below 2x, and total adjusted debt to EBITDA of about 7x for the 12-month period ended Sept 30, 2002, S&P said. Improved volumes and benefits from ongoing restructuring initiatives are expected to support a gradual improvement in profitability margins to the low-teens percentage area. Accordingly, key credit protection measures, including the ratio of EBITDA to interest and total adjusted debt to EBITDA are expected to improve to appropriate levels of above 2x, and 6x respectively.

S&P upgrades Hanger Orthopedic

Standard & Poor's upgraded Hanger Orthopedic Group Inc. including raising its $150 million 11.25% senior subordinated notes due 2009 to B- from CCC+, its $200 million 10.375% senior unsecured notes due 2009 to B from B- and its $75 million senior secured bank facility due 2007 to BB- from B+. The outlook is stable.

S&P said it upgraded Hanger because of consistent improvements in the company's operating efficiency, profitability and capital structure during the past several quarters.

In recent years, Hanger has grown considerably. Although the company has delevered its capital structure as expected, it remains burdened with much of the debt incurred to acquire NovaCare Orthotics & Prosthetics Inc. in 1999, S&P said.

In the next few quarters, total lease-adjusted debt to EBITDA is expected to fall below 5x, down from about 6x at year-end 2001, mainly through earnings retention, S&P added.

Although operating margins are relatively healthy for the rating category, cost containment and the efficient integration of growing operations remain critical due to the company's reliance on third-party payors, S&P said. Government entities represent more than 40% of total revenues, and Hanger contracts with more than 1,000 managed care programs. In addition, practitioner retention is a key focus.

Hanger is expected to maintain profitability and cash flow protection measures commensurate with the rating category, owing to the strength and scope of its operations and the fruits of an extensive operating efficiency program initiated in 2001, S&P said. Operating margins are expected to continue to average in the low-20% area, return on permanent capital and funds from operations to total debt in the low teens, and EBITDAR coverage of interest and rents above 1.7x.

Moody's lowers Petroleum Geo-Services

Moody's Investors Service downgraded Petroleum Geo-Services ASA, affecting $1.6 billion of debt including its senior secured bonds, cut to Ca from Caa2, and senior unsecured bonds, cut to Ca from Caa3.

Moody's said the downgrade reflects materially lower anticipated recovery rates on the Petroleum Geo-Services's total financial claims in the event of a liquidation of its assets.

Moody's said it expects limited improvement in Petroleum Geo-Services' operating cash flow over the next 12 months. A recovery in the demand for the company's seismic services sufficient to allow for higher cash margins is not likely to occur in the near term based on continued industry overcapacity and only limited demand growth.

In order to improve the profitability of its production segment, Petroleum Geo-Services will need to secure new contracts for two of its production vessels (the Ramform Banff and the Varg). The company has not completed the sale of its Atlantis subsidiary.

On Dec. 30, 2002, Petroleum Geo-Services deferred a scheduled interest payment on its 6 5/8% senior notes due 2008 and its 7 1/8% senior notes due 2028, Moody's noted. Subsequently, on Jan. 15, 2003, the company deferred a scheduled interest payment on its 8.15% senior notes due 2029. In addition, the company has deferred distribution payments on the preferred securities issued by its wholly owned trust subsidiary PGS Trust I.

Moody's added that it believes management will undertake a financial restructuring to address the company's significant liquidity challenges. Petroleum Geo-Services has approximately $1 billion of debt maturing in 2003, including a $250 million bank facility due in June, a $430 million revolving credit facility due in September, and $250 million of senior unsecured notes due in November. Because of significant non-cash charges incurred by the company in the third quarter of 2002, it remains in breach of financial covenants contained in certain of its credit facilities, including the above-noted bank facilities.

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