S&P cuts NRG multiple notches to junk

Standard & Poor's downgraded NRG Energy Inc. multiple notches to junk. Ratings lowered include NRG's senior notes and convertibles securities to B+ from BBB- and NRG Northeast Generating LLC's and NRG South Central Generating LLC's senior secured bonds to BB from BBB-. NSP Financing I's trust preferreds were held steady at BB+ as were Northern States Power Co.'s first mortgage bonds at BBB+ and notes at BBB- and Xcel Energy Inc.'s preferred stock at BB+ and senior notes at BBB-. NRG's corporate credit rating was cut three notches to BB. All ratings were placed on CreditWatch with negative implications.

S&P said NRG's senior unsecured bonds were lowered to B+ to reflect their position as inferior to the secured project level debt.

S&P said the action is a consequence of its view that NRG's access to capital is severely constrained and its ability to finance the $1.5 billion acquisition of certain First Energy power plants is highly problematic given today's adverse market conditions.

The CreditWatch listing reflects primarily the existence of substantial collateral calls that are triggered by this rating downgrade, which have the potential to severely exacerbate NRG's liquidity concerns and its default risk, S&P said.

The ratings on Xcel Energy, Inc and its utilities subsidiaries are also placed on CreditWatch with negative implications, pending the outcome of negotiations concerning structural linkages to NRG, S&P added.

If Xcel Energy removes the cross-default provision in its corporate revolving credit facility and the banks forbear in exercising their rights to collateral under the NRG revolving construction facility, then NRG's rating may move to around the B+ level, reflecting its stand-alone credit quality and presumed diminished parent support. Accordingly, Xcel Energy's rating may be maintained at the current level, S&P said.

If Xcel Energy removes the cross-default provisions but the banks do not forbear in exercising their rights to collateral under the NRG revolving construction facility, then there would a risk of impending default at NRG. However, in this case, Xcel Energy's rating may be maintained at the current level, as it distances itself from its failing subsidiary, S&P continued.

If Xcel Energy is not successful in removing the cross-default provisions but the banks forbear in exercising their rights to collateral under the NRG revolving construction facility, then NRG's rating would likely remain at BB, and Xcel's ratings could fall to BB. This action would reflect the notion that the cross-default provision closely ties together the two companies' credit quality, S&P said.

If Xcel Energy is not successful in removing the cross-default provisions and the banks do not forbear in exercising their rights to collateral under the NRG revolving construction facility, then there would a risk of impending default at NRG. In this case, Xcel Energy's rating would fall to speculative grade, S&P said.

Fitch cuts Williams Cos.

Fitch Ratings downgraded The Williams Cos., Inc. including lowering its senior unsecured debt to BB- from BB+ and the senior unsecured debt of its three issuing pipeline subsidiaries, Northwest Pipeline Corp., Texas Gas Transmission Corp., and Transcontinental Gas Pipe Line Corp., to BB from BBB-. All outstanding ratings remain on Rating Watch Negative.

Fitch said its action is based on a review Williams' near-term operating cash flow and liquidity profile.

Although Williams' core asset-based businesses, including the FERC regulated gas pipeline segment and diversified Energy Services business, should produce relatively predictable cash flows through year-end 2002, the energy marketing and trading segment is performing well below prior expectations due to increasing cash margin requirements and a lack of new origination activities which has impaired Williams' ability to mitigate risk under the unhedged portion of its power tolling contract portfolio, Fitch said. This trend is likely to continue for the foreseeable future.

The subsequent lapsing of Williams' $2.2 billion credit facility on July 23 has placed a significant strain on the company's near-term liquidity profile, Fitch added.

Currently, available liquidity approximates $1.14 billion, consisting of $440 million in cash and $700 million of available funds under Williams' existing three-year revolving credit facility, Fitch said.

However, with $750 million of upcoming debt maturities in July and August, $185 million of rating-trigger related payments, and the posting of cash collateral for energy trading activities, the successful execution of Wiliams' pending secured credit facility in the near term is of utmost importance, Fitch said.

S&P takes Solutia off watch

Standard & Poor's removed Solutia Inc. from CreditWatch with negative implications and confirmed the company's ratings including its senior unsecured debt at BB-, senior secured bank loan at BB and SOI Funding Corp.'s senior secured debt at BB-. The outlook is negative.

S&P said the confirmation follows Solutia's announcement that it completed its refinancing with the extension and amendment of its credit facility. Following the recent issuance of senior secured notes, the proceeds of which are now available to repay notes due October 2002, the credit facility extension removes the refinancing risk that had pressured the financial profile.

Solutia had been on CreditWatch because of the increasing pressure on the company's liquidity and financial profile as a result of continuing delays in addressing near-term refinancing needs, S&P noted.

The ratings continue to reflect Solutia's somewhat-better-than-average business risk profile, tempered by relatively sizable debt levels and significant long-term liabilities, S&P said.

The company's financial profile has been weakened by the continuation of challenging industry fundamentals, an increase in liabilities and expenditures related to the company's PCB exposure, and slower-than-expected progress in the completion of asset sales, the rating agency added. Profitability and cash flow have been constrained by a slowdown in the company's key end markets and unfavorable currency fluctuations.

In addition, higher energy and raw material costs, despite recent improvement, reduced earnings over the past several quarters, with operating margins (before depreciation and amortization) of about 10%, S&P said.

However the rating agency said it recognizes Solutia's efforts to reduce costs and manage cash flow, recent earnings improvement, and the financial benefit from the sale of the company's interest in the AES joint venture.

Moody's cuts Ericsson to junk, on review

Moody's Investors Service downgraded Telefonaktiebolaget LM Ericsson to junk and kept it on review for possible further downgrade, affecting $5.2 billion of debt. Ericsson's long-term ratings were cut to Ba1 from Baa3 and its short-term ratings to Not-Prime from Prime-3.

Moody's said it cut Ericsson in response to the accelerated decline for operator's investments in current generation wireless equipment as evidenced by Ericsson's weak order inflow in the second quarter and the challenges faced by management in quickly implementing additional downsizing measures and further reducing working capital.

However the ratings also reflect Ericsson's successful renegotiation of its undrawn $600 million revolving credit facility and the additional liquidity expected from the pending SEK30 billion rights issue, Moody's said.

Both are critical elements that will provide the time needed by Ericsson to adjust its cost base to rapidly declining demand, the rating agency added.

The review ill continue until completion of the rights issue, after which Moody's said it expects to confirm the Ba1 ratings with a negative outlook - unless due diligence during the period up until Sept. 3 leads to indications of a severe further contraction in the business beyond current assumptions or to concerns about the company's ability to achieve its cost-saving and working capital reduction plans.

Moody's puts Group 1 on upgrade review

Moody's Investors Service put Group 1 Automotive, Inc. on review for possible upgrade, affecting $200 million of debt include its senior subordinated notes at B2.

Moody's said its review will focus on the improvements in Group 1's credit protection measures and capital structure; its operating performance relative to its peers; its inventory management; and its financial strategies, including acquisition and financing plans.

S&P says no change to Saks

Standard & Poor's said Saks Inc.'s announcement it will sell its credit card business to Household Financial has no impact on the company's credit rating or outlook. S&P rates Saks' corporate credit at BB with a negative outlook.

The transaction is viewed as credit neutral because Saks is expected to use a substantial portion of the proceeds to reduce debt that had effectively financed the accounts receivable, S&P said.

S&P says Chesapeake unchanged

Standard & Poor's said Chesapeake Energy Corp.'s ratings and outlook remain unchanged. S&P assesses Chesapeake's corporate credit at B+ with a positive outlook.

Chesapeake still is a likely candidate for a ratings upgrade during the next several years, as it digests recent acquisitions and uses an eventual increase in natural gas prices to deleverage, S&P said.

But for now increased debt leverage from pending acquisitions following the $135 million acquisition of Canaan Energy Corp. at the end of the second quarter, outweigh good operational news, S&P said.

S&P's comments came after "a flurry" of news about the company, including $165 million of pending debt-financed acquisitions, exploration success on its Cat Creek well that could unlock up to 250 bcfe of reserve additions, depending on future drilling results and strong, organic production growth during the second quarter.

Fitch confirms Saks

Fitch Ratings confirmed Saks Inc.'s ratings including its $700 million bank facility at BB+ and its senior notes at BB-. The outlook remains negative.

Fitch said its ratings reflect Saks' solid position within its markets balanced against its weak operating results and high financial leverage. Saks' operations have been pressured by soft apparel sales and growing competition from specialty and discount retailers. Sales at the company's luxury retail business (Saks Fifth Avenue) have been particularly hard hit by the drop off in tourism since 9/11. Weak industry conditions are expected to persist over the near term, the rating agency said.

The sale of receivables to Household will generate net proceeds of $300-$350 million, which will be used to repurchase common stock and reduce debt. In addition to some debt reduction, the transaction will help to simplify Saks' balance sheet by removing approximately $1.1 billion of off-balance sheet securitized receivables and reducing financing requirements in the future. These benefits will be offset in part by the loss of finance income, Fitch said.

Saks' credit measures have softened over the past two years, despite meaningful debt reduction, due to a sharp decline in operating cash flow, Fitch continued. EBITDAR coverage of interest plus rents declined to 1.7 times in the 12 months ended May 4, 2002 from 2.1x in 2000 and 2.5x in 1999. Leverage as measured by lease-adjusted debt to EBITDAR increased to 5.3x in 12 months ended May 4, 2002 from 4.4x in 2000 and 4.0x in 1999.

S&P keeps Tyco on watch

Standard & Poor's said Tyco International Ltd. remains on CreditWatch Negative including its senior unsecured debt at BBB-, commercial paper at A-3, subordinated debt at BB+ and preferred stock at BB.

S&P made its comments in light of recent developments.

The rating agency said it believes that reports regarding a planned bankruptcy filing by Tyco are unfounded and the company hosted a teleconference on July 25 to strongly refute this rumor.

The same day, Tyco announced the appointment of Edward Breen, former president and chief operating officer of Motorola Inc., as chairman and chief executive officer. S&P said it views the appointment of Breen, who is generally well-regarded, as a positive development.

Tyco began the quarter with more than $7 billion in cash following the recent IPO of its commercial finance subsidiary, S&P noted.

Management intends to use a significant portion of this to reduce debt. The company has recently repurchased $300 million of public debt in the open market and plans to repurchase an additional $2 billion in the current quarter, S&P said.

During the next 18 months, the company will have public and bank debt maturities totaling about $6.8 billion, plus the potential put of two zero-coupon debt issues totaling about $5.9 billion, S&P said. (Tyco has the option to satisfy $2.3 billion of the latter amount in common stock at the February 2003 put date. However, it may choose not to do so because at the current low common share price, this would cause significant dilution).

S&P cuts AlphaGen

Standard & Poor's downgraded AlphaGen Power LLC to junk including cutting its $194.3 million 9.01% notes due 2024 to B+ from BBB-. The ratings are now on CreditWatch with negative implications.

S&P said it cut AlphaGen because of the project's reliance on a 16-year capacity sale and tolling agreement with Williams Energy Marketing and Trading Co., a wholly owned subsidiary of The Williams Companies Inc. EM&T's obligations under the tolling agreement are guaranteed by Williams.

The CreditWatch listing reflects that of Williams, S&P added.

S&P cuts AES Ironwood to junk

Standard & Poor's downgraded AES Ironwood LLC to junk including cutting its $308.5 million 8.85% bonds due 2025 to BB- from BBB-. It also put the rating on CreditWatch with developing implications.

S&P said the action follows the recent downgrade of The Williams Cos. to B+.

Williams is the guarantor of the payment and performance obligations of Williams Energy Marketing and Trading Co. under the long-term tolling agreement with AES Ironwood.

The downgrade to AES Ironwood's bonds reflects the uncertainty surrounding Williams' ability to post investment-grade collateral against its obligations under the tolling agreement, given the constraints in its liquidity position, S&P said.

The project's ratings are supported at the BB- level rather than at Williams' rating based on the project's ability to service its debt as a merchant power plant subject to volatile cash flows in a competitive environment without the benefit of the tolling contract, S&P said.

S&P cuts AES Red Oak to junk

Standard & Poor's downgraded AES Red Oak LLC to junk including cutting its $224 million 8.54% bonds due 2019 and $160 million 9.2% bonds due 2029 to BB- from BBB-. It also put the rating on CreditWatch with developing implications.

S&P said the action follows the recent downgrade of The Williams Cos. to B+.

Williams is the guarantor of the payment and performance obligations of Williams Energy Marketing and Trading Co. under the long-term tolling agreement with AES Red Oak.

The downgrade to AES Ironwood's bonds reflects the uncertainty surrounding Williams' ability to post investment-grade collateral against its obligations under the tolling agreement, given the constraints in its liquidity position, S&P said.

The project's ratings are supported at the BB- level rather than at Williams' rating based on the project's ability to service its debt as a merchant power plant subject to volatile cash flows in a competitive environment without the benefit of the tolling contract, S&P said.

S&P lowers UbiquiTel outlook

Standard & Poor's lowered its outlook on UbiquiTel Inc. to stable from positive. Ratings affected include UbiquiTel's subordinated debt at CCC and senior secured bank loan at B-.

S&P said the outlook revision is in response to UbiquiTel's weak cash flow measures, in addition to slowing wireless industry growth and competitive challenges from national wireless service providers. EBITDA is not expected to turn positive until 2003.

On July 18, 2002, UbiquiTel announced that it had reached an agreement with its banks to modify certain covenant levels in its $300 million credit facility, S&P noted. The company was in compliance with covenants in the second quarter of 2002. The modified credit facility provides more flexibility beyond 2002.

As of March 31, 2002, liquidity was comprised of $105 million in cash, of which $5 million is restricted, and $85 million availability under the bank credit facility. This should be sufficient to support the company's funding needs until it turns free cash flow positive in 2004, S&P said.

UbiquiTel's weak financial profile is tempered somewhat by its relationship with Sprint PCS and the advanced stage of its network build-out, S&P said. The company is able to use Sprint PCS's distribution channels, obtain Sprint PCS volume-based pricing from vendors, and access Sprint PCS's back-office services.

S&P raises Key Energy

Standard & Poor's upgraded Key Energy Services Inc. including lifting its $500 million senior secured bank loan due 2003, $175 million 8.375% senior unsecured notes due 2008 and $100 million 8.375% senior unsecured notes due 2008 to BB from and its $150 million 14% senior subordinated notes due 2009 to B+ from B. The outlook is stable.

The ratings were also removed from CreditWatch with positive implications, where they were placed on May 15, 2002 following Key's announced merger with Q Services Inc.

The new ratings reflect Key's enhanced financial position and management's commitment to capital structure improvement, S&P said.

The Q Services transaction was financed with $146 million of equity issuance and the assumption of $75 million of debt for a total consideration of $221 million.

Q Services is a small, oilfield services company providing fluid hauling, pressure pumping, and rental tool services in the Texas, Louisiana, Oklahoma, New Mexico, and Gulf of Mexico regions, S&P noted. The transaction deepens Key's ancillary business lines with the addition of 350 vacuum trucks, 700 frac tanks, and a broad fishing and rental tools line. In addition, Q Services operates a niche pressure pumping business with very a respectable market share in its target markets.

Key has demonstrated a greater degree of resiliency in the recent industry downturn, compared with the 1999 downturn, although stronger oil prices in this most recent slowdown in the North American oilfield services industry likely have cushioned Key's financial results, S&P said.

Well-servicing pricing declines have been less severe and the company has generated roughly $60 million of EBITDA in the first half of 2002, compared with $20 million during its two worst quarters in 1999. Further, Key has steadfastly applied excess cash flow to debt-reduction bringing total debt, pro forma for the Q Services acquisition, to slightly below 40% of total capital, S&P said. Management has publicly stated that it intends to continue its debt reduction initiatives, targeting a 25% debt-to-capital ratio over the next two years.

S&P puts Banco Comercial on negative watch

Standard & Poor's changed the CreditWatch on Banco Comercial SA to negative from developing. Ratings affected include Banco Comercial's $100 million 8.25% bonds due 2007 and $100 million 8.875% bonds due 2009, both at B.

Fitch upgrades Boyd subordinated notes, rates loan BB+

Fitch Ratings upgraded Boyd Gaming's senior subordinated notes to B+ from B, confirmed its senior unsecured notes at BB-, raised the outlook to stable from negative and assigned a BB+ rating to its $500 million bank credit agreement.

Fitch said the improved outlook reflects Boyd's progress in reducing leverage, the refinancing of the company's credit agreement and solid operating performance.

Following the opening of the casino at Delta Downs and the $37 million equity contribution to The Borgata made during the first quarter 2002, Boyd will focus on debt reduction for the remainder of the year, Fitch noted. Boyd reduced debt by $40 million during the second quarter to $1.1 billion and will apply free cash flow after $30 million in maintenance capital spending during the second half of 2002 toward debt reduction.

As a result, leverage should show meaningful improvement by Dec. 31, 2002, from 4.4 times for the last 12 months ended June 30, 2002, and 5.1x at Dec. 31, 2001.

The refinancing of Boyd's bank credit agreement and the issuance of $250 million in 8.75% senior subordinated notes in April 2002, extended Boyd's debt maturities and eliminated the prior refinancing risk, Fitch said. The current bank credit agreement has capacity to fund the $200 million in 9.25% senior notes maturing in October 2003.

The upgrade of the subordinated notes reflects the improved collateral support for the company's debt, Fitch added.

Moody's rates New World Pasta loan B1

Moody's Investors Service assigned a B1 rating to New World Pasta Co.'s new $30 million senior secured revolving credit facility due 2007 and $200 million senior secured term loan due 2008 and confirmed its existing ratings including its $160 million 9.25% senior subordinated notes due 2009 at Caa1. The outlook is stable.

Proceeds from the new Term Loan will refinance amounts outstanding under New World's existing senior secured credit facilities.

Pro forma at closing, before refinancing, existing outstandings are expected to be: $16 million under the revolver, $124 million under term loan B and $55 million of accreted obligations under the 8% PIK Term Loan C (not rated), Moody's said.

New World's equity sponsor participated for the full amount of term loan C to finance New World's July 2001 acquisition of assets from Borden. term loan C is part of the same covenant and security package as term loan B and the $20 million revolver, but its right to repayment comes after term loan B and the revolver, Moody's said.

The ratings are limited by New World's high leverage and weak balance sheet, Moody's said.

In the near term, increased capital spending for new production lines could restrain leverage reduction, depending on the actual pace and size of expected sales and EBITDA improvements achieved by management from plant rationalization, cost, distribution and marketing initiatives, the rating agency added.

In addition, the ratings take into account the company's product concentration in dry pasta, a highly competitive product category, which has experienced declining unit and dollar growth over the past five years, although demand appears to have stabilized over the past year. Changing consumer dietary preferences combined with a high level of trade promotional activities have positioned dry pasta in a commodity-like role in the retail channel, which has restrained producers' revenue potential, while the ongoing effectiveness of New World's shift in emphasis from a heavy orientation on trade spending to consumer promotions to rebuild brand values has yet to be demonstrated, Moody's said.

New World's EBIT/Interest was 1.3x (about 1.5x, adjusted to exclude PIK interest) in the 12 months ending March 30, 2002, Moody's said. Debt/trailing 12 months EBITDA was 6x.

The refinancing increases debt slightly and replaces PIK interest expense with cash interest expense at a lower interest rate.

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