S&P keeps Northwest on negative watch

Standard & Poor's said Northwest Airlines Corp. and subsidiary Northwest Airlines Inc. remain on CreditWatch with negative implications including their B+ corporate credit rating after reporting a substantial first-quarter 2003 pretax loss of $426 million (including $78 million of special charges).

The loss, which was expected, reflects damage from depressed passenger revenue leading up to and during the Iraq war, plus high fuel prices prior to the war, S&P said. More recently, the SARS virus has caused a decline in travel to and within Asia, a major market for Northwest.

However, most of Northwest's Asian flights are focused on Japan, which has been less affected than other Asian regions.

Northwest, like other large U.S. airlines, is cutting flying and its costs where possible and has opened talks with its unions about potential labor cost concessions.

Liquidity remains good, with $2.15 billion of unrestricted cash at March 31, benefiting from a $217 million tax refund and little changed from the total at the end of 2002, S&P said.

S&P cuts Jackson Products

Standard & Poor's downgraded Jackson Products Inc. including cutting its $105 million acquisition line due 2004 and $30 million revolver due 2004 to D from CCC and $115 million 9.5% subordinated notes due 2005 to D from CC.

S&P said the action follows Jackson's recent 8-K filing stating it was in default under its credit facility and that the senior lenders blocked the April 15 senior subordinated debt interest payment.

Jackson Products has indicated that its senior lenders do not intend to waive any defaults under the senior credit facility, S&P noted. However, the company is seeking a new forbearance agreement.

In addition, Jackson Products is in the 30-day grace period to cure the default on its subordinated notes and it appears that there is a high probability that the company will be unable to make the interest payment within the cure period, resulting in payment default.

S&P takes Dynegy off watch, rates loan B+

Standard & Poor's removed Dynegy Inc. from CreditWatch with negative implications and confirmed its ratings including its senior unsecured debt at CCC+. S&P also assigned a B+ rating to Dynegy Holdings Inc.'s new $1.66 billion senior secured credit facility. The outlook is negative.

S&P said the CreditWatch removal reflects the successful restructuring of two revolving bank loans coming due in April and May 2003 and a third bank loan related to a communications operating lease.

The B+ bank loan rating is supported by S&P's analysis that the quality and dollar value of the collateral package underpinning the $1.66 billion senior secured credit facility indicates a strong likelihood of substantial recovery of principal in the event of a default or bankruptcy.

The successful completion of the new bank facility relieves some concerns regarding Dynegy's liquidity position because it renews a significant amount of bank line capacity, S&P said.

However, the negative outlook reflects the uncertainty around Dynegy's ability to generate sustainable cash flow, given the current environment in electric generation, as well as the price volatility in gathering and processing of natural gas liquids, S&P added. Given the firm's current weak financial profile, adverse economic conditions could result in thinner margins on generation and gathering and processing of natural gas liquids, which, in turn, could stress Dynegy's ability to produce reliable cash flow and meet debt service obligations.

Dynegy is challenged to produce cash flow from its reconstituted business plan to counter the massive amount of debt leverage retained from the prior failed business strategy, S&P said. Also, the plan does not provide a sizable amount of discretionary funds as net cash flow after maintenance capital expenditures for 2003 is marginal.

S&P cuts Leap Wireless

Standard & Poor's downgraded Leap Wireless International Inc. including cutting its $225 million 12.5% notes due 2010 and $325.1 million senior discount notes to D from C.

S&P said the action follows Leap's Chapter 11 bankruptcy filing.

S&P raises PDVSA outlook

Standard & Poor's raised its outlook on Petroleos de Venezuela SA to stable from negative and confirmed its ratings including its corporate credit rating at CCC+.

S&P said the revision follows a similar change to its outlook for the ratings on the Bolivarian Republic of Venezuela. That revision reflects improving liquidity for the country as a result of recovering oil production against a backdrop of continuing, albeit diminished, economic pressures, and political turmoil.

Future ratings changes on PDVSA will be linked to those on Venezuela, S&P said.

As Venezuela recovers from the political and economic strife that has affected the company during the past year, S&P said it expects that the government will continue to use its authority to exploit PDVSA's financial resources to effectively consolidate the debt management of the republic with PDVSA.

This interrelationship has the potential to diminish PDVSA's access to international capital markets and trade credit on favorable terms. Mechanisms to extract cash from PDVSA include royalties, taxes, dividends, use of PDVSA's cash balances to support the bolivar (the Venezuelan currency), and the slow payment on government receivables held by PDVSA.

As an operating entity, PDVSA has been one of the largest and most profitable oil companies in the world. Until labor relations rocked PDVSA over the past year, the company benefited from a low cost production base, an accomplished operational staff, and an enviable exploration acreage position that could be exploited for strong production growth, S&P said.

However, PDVSA's operational skills have been weakened by the dismissal of several thousand skilled workers. Although PDVSA has increased production to between 2.4 million barrels per day and 3.1 million barrels per day from less than 500,000 barrels per day at the peak of the strike, which is much more rapid than had been expected, questions remain about the long-term impact of the strike on PDVSA's production capacity.

S&P added that it also is concerned about the strike's impact on PDVSA's ability to finance both sustaining capital expenditures and growth initiatives.

Fitch says American unchanged

Fitch Ratings said American Airlines' senior unsecured debt remains at CCC+ with a negative outlook in a comment released in anticipation of the ratification of new labor contracts by each of the company's three main unions.

The completion of the labor cost restructuring does not eliminate the ongoing credit challenges that will continue to complicate the airlines' effort to generate strong cash flow and begin the process of rebuilding a badly weakened balance sheet, Fitch said.

Although some firming in bookings and traffic is likely to occur as the demand-suppressing effects of the Iraq war wane, American and the other network carriers continue to struggle with a destructive pricing environment, weak business travel demand and stiffening competition from low-cost carriers.

Beyond the weakness of the operating environment, American faces a number of ongoing cash flow challenges tied to its heavy debt load, growing fixed financing obligations and a substantially underfunded defined benefit pension liability, Fitch said. Between January 2001 and December 2002, AMR completed $8.3 billion in new debt issuance and other financings to fund operating losses and capital spending commitments (primarily new aircraft). This brought AMR's total balance sheet debt and capital leases to $13.1 billion (including current maturities) as of December 31, 2002.

After adding off balance sheet lease obligations, AMR's total lease-adjusted debt reached approximately $27 billion at the end of 2002 - up significantly from about $17 billion at the end of 2000.

In addition to 2003 debt maturities of $627 million, AMR is facing scheduled annual debt payments of $540 million in 2004, $1.3 billion in 2005 and $1.1 billion in 2006. Absent refinancing of these maturities, American will be heavily reliant on strong cash flow from operations (and a markedly improved revenue environment) to meet these scheduled payments beyond 2003, Fitch said. Refinancing risk has increased as a result of the sharp decline in American's pool of unencumbered assets over the last two years.

Critical debt covenant issues remain with respect to American's fully-drawn $834 million secured credit facility that matures in December 2005, Fitch added. The airline has successfully negotiated a waiver of a March 31 liquidity covenant and a June 30 cash flow coverage test that would have given American's lenders the option of accelerating repayment of the facility. Under the amended terms of the agreement, AMR will be required to maintain an unrestricted cash and short-term investment balance of at least $1.0 billion at the end of the second quarter of 2003 and beyond.

The next test date for the EBITDAR interest coverage covenant has been moved from June 30, 2003 to March 31, 2004. As of May 15, American expects to pledge an additional 30 non-Section 1110 eligible aircraft ($451 million in estimated book value) to provide additional collateral support for the banks. This will further reduce the size of American's already diminished unencumbered asset base, potentially complicating the task of completing any future debt transactions. The company has noted recently that about $700 million in Section 1110 eligible aircraft remain available to be pledged as collateral in future borrowings.

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