S&P cuts Calpine

Standard & Poor's lowered Calpine Corp. including cutting its secured debt to B from BB, senior unsecured debt and convertible notes to CCC+ from B+ and its convertible preferreds to CCC from B due to deteriorating financial performance in the face of a growing debt burden and persistently weak electricity margins.

The outlook remains negative.

Calpine faces considerable liquidity issues through 2004 with $6.7 billion in potential refinancing and about $3.1 billion in planned capital expenditures, S&P said.

There are limited opportunities to reduce debt, and Calpine in fact is taking on more debt in order to fund its construction program.

In order to meet liquidity needs, Calpine must generate cash from sources other than operating cash flow, such as asset sales and debt financings, which carry execution risk, S&P said.

Calpine's target of 65% leverage to total capitalization makes it vulnerable to electricity price volatility and capital market access. Inability to access the equity markets has led to debt levels over 70%. Adjusted debt levels are expected to remain above 70% over the next five years.

At Dec. 31, Calpine had about $580 million of cash and short-term investments and a secured revolving credit agreement for $949.6 million, which was reduced from $1 billion after the sale of certain assets.

The maturity on the entire $949.6 million revolving credit agreement was extended from May 24, 2003, to June 16, 2003, to allow Calpine and the banks time to finalize terms on a two-year $1.0 billion line of credit.

S&P noted Calpine's credit statistics have significantly deteriorated. For example, adjusted funds from operations interest coverage dropped to 1.5x in 2002 from 2.2x in 2001, significantly below expectations.

S&P confirms Continental Airlines, off watch

Standard & Poor's confirmed the ratings of Continental Airlines Inc. including the senior secured debt at B, senior unsecured debt at CCC+ and equipment trust certificates at BB- and removed them from negative watch. The outlook is negative.

The ratings are based on a heavy debt and lease burden with relatively limited financial flexibility, which outweigh better-than-average operating performance and a modern aircraft fleet, S&P said.

Debt and leases, net of cash, as a percentage of revenues is about 166%, highest among the large U.S. airlines. Losses in the past two years have been the narrowest among large hub-and-spoke carriers, reflecting efficient operations and good labor productivity.

Management projects a further $100 million war effect in the second quarter, though it anticipates reaching about cash breakeven in that period.

Continental has undertaken further efficiency initiatives, but is not approaching its labor unions asking for cost concessions, as have its peers.

The relative weak point in Continental's credit profile remains liquidity, with $1.12 billion of unrestricted cash at March 31, S&P said. Continental has no general bank line and no unsecured aircraft.

Current maturities of on-balance-sheet debt and capitalized leases total $468 million in 2003, and debt maturities remain heavy over the following four years.

S&P confirms AirTran ratings

Standard & Poor's confirmed the B- senior secured and CCC unsecured ratings of AirTran Holdings Inc. and subsidiary AirTran Airways Inc. The outlook is stable.

The affirmation is due primarily to improved liquidity following the new $125 million convertible offering and a $38 million refund from the U.S. government, as well as continued good operating performance.

AirTran's unrestricted cash position is currently around $275 million, a significant increase from $115 million level at March 31.

Despite profitability, credit ratios are still relatively weak, S&P said. Credit ratios are expected to improve modestly along with its earnings but any significant improvement will be constrained by a growing operating lease burden as the company continues to add to its fleet.

Liquidity improved with the convertible proceeds but financial flexibility is still weak with no bank lines and most assets encumbered.

At May 31, AirTran had approximately $275 million of unrestricted cash. Debt maturities through 2006 are modest, ranging between $10 million to $16 million a year.

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