Moody's puts Nortel on review

Moody's Investors Service put Nortel Networks on review for possible downgrade. The action affects $4.5 billion of long-term debt including Nortel's senior debt at Ba3 and preferred stock at B3.

Moody's said it began the review after Nortel announced third quarter revenues will be up to 10% below the second quarter. Additionally, the company has announced a headcount reduction to 35,000 from its current target of 42,000 and related facilities closures. The headcount reduction is expected to result in additional cash charges, although Nortel does not expect to utilize its currently undrawn bank facilities to fund these actions.

Capital spending in the telecommunications industry has declined precipitously over the past two years, initially in the emerging carrier segment, but has now expanded to the incumbent carriers, Moody's noted, adding that it expects this condition to continue going forward creating continued weakness in Nortel's end markets.

While recognizing the company's strong cost-cutting efforts to date, the announcement is evidence that further cost cutting is necessary in an attempt to achieve a cost structure that allows the company to return to profitability, Moody's said.

Working capital management and the issuance of $1.48 billion in equity units and common stock have substantially offset operating losses, while limiting the need to issue new debt and eliminating the need for significant asset sales, Moody's said.

At the end of the second quarter Nortel's net debt was effectively zero, although Moody's said it expects the company to use cash near-term to execute its latest restructuring.

Moody's raises Isle of Capri outlook

Moody's Investors Service raised its outlook on Isle of Capri Casinos, Inc. to stable from negative and confirmed its existing ratings including its $390 million 8.75% senior subordinated notes due 2009 and $200 million 9.00% senior subordinated notes due 2012 at B2.

Moody's said it revised the outlook because Isle of Capri has reduced debt/EBITDA to a level more appropriate for the current rating.

The combination of absolute debt reduction and EBITDA growth has lowered restricted group Debt/EBITDA for the 12 months to July 28, 2002 to 4.0 times, significantly lower than the 5.2x reported for the 12-months to Oct. 28, 2001.

The stable ratings outlook also anticipates that the company will be able to maintain its current credit profile while it embarks on its recently announced $135 million expansion plan, Moody's added.

Moody's said it expects that combined capital spending for fiscal year 2002 and fiscal year 2003 will total between $230 million and $250 million, and that cash flow after interest and scheduled debt maturities for that same period will be more than adequate to fund the expansion.

S&P cuts Foster Wheeler

Standard & Poor's downgraded Foster Wheeler Ltd., removed the company from CreditWatch with negative implications and assigned a negative outlook.

Ratings affected include Foster Wheeler's corporate credit rating, cut to B from B+, its $200 million 6.75% notes due 2005, cut to CCC+ from B+, its $200 million convertible subordinated notes due 2007, cut to CCC+ from B-. S&P also assigned a BB- rating to its new $71 million term A bank loan, a B+ to its $149.9 million letter of credit bank loan and a B to its $68 million revolving credit facility. The B+ rating on the previous $270 million revolving credit facility due 2003 was withdrawn.

Ratings reflect a very aggressive financial profile and limited liquidity, S&P said. Financial risk assessment reflects the heavy debt load, poor cash flow protection measures and limited financial flexibility.

Although successful resolution of the bank financings was factored into previous ratings, liquidity is still modest relative to the geographic and project scope of the company, the rating agency added.

S&P said it expects pro forma total debt to EBITDA to strengthen to about 5 times over the next 18 months, but debt leverage, even with potential asset sales, will be very aggressive and liquidity is expected to remain limited.

The main near-term source of liquidity is its $344 million cash and equivalents, but a substantial portion of the cash is needed for project funding and collateral to support letters of credit.

Also, S&P said it has heightened concerns that protracted lender negotiations, which had been in progress since January, may have eroded customer confidence, which could affect backlog and new awards for the next several quarters.

Should the company fail to improve liquidity through assets sales or new awards prove more challenging than expected, ratings could be lowered.

S&P takes EES Coke off watch

Standard & Poor's removed EES Coke Battery LLC from CreditWatch with negative implications and confirmed its ratings. The outlook is negative. Ratings affected include EES Coke Battery's $75 million 9.382% senior secured notes series B due 2007.

S&P noted EES Coke Battery relies primarily on cash flow from a sales agreement with National Steel Corp. given that another primary source of revenue, section 29 tax credits, expires this year. The notes had been placed on watch after S&P took a similar action on National Steel in February 2002.

S&P said National Steel did not seek to vacate its contract with EES during the bankruptcy and has remained current with its payments. National Steel had missed one monthly payment prior to filing and one additional invoice was outstanding at the time of filing for a total of $25.6 million.

As a result, cash declined by about $20 million for the six months to June 30, 2002 but EES Coke Battery still had $23 million of cash on hand.

S&P keeps EOTT on watch

Standard & Poor's said EOTT Energy Partners LP remains on CreditWatch with negative implications. S&P rates EOTT's senior unsecured debt at CC.

S&P maintained the CreditWatch after EOTT said it had negotiated a 30-day extension to payments on its credit facilities.

While the extension provides EOTT with some needed breathing room to negotiate debt-restructuring alternatives, the partnership's near-term liquidity crisis remains at a critical juncture, S&P said.

Because EOTT needs to have sufficient liquidity to support its trading and marketing activities, S&P said it places great importance on the company's continued access to short-term liquidity.

EOTT's declining credit quality has prompted counterparties to demand greater credit support to continue doing business with it, which has led to severe liquidity problems, higher costs, and a cut-back in the amount of business activity due to credit constraints, S&P said. EOTT is essentially out of liquidity, as its $300 million of credit facilities are almost completely drawn.

S&P raises Radio One outlook

Standard & Poor's raised its outlook on Radio One Inc. to positive from stable and confirmed its existing ratings including its senior secured bank loan at B+, its subordinated debt at B- and preferred stock at CCC+.

S&P said it revised Radio One's outlook because it expects the company will continue to improve its financial profile following the $200 million common stock offering in April 2002 and subsequent bank facility repayment.

The company's strong operating momentum, fueled by growing advertising spending targeting the African American market, could contribute to longer-term financial profile improvement, S&P said. However, further potential debt-financed acquisitions could limit rating upside over the near term.

Despite the weak radio advertising environment, Radio One delivered above-average, double-digit same-station revenue and EBITDA growth, year-over-year, for the quarter ended June 30, 2002, S&P noted. Radio One's upper-40% EBITDA margin is good, considering the company's numerous startup station acquisitions, and has grown from the lower-40% area. Margin gains will likely slow as the company grows in size and as stations reach a mature stage of development.

Pro forma for the $200 million equity issuance and debt repayment, EBITDA coverage of interest is approximately 2.2 times and debt divided by EBITDA is about 5.3x, S&P said.

S&P takes Merrill off watch, rates notes CCC+

Standard & Poor's removed Merrill Corp. from CreditWatch with negative implications and assigned a CCC+ rating to its new $25 million class A senior subordinated notes due 2009 and $120.5 million class B senior subordinated notes due 2009. S&P also confirmed the company's existing ratings including Merrill Communications LLC's $50 million revolving credit facility due 2005, $65 million term loan A due 2005 and $140 million term loan B due 2007 at B and raised Merrill Corp.'s $150 million 12% senior subordinated notes due 2009 to CCC+ from D. The outlook is negative.

S&P noted Merrill carried out a recapitalization after interest payments on its outstanding subordinated notes were blocked by the banks due to Merrill's noncompliance with certain financial covenants.

The ratings reflect Merrill's still significant debt levels, moderate-size cash flow base, and competitive market conditions, S&P said. In addition, the company's transaction-based financial printing business is subject to the volatility of the capital markets.

Positives are Merrill's solid market positions, diversified customer base and long-standing client relationships, S&P added. Also, the company's increasing focus on the production of compliance and reporting materials provides a more stable revenue and cash flow base.

Adjusted EBITDA for the three months ended April 30, 2002 was $20.9 million compared to $19 million for the prior-year period, as continued weakness in transaction-based financial printing was offset by a solid compliance printing business and a lower cost structure, S&P said. Pro forma for the recent recapitalization, EBITDA coverage of total interest is less than 1.5 times and consolidated total debt to EBITDA approximately 6x. EBITDA coverage of cash interest is slightly higher due to the noncash-pay debt outstanding at the holding company.

S&P puts Tesoro on watch

Standard & Poor's put Tesoro Petroleum Corp. on CreditWatch with negative implications. Ratings affected include Tesoro's $300 million 9% senior subordinated notes due 2008, $215 million 9.625% senior subordinated notes due 2008 and $450 million 9.625% senior subordinated notes due 2012, all at B+, and its $225 million senior secured credit facility due 2006, $750 million senior secured credit facility due 2007 and $250 million senior secured term loan due 2006, all at BB+.

S&P said the watch placement is in response to Tesoro's announcement it will decrease planned production levels by 15% until the end of September as a direct result of poor market fundamentals driven by higher crude prices.

Tesoro's capital structure became highly levered following two largely debt-financed acquisitions in late 2001 and early 2002, S&P noted. The company intends to reduce debt by $500 million by year-end 2003 with asset sales, reduced capital spending, cost reductions, and cash from operations.

Dismal refining economics throughout 2002 have sufficiently constrained Tesoro's cash flow such that the viability of the company's debt reduction plan is in question, S&P said.

In addition, diminished cash flow could cause Tesoro to violate its EBITDA/interest coverage covenant at the end of the third quarter, S&P added.

S&P cuts Eletropaulo

Standard & Poor's downgraded Eletropaulo Metropolitana Eletricidade de São Paulo SA to SD (selective default) from CC.

S&P said the action is because Eletropaulo is unable to repay $225 million of a syndicated loan that came due Monday.

Although the company has made an 15% upfront payment of principal and interest and is currently under a standstill agreement until Sept. 9, S&P said it views the renegotiation of the terms of the syndicated loan (including the present standstill agreement) as tantamount to default, as creditors have no practical alternative other than accepting the restructuring of the initial terms and conditions.

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