Bear Stearns downgrades El Paso parent bonds to "hold" from "buy"

St. Louis, Oct. 20 - Bear Stearns & Co. is downgrading its recommendation on El Paso Corp. and El Paso CGP bonds to "hold" from "buy," based on valuation, according to a report prepared by analysts Gary Stromberg and Andrea Wagner.

The report noted that since May, El Paso "has handily outperformed" the Bear Stearns High Yield Index (BSIX): the spread difference between El Paso's 7% of 2011 notes and the BSIX has tightened by about 250 basis points.

The analysts noted the following credit concerns:

* $5 billion in maturities in 2005 to 2007;

* Limited free cash flow in 2006 on $16 billion in projected net debt;

* Production declines and high finding costs in the exploration and production business and;

* Continued losses from the trading book.

Bear Stearns' 2006 EBITDA estimate is $2.98 billion, which it estimates will leave El Paso roughly free cash flow break-even on an estimated $16 billion in net debt.

The report specifies that El Paso's near-term debt maturities are "still substantial."

The analysts estimated that maturities over the 2005 to 2007 time frame will total $5.2 billion. Of that amount, $600 million in bank debt will likely be refinanced in the bank market and an estimated $755 million will be refinanced in the high-yield market. The resulting $3.9 billion would need to be refinanced in the high-yield market using cash on hand (estimated at $2.2 billion at year-end 2004) or using equity or equity-like instruments.

"In our view, El Paso Production Holding's 7¾% notes appear cheap compared with the corporate notes, given better asset coverage, the possibility of a sale/spin-off and credit benefits from a possible transfer of Coastal's E&P assets," the analysts concluded.

"Production levels in the E&P business appear to have stabilized somewhat in the early third quarter of 2004, though hurricane activity in the Gulf of Mexico will likely lead to lower-than-expected results for all of that quarter.

"In summary, we are moving to a hold (marketweight) on El Paso Corp. and El Paso CGP senior notes, as we view the bonds as fairly valued today. The short-dated notes (through 2007) appear to be the safest place to play at the parent level, in our view, and we would pickup basis points and swap into Coastal paper where possible. We maintain our buy recommendation on El Paso Production Holdings 7¾% senior notes, and maintain our attractive recommendation on all of the pipeline issuers."

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