Moody's cuts El Paso sub debt to junk

Moody's downgraded El Paso Corp.'s senior unsecured debt to Baa3 from Baa2 and subordinated debt from Baa3 to Ba1, and the ratings remain under review for possible further downgrade.

The downgrade reflects low cash flow relative to substantial debt, Moody's said.

Annualized second quarter 2002 retained cash flow-to-debt was only 2% and Moody's expects improvement near-term will be challenged by the severe downturn in merchant energy sector and uncertainties related to the pending ruling by the FERC.

The FERC is expected to issue its order around the end of the year.

Liquidity appears adequate to meet foreseeable near-term obligations, with cash balances at about $1 billion, net of about $250 million of commercial paper outstandings.

All outstanding commercial paper is scheduled to roll off by end of the year and no new issuance is expected, Moody's said.

El Paso has $240 million of long-term debt maturities for the remainder of the year, which should be manageable given current liquidity.

The company also has a $3 billion 364-day bank facility expiring in May 2003 and a $1 billion term loan expiring in August 2003. The 364-day facility has a one-year term-out option, which, if exercised, could potentially provide liquidity through May 2004.

About $1.9 billion of debt matures in 2003.

Under severe scenarios, unencumbered assets could be pledged as collateral for future borrowings and to bridge to asset sales.

At June 30, 2002, consolidated total assets were reported at $50 billion against adjusted debt of $23 billion.

Moody's puts Charter on review

Moody's placed the ratings of Charter Communications Inc., including the 4.75% and 5.75% convertibles at B3, and subsidiaries under review for possible downgrade, following the company's warning.

Concerns continue to center on very high consolidated financial leverage, still large capital investment needs and recent evidence that cash flow growth may be slowing to levels that preclude the ability to achieve financial targets, Moody's said.

The review will focus on plans to address high subscriber losses, mitigate further margin erosion and resume higher absolute operating cash flow generation.

While some diminished performance in these areas had been anticipated, the impact of the same may ultimately take a larger toll than expected and remains cause for further evaluation of the ratings.

S&P cuts Goodrich ratings

Standard & Poor's lowered the ratings on Goodrich Corp., including unsecured debt to BBB from BBB+ and preferreds to BB+ from BBB-, citing the mostly debt-financed acquisition of TRW's Aeronautical Systems unit for $1.5 billion in cash.

The recently closed acquisition will be financed initially by a $1.5 billion bridge loan.

The outlook is stable, contingent on repaying the bridge facility using proceeds from the issuance of long-term debt and common equity, plus proceeds from the sale of assets in proportions that preserve credit quality at a level consistent with the revised rating, S&P said.

Failure to complete the refinancing and debt paydown could result in a change to the outlook or rating.

Although the acquisition will strengthen Goodrich's competitive position in selected commercial aerospace businesses, the additional debt weakens the financial profile, S&P continued.

Still, the combination of planned paydown of debt, good profitability, expected cost savings of $30 million-$40 million from the merger and anticipated debt reduction should partly offset the initial adverse impact of the added debt on key credit protection measures.

Liquidity is strong, with some $150 million in cash, $520 million available under revolving credit facilities and almost no near-term debt maturities.

Moody's cuts Goodrich ratings

Moody's downgraded the ratings of Goodrich Corp., including senior unsecured to Baa3 from Baa1 and preferreds to Ba1 from Baa2, to reflect significantly higher debt due to the TRW acquisition to its already leveraged capital structure.

The downgrade also reflect a substantial increase in exposure to the commercial aerospace sector when that industry has yet to reach the cyclical trough, Moody's said.

Negatives are partially offset by the expectation that Goodrich will aggressively reduce acquisition debt near-term.

The outlook is stable but ratings could be pressured should the company not be able to sell assets or issue equity near-term, or fail to generate free cash flow from operations over the first year of operation.

Moody's: Lodging REITs' outlook negative

Moody's said recent warnings by several lodging REITs that third quarter results will be lower than expected underscore a weak operating environment and the group's near-term outlook remains negative, including for FelCor Lodging Trust Inc. and Host Marriott Corp.

Moody's anticipates that recovery in lodging REITs' operating performance to more normalized levels will be delayed well into 2003 but no immediate rating actions are contemplated.

Moody's said lodging REITs for the most part have some cushion available at current rating levels to withstand weak hotel market conditions. However, some ratings could be lowered if there is not a pick-up in operating results over the next few quarters.

REITs such as Host Marriott, that have larger hotel properties with well-established brands, are benefiting from stronger demand recovery in group and convention business.

Fitch affirms Transocean ratings

Fitch Ratings affirmed the BBB+ senior unsecured debt rating of Transocean Inc., based on an improving credit profile, superior offshore drilling fleet and repair to its balance sheet. The outlook is stable.

Fitch noted gradual improvement to the balance sheet, with interest coverage of 5.0x, debt at a 4.4x run-rate EBITDA and debt to capital of 32% at June 30.

At June 30, last 12-months EBITDA was $1.1 billion for interest coverage of 4.6x and debt/EBITDA of 4.3x.

Transocean should be significantly free cash flow positive in the intermediate term due to relatively stable utilization rates and dayrates plus reduced capital expenditures, Fitch said. Management has indicated it will use excess cash flow to reduce debt as it continues to be the top priority.

Since year-end 2001, Transocean has sold some $300 million of non-core assets, eliminate its $38 million annual dividend and cut debt by $397 million.

In July of 2002, Transocean announced plans to spin off its Shallow and Inland Water business as a separate, publicly traded company in an initial public offering by late 2002 or early 2003, with proceeds going to further reduce debt.

Moody's cuts Encompass Services

Moody's Investors Service downgraded Encompass Services Corp., affecting $1.2 billion of debt and preferred stock. Ratings lowered include Encompass' $130 million senior secured term loan A due 2006, $170 million senior secured term loan B due 2006 and $300 million senior secured revolving credit facility due 2005, lowered to Caa1 from B2, $335 million 10.5% senior subordinated notes due 2009, lowered to C from Caa2 and $300.5 million accreted amount 7.25% mandatorily redeemable convertible preferred stock, lowered to C from Caa3. The outlook is negative.

Moody's said its action reflects its concern about Encompass' prospective ability to comply with its bank covenants.

The company had been granted a waiver by the banks in June contingent upon the net investment of $31 million by Apollo Investment Fund IV, LP. This waiver is due to expire on Oct. 15 and the

Apollo equity contribution now appears unlikely to occur, Moody's said.

Unless the waiver is extended again, the company's covenant violations are cured, or its bank credit facility is further amended, Encompass may very well be forced into bankruptcy, the rating agency warned.

Tuesday's announcement regarding the retention of Houlihan Lokey as a restructuring advisor suggests that the company is considering all available options, Moody's said. In any event, Moody's added that it believes that the bank lending group may block the coupon payment of $17.6 million on the subordinated notes that is due on Nov. 1, 2002 unless a long-term solution to the company's problems is reached by that date, which appears increasingly uncertain.

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