S&P cuts Quantum

Standard & Poor's lowered Quantum Corp.'s subordinated debt rating to B from B+, reflecting deterioration in profitability over multiple quarters.

The outlook is stable, with the expectation that recent acquisition and restructuring actions will contribute to steady profitability improvements over the next year, S&P said.

Quantum is taking steps to offset declining profitability, including selling assets and outsourcing manufacturing, reducing other operating expenses and divesting its unprofitable network-attached storage business. S&P views these actions positively.

Still, recovery to historical profitability levels will require an improvement in the IT spending environment to more normalized rates.

The rating is supported by Quantum's cash balances, which were $308 million versus $291 million of funded debt as of Sept. 29. A portion of the funded debt, $96 million of Quantum's $287 million of outstanding convertible bonds, is offset by a receivable from Maxtor Corp., which bought Quantum's hard disk drive business in 2001.

Quantum's credit facility, which consists of an undrawn $187 million revolver, expires in April 2003 and the company was in violation of certain covenants at Sept. 29.

Although waivers were granted, the covenants have not yet been amended, suggesting that access to the facility could be hampered, S&P added.

Fitch affirms ACE

Fitch Ratings confirmed the ratings of ACE Ltd., including the convertible trust preferreds at A-. The outlook is stable.

Affirmations reflect strong recovery in underwriting results following the 2001 loss that resulted largely from the events of Sept. 11, 2001.

The ratings consider progress in reducing financial leverage that resulted from the ACE INA purchase in 1999. Financial leverage has dropped from a high of around 40% at year-end 1999 to 25% at Sept. 30.

Ratings also recognize that ACE has considerable exposure to reinsurance recoverables and significant asbestos and environmental reserve exposure.

Fitch anticipates tangible equity and financial leverage will continue to improve as a result of earnings and as convertibles are retired or converted into equity. Fitch also expects earnings-based fixed-charge coverage ratio will continue to remain above 3x.

Moody's puts Fiat on review

Moody's Investors Service put the Baa3 ratings for long-term debt of Fiat and units on review for possible downgrade, prompted by continued weak operating performance.

The review will focus on plans to strengthen financial flexibility by improving operating performance and selling further assets. In third quarter, operative cash consumption and the growth of financing receivables far exceeded the €635 million proceeds from asset disposals.

Also, Moody's will assess the likelihood that Fiat will exercise its put to General Motors of its stake in Fiat Auto and evaluate the impact of that potential action.

Moody's said it believes Fiat's €5.1 billion in cash and marketable securities plus sufficient headroom under its committed bank lines available will cover maturing debt.

S&P cuts Reptron

Standard & Poor's downgraded Reptron Electronics Inc. including cutting its $115 million 6.75% convertible subordinated notes due 2004 to CCC from CCC+. The outlook is negative.

S&P said the action reflects a prolonged period of operating losses and unfavorable prospects for improvement in marginal credit measures in the near term.

Difficult market conditions have kept sales at depressed levels particularly its distribution business, S&P noted. Due to a difficult business environment, operating performance has been sub-par over the past year. For the nine months ended Sept. 30, 2002, the company posted an operating loss of nearly $5 million on revenues of about $243 million.

S&P said it believes the business environment in both of Reptron's major lines of business will remain challenging over the near term.

Cash balances are minimal at about $350,000 as of Sept. 30, S&P said. The company is reliant on its bank lines for liquidity. Reptron completed a new secured $60 million line of credit in October 2002, which has a term of three years, to primarily fund its working capital requirements.

Management is considering various alternatives related to the payment of approximately $76.3 million of 6.75% convertible subordinated notes that will become due in August 2004, S&P said.

Moody's puts Westport Resources on review

Moody's Investors Service put Westport Resources on review for downgrade. Ratings affected include Westport Resources' $275 million 8.25% senior subordinated notes due 2011 and $125.7 million 8.875% senior subordinated notes due 2007 at Ba3 and convertible preferred stock at B1.

Moody's said the review is in response to Westport Resources announcement that it will buy multi-zone Uinta Basin (northeastern Utah) natural gas reserves and gas gathering and processing assets from El Paso for $502 million in cash.

The ratings will be downgraded or confirmed, depending on how certainly Westport Resources can issue very substantial equity in the near term, Moody's said. If downgraded, the senior implied rating would fall by one notch to Ba3, causing (per Moody's subordinated debt notching practice) the senior subordinated note ratings to fall two notches. If the senior implied rating is not downgraded, the subordinated note ratings could still be downgraded by one notch if the pro-forma debt structure contains substantial secured bank debt.

Though highly leveraged, the scale purchase of long-lived Rocky Mountain reserves with several years of identified relatively lower risk development activity addresses a core challenge, Moody's said. Westport Resources has not sustained production growth in the face of a short proven developed (PD) reserve life. In spite of $42 million of 2002 acquisitions through Sept. 29, 2002, third quarter 2002 production was just below fourth quarter 2001 and first quarter 2002 levels and down 5.6% from second quarter 2002. Rejuvenated prospects for growth would, if delivered, enhance financial flexibility after high leverage is reduced. The acquisition boosts the PD reserve life from a short 5.5 years to a still fairly short 6.7 years.

Pro-forma leverage would soar and liquidity tighten. Pro-forma for both acquisitions, and assuming an all-debt-funded acquisition, leverage surges to approximately $5.80/boe of PD reserves, up from an already full roughly $4.25/boe of PD reserves pro-forma for Smith and earlier 2002 acquisitions, Moody's said. Debt/capital was 38% at third quarter 2002 but rises to 53% pro-forma for the El Paso purchase.

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