Allegheny ratings cut to junk; FMC upsizes 7-years

By Paul Deckelman and Paul A. Harris

New York, Oct. 9 - Allegheny Energy Inc.'s debt ratings were cut to junk levels Wednesday by Standard & Poor's, completing the company's fall from investment-grade grace; the Hagerstown, Md.-based utility owner and merchant energy provider thus becomes the latest name from that troubled sector to run into financial troubles.

In the primary sphere, FMC Corp. not only managed to get its planned seven-year senior secured bond issue done - no small feat amid currently unsettled market conditions - but even upsized the offering to meet demand, although the bonds did price at a discount to par.

Meanwhile no terms were heard Wednesday on the deal that Amerco Inc. has been hauling around to investors. However, asked late Monday about reports that the deal was hitting bumps, syndicate sources were mum.

FMC upsized its seven-year senior secured notes (Ba2/BB+) to $355 million from a planned $300 million. They came, via Salomon Smith Barney and Banc of America Securities, with a coupon of 10¼%, pricing at 98.772 to yield 10½% - right on the 10½% area price talk.

Syndicate sources told Prospect News late Wednesday that investors seemed to find the Philadelphia agricultural, industrial and specialty chemical-maker's notes invigorating at 10½%.

"There was strong demand and the book was three times oversubscribed," one syndicate source commented. "A lot of people wanted to be a part of it."

During a conversation with Prospect News on Wednesday afternoon after the deal priced, FMC's director of investor relations Eric Norris said that a $100 million maturity in November among other liquidity issues caused Moody's to downgrade the company to speculative grade. However, Norris added, the new paper - FMC's first junk-rated deal - came where the company anticipated it would (see story on page one of this issue).

Some market observers were also anticipating hearing terms Wednesday on Amerco's $275 million of seven-year senior notes (Ba2/BB+/BB+) via Credit Suisse First Boston and Merrill Lynch. Price talk of 12% area was heard on Monday.

At the close of the session no terms had been heard, however. And word was circulating the market late Wednesday that the deal was meeting some resistance. Syndicate sources declined to comment.

Back in the secondary market Allegheny Energy was on the receiving end of a downgrade from Standard & Poor's which dropped its senior unsecured ratings to BB from BBB previously, and put the ratings on CreditWatch with negative implications.

The downgrade came as no surprise to the market, following as it did by a day the company's announcement that its principal credit agreements and those of several subsidiaries - Allegheny Energy Supply Co. LLC, and Allegheny Generating Co.-were in technical default after it declined to post additional collateral in favor of several trading counterparties.

That announcement of technical default had sent Allegheny's bonds lower on Tuesday; Allegheny Generating's 8¼% notes due 2012, for instance, had slid to 42.5 bid from prior levels around 49. No fresh levels were seen on the bonds Wednesday after the ratings downgrade.

S&P analyst Tobias Hsieh noted in his downgrade message that Allegheny had planned to issue between $400 million and $600 million of equity and convertible debt in September to reduce financial leverage and bolster liquidity, but "did not follow through with its plans because of a sharp drop in its stock price and administrative obstacles."

Allegheny then indicated to the rating agency that, as an interim measure, it planned to have an additional $400 million bank loan in place by October to provide liquidity, but for reasons unclear to Standard & Poor's, the schedule was postponed to early December. In the meantime, said Hsieh, "Allegheny's liquidity has become increasingly constrained."

That tightened liquidity picture had pushed Moody's Investors Service to downgrade Allegheny's ratings to Ba1 from Baa2 on Oct. 1. Fitch Ratings also lowered the company's senior unsecured ratings to BB from BBB on Tuesday.

Allegheny's shares - which lost half of their value on Tuesday after announcement of the technical default (which in turn triggered the cross-default provisions under its principal bank credit agreements and other trading agreements) - initially swooned as low as $2.95 from Tuesday's close at $3.80, but later in the day, the shares recovered to actually end higher (up 25 cents - 6.58% - at $4.05 on New York Stock Exchange volume of 12.5 million shares, about five times the norm.

Also later in the session, Allegheny, seeking to turn the situation around, said that it had filed an application with the Securities and Exchange Commission seeking approval for Allegheny Energy Supply Co. to provide collateral to support additional borrowings; the application seeks authorization for the unit to borrow up to $2 billion on a secured basis.

As a part of the filing, Allegheny Energy also disclosed that it intends to cut its dividend by at least half - and maybe even more, up to and including suspending it altogether - through at least the fourth quarter of 2003, although the company said that it has not yet determined the actual future dividend level within this range.

Allegheny said the SEC filing was part of its ongoing effort to obtain the liquidity necessary to cure existing default conditions and to resume posting collateral to trading counterparties.

Allegheny's troubles were the latest manifestation of problems in the utility and merchant energy sectors, which have been hard hit over the past year - a slide which began with the revelations last fall about Enron Corp.'s fishy book keeping, and which escalated as the financial reporting of other sector players came under regulatory scrutiny, and as their profits also shrank in the face of the softer economy, both in the U.S. and abroad.

Another such company being battered last week and this week has been TXU Corp., whose nominally investment-grade debt issues have been getting pounded down to junk bond like trading levels and whose shares have also slid, mostly due to the troubles of the Dallas-based integrated utility company's European unit.

TXU said on Wednesday that it was in talks with its banks on removing a provision on an outstanding credit line that would trigger repayment of a $500 million working capital facility if the company's European unit defaults on its debt. The possibility that the U.S.-based parent might lessen or even withdraw its support have smashed TXU's euro-denominated debt issues down to about the 20 level; they had been quoted Tuesday at 35 and as recently as last week were around 80; Moody's on Wednesday dropped the rating on the European bonds to Baa3 from Baa1, while re-affirming the Baa3 rating of the parent company.

"The company is currently encumbered with a number of long-term electricity purchase contracts that are out of the money. Additionally, with the collapse in wholesale generation prices and the high margins in the competitive supply business, the company has suffered higher-than-expected erosion of its retail customer base," Moody's said in cutting the TXU Europe ratings.

The parent's dollar denominated bonds, meantime, are also trading at junk-like levels despite their nominal investment grade rating; its 6 3/8% notes due 2006 were being quoted around 69 bid, well down from recent levels in the mid-80s.

TXU shares, meantime fell $2.53 (14.73%) in Wednesday's NYSE dealings, to end at $14.65; volume of 26.8 million shares was more than ten times the average daily turnover.

"TXU is an absolute mess," one junk trader said, "but our desk has not been given it, or Allegheny - yet."

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