S&P ups Hasbro outlook to stable

Standard & Poor's raised its outlook on Hasbro Inc. to stable from negative, reflecting improved operating performance from refocusing on more stable, established toy lines and lower debt leverage.

All ratings were confirmed, including the convertible at BB.

Hasbro is in the process of negotiating a new bank facility, S&P noted.

The ratings reflect long-term concerns regarding increasing business risk in the traditional toy industry due to video game competition; mature industry growth prospects as children outgrow toys at younger ages and consolidation of the retail customer base.

Those are partly offset by Hasbro's competitive position in the toy industry, good product line diversity and a moderate capital structure, S&P said.

Discretionary cash flow has been strong during the past two years, reflecting higher inventory sell-through, the absence of interactive losses, good working capital management and a dividend reduction. The company repaid its $200 million 7.95% notes due in March 2003 using discretionary cash flow.

Average debt to EBITDA declined to 2.1x in the 12 months ended Sept. 28 from 3.0x in 2001. EBITDA coverage of interest expense improved to 7.8x from 4.2x for the same period, reflecting cost reductions, reduced debt levels and lower interest rates.

S&P expects that ample discretionary cash flow will be used for further debt reduction. In 2001-2002, the company converted 30% of EBITDA to discretionary cash flow, holding working capital constant.

The ratings incorporate the expectation that covenants in the new credit facility will provide a satisfactory cushion relative to anticipated performance.

Intermediate-term debt maturities consist of the $98 million 5.6% notes due 2005 and the $200 million 8.5% notes due 2006. The $250 million 2.75% senior convertible debentures due 2021 gives holders a put option in December 2005 Hasbro has stated that it intends to settle in cash any puts exercised.

S&P puts Ford on watch

Standard & Poor's placed the ratings of Ford Motor Co. and all related entities, including Ford Motor Credit Co. and Hertz Corp., on CreditWatch negative, reflecting concern about overall financial performance amid intensifying competition. Ford Motor's corporate credit rating is currently BBB.

S&P said it is highly unlikely that ratings will be lowered below investment-grade as a result of the current review.

Ford's pretax automotive earnings for 2003 are expected to approximate management's breakeven objective, excluding special items. In North America, Ford has partially offset price erosion and lower production volumes by accelerating cost-cutting, thereby containing earnings erosion since 2002.

However, even if industry demand and pricing undergo a cyclical recovery, S&P is skeptical about whether additional earnings improvement in North America can be realized, given the long-range trend of price erosion plus ongoing proliferation of new products and substantial excess production capacity.

Within Ford's global automotive operations, there is little to mitigate the risks it faces in North America. Luxury brands are expected to achieve modest profitability following large losses in 2002, but S&P expects earnings improvement beyond 2003 to be gradual.

Moreover, Ford's dismal performance in Europe raises particular concerns, S&P said.

Ford's consolidated earnings before special items are now expected to total $1.8 billion to $2 billion in 2003, compared with the very weak $872 million in 2002, and Ford Credit and other financing units are providing all of the earnings, compared with $1.5 billion of net income in 2002.

S&P views Ford's financial leverage as aggressive, given its burdensome unfunded pension and retiree medical liabilities, which totaled $15.6 billion and $30.3 billion, respectively, at yearend 2002. However, Ford is awash with cash at both the parent level and at Ford Credit, and S&P sees little prospect that the company will face funding difficulties in the foreseeable future.

Ford has a large liquidity position of $26.9 billion at Sept. 30, excluding Ford Credit, and near-term parent-level debt maturities are minimal. Also, Ford faces no ERISA-mandated pension fund contributions for the next few years. Ford Credit had a cash position of $18 billion at Sept. 30.

Moody's affirms E.ON ratings

Moody's affirmed the ratings of E.ON AG's, Powergen plc and affiliates following the announcement that Powergen has agreed to acquire Avon Energy Partners Holdings from Aquila, Inc. and FirstEnergy Corp. The outlook remains stable.

The proposed transaction comprises £36 million in cash to Aquila and FirstEnergy, £484 million in assumed debt and £626 million in cash to Avon Energy bondholders. The agreement is subject to Avon Energy bondholders agreeing to tender their bonds at 95.8% of nominal value plus accrued interest. Powergen intends to pay the cash with financing provided by parent, E.ON.

S&P confirms GM with negative outlook

Standard & Poor's confirmed the ratings of General Motors Corp., General Motors Acceptance Corp. and all related entities, reflecting an average overall business position and a financial profile dominated by burdensome debt. General Motors' corporate credit rating is BBB.

The outlook remains negative.

In North American, GM has made significant progress in enhancing its competitiveness, S&P said. The company's cost performance has improved as a result of ongoing efforts to contain material costs, capitalize on the use of common components among vehicles, enhance labor productivity and cut jobs.

Nevertheless, GM has been unable to sustain satisfactory profitability in North America this year, given intensified price competition, a slight decline in industry demand and substantially higher accruals for pension and retiree medical benefits.

GM's aggregate automotive earnings have deteriorated precipitously this year compared with 2002, but it has been mitigated by soaring profits at GMAC.

S&P expects GM's net income in 2003 to total $2.9 billion, excluding Hughes Electronics Corp. and before special items, compared with $3.9 billion in 2002. GMAC's earnings should be more than $2.4 billion in 2003, compared with $1.9 billion in 2002.

It is highly unlikely that GMAC will be able to sustain earnings at recent levels, S&P said.

Despite lower earnings this year, GM continues to generate strong operating cash flow, which could well exceed $5 billion.

S&P views GM's overall financial leverage as aggressive. Long-term debt has increased and unfunded retiree medical liability remains massive at $51.4 billion as of year-end 2002, and continues to grow. Financial flexibility and liquidity are satisfactory, however, with $21 billion in early October.

Fitch notes Best Buy dividend

Fitch Ratings said Best Buy Inc.'s plan to institute a dividend and resume share repurchases does not have rating implications.

The anticipated payouts were factored into Fitch's affirmation of the ratings, including the convertible at BBB-, on Sept. 18.

The total dividend payout will be roughly $130 million annually, but Fitch noted that Best Buy also plans to begin opportunistically repurchasing its shares with some $300 million currently available under for that purpose.

While Best Buy will be tapping its cash balance to fund the dividend payments, Fitch believes its high cash balance of about $1.7 billion at Aug. 30, combined with significant operating cash flow, provides more than sufficient liquidity to support the expenditure.

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