S&P cuts GM

Standard & Poor's lowered the long-term ratings of General Motors Corp. and General Motors Acceptance Corp., including their senior unsecured debt to BBB from BBB+. Short-term ratings were affirmed at A-2.

The primary reason for the downgrade is that poor pension investment portfolio returns have contributed to a huge increase in GM's already large unfunded pension liability, S&P said.

Other pressures were the persisting weak operating performance of 20%-owned Fiat Auto and GM's goal of monetizing its stake in Hughes Electronic Corp. dangling as a result of the FCC initial ruling to block the sale to EchoStar Communications Corp.

These developments are only partly mitigated by the impressive earnings and cash flow recently achieved at GM's core North American automotive unit, as it is uncertain how long these advancements can continue, S&P said.

GM has disclosed that its U.S. pension plans could be underfunded by a massive $21 billion to $23 billion at year-end 2002, assuming the asset return is 0% in the fourth quarter of the year, following erosion of 10% in the first nine months.

S&P estimates GM's total underfunding could approach $26 billion to $28 billion, compared with $12 billion at the end of 2001. Absent a dramatic rebound in investment performance, pension contributions will now absorb the dominant portion of GM's surplus cash generation over the foreseeable future.

Forestalling more of a negative impact on GM's credit profile has been the remarkable progress made in improving the competitive standing and financial performance of GM's North American automotive unit.

And its finance unit, General Motors Acceptance Corp., remains a substantial earnings contributor.

Although cash flow could vary widely over the next few years, it should remain sufficient on average to enable progress in reducing the company's benefits obligations, S&P said.

Liquidity and funding flexibility remain satisfactory, in light of GM's large cash position and access to bank credit facilities, and the varied funding sources that continue to be available to GMAC.

S&P puts Ford on watch

Standard & Poor's placed the ratings of Ford Motor Co. and Ford Motor Credit Co. on negative watch in anticipation that any downgrade would be limited to one notch, to BBB. Short-term ratings were affirmed.

The watch primarily reflects concerns about the adequacy of restructuring measures being implemented by Ford to restore the competitiveness its core automotive operations, S&P said.

Even though its automotive operations, in aggregate, remain unprofitable, Ford is currently exceeding its modest initial goal of pre-tax breakeven earnings in 2002. However, S&P is concerned that the benefits of Ford's restructuring could eventually be offset by weakening industry demand in North America and Ford's market share losses.

Moreover, Ford's financial leverage has increased as a result of growth in its unfunded pension liability.

Ford just disclosed that, as a result of poor investment portfolio returns, its U.S. plans are now underfunded by $6.5 billion.

S&P estimates Ford's total underfunding is well in excess of $10 billion, compared with underfunding of $2.5 billion at year-end 2001.

Ford continues to benefit from having a liquid balance sheet. Gross automotive liquidity totaled $25.7 billion at Sept. 30, or $ 11.9 billion in excess of industrial borrowings, S&P said.

Given this, financial flexibility to meet near-term requirements, including substantial 2003 maturities at Ford Credit, remains adequate.

S&P cuts TXU Europe

Standard & Poor's lowered the long-term ratings of TXU Europe Ltd. and subsidiaries to CC from B+, reflecting heightened potential for TXUE to be placed into administration in the near term. The ratings remain on negative watch.

The watch highlights the risk that should negotiations with bondholders and creditors not work out in TXU Europe's favor, the company could be moved into administration quickly, which would lead to automatic default.

S&P said TXU Europe is currently investigating the possibility of renegotiating contracts with creditors to reduce ongoing liabilities in order to remain operational, but failing that, the break-up and sale of the business is likely.

The second scenario is more likely, S&P said, noting that the realizable asset value of the company appears unlikely to exceed the amount of outstanding liabilities. The likelihood of ultimate default for bondholders has therefore significantly increased.

Moody's cuts Ciena

Moody's Investors Service lowered the ratings of Ciena Corp., including the 3.75% convertibles due 2008 to B1 from Ba3. The outlook is negative.

The downgrade is based on the deterioration in revenues over the past four fiscal quarters in the wake of a severe retrenchment in capital spending by telecom service providers worldwide, Moody's said.

On July 31, Ciena's cost structure implied a cash break-even quarterly revenue run rate of $300 million, yet revenues totaled only $50 million leading to a quarterly cash burn.

Risks are mitigated by a formidable cash and investments position, which exceeded $2.25 billion at July 31 and a satisfactory balance sheet with total debt at about 41% of capitalization.

The negative ratings outlook reflects Moody's concerns over the intermediate to long term viability of intelligent optical networking equipment market.

The ratings would be lowered further if Ciena fails to reverse the recent revenue trend and demonstrate progress in achieving break-even, at least on a cash flow basis.

Conversely, the outlook could be revised to stable if telecom spending stabilizes and Ciena is able to re-establish the solid shares it attained in 2000 and 2001 of the optical telecom markets.

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