S&P cuts Ford

Standard & Poor's downgraded Ford Motor Co. and Ford Motor Credit Co. and removed the ratings from CreditWatch with negative implications where they were placed on Oct. 16. Ratings lowered include Ford Motor's senior secured debt and senior unsecured debt, cut to BBB from BBB+ and Ford Motor Credit's senior unsecured debt, cut to BBB from BBB+.

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

Ford has been pursuing its extensive revitalization plan, announced in January of this year, following the company's dismal operating performance in 2001, S&P said. Significant progress has been made in certain areas, such as enhancement of product quality measures. A turnaround has already been effected at Ford's automotive operations in Europe.

Furthermore, largely reflecting stronger-than-anticipated industry demand, Ford has been exceeding its modest initial goal of consolidated pretax breakeven earnings in 2002, S&P added.

Even so, its automotive operations remain unprofitable in aggregate.

S&P said it is concerned that the benefits of Ford's restructuring could eventually be offset by decreasing industry demand in North America, industry-wide intensification of price deterioration - partly resulting from aggressiveness by General Motors Corp. - and Ford's market share weakness.

In addition, although an important element of Ford's long-range plan has been expansion in relatively high-margin luxury vehicles, the performance of the brands within its Premier Automotive Group has been mixed, S&P said.

Moreover, Ford's financial leverage has increased as a result of growth in its unfunded pension liability, S&P said. Ford recently disclosed that, as a result of poor investment portfolio returns, its U.S. plans are now underfunded by $6.5 billion. Taking the deficit in Ford's non-U.S. plans into account, S&P estimated Ford's total underfunding is well in excess of $10 billion, compared with underfunding of only $2.5 billion at year-end 2001.

S&P keeps Tyco on watch

Standard & Poor's said Tyco International Ltd. remains on CreditWatch with negative implications including its senior unsecured debt at BBB-, subordinated debt at BB+ and preferred stock at BB.

S&P's comment follows Tyco's announcement of fiscal fourth quarter earnings.

Earnings, which continue to be depressed by economic weakness, largely reflected in the electronics business, included: impairment and restructuring charges totaling $2.8 billion pretax (most of which had previously been announced and is associated with downsizing the telecommunications business; of the total, $2.2 billion is non-cash); a minor restatement of the previous three quarters' earnings related to the recognition of upfront fees received in the security business; and a $400 million non-cash charge for increased pension liabilities, S&P said.

Management does not anticipate any major additional writedowns in the near term.

The company remains in compliance with bank loan covenants and is in discussions with lenders regarding new financing arrangements, S&P said.

Free cash flow exceeded previous guidance primarily because of aggressive receivables collections and lower inventories. The company repaid $1.9 billion of debt during the quarter and had a cash balance of $6.5 billion as of Sept. 30, 2002.

The company also reported that the investigation into its accounting practices that is being conducted by outside counsel and forensic accountants has not uncovered anything to date that requires additional disclosure or would meaningfully diminish earnings, S&P added. The lead investigator said that based on the extensive work completed so far, the chances of uncovering a large fraud are slim.

S&P said liquidity remains its key concern. In February 2002, Tyco drew down its bank credit facilities in full and has not accessed debt markets since then. The company has public and bank debt maturities during the next 15 months of about $5.6 billion, plus the potential put of two zero-coupon debt issues totaling about $5.9 billion. Of the total, $3.9 billion of bank debt is due and $2.3 billion of puts can be exercised in February (for cash or stock).

Management indicated that it expects to have a financing plan in place before February, S&P said. It intends to satisfy the February put in cash; the second zero-coupon debt issue, putable in November 2003, must be satisfied in cash.

The resolution of the CreditWatch will depend on how management addresses the gap between cash balances (currently $6.5 billion) plus free cash flow (estimated by new management to total between $2.5 billion and $3.0 billion in fiscal 2003 based on current market conditions and an increase in the income tax rate) and obligations coming due in the next 15 months ($11.5 billion), S&P said. A potential additional obligation is amounts outstanding under accounts receivable securitizations (currently about $540 million) that might come due as a result of downgrades during the past several months. The funding gap could be bridged through a combination of successful negotiation of new bank credit facilities, selling additional assets, and accessing the public capital markets.

S&P puts Aspect Communications on watch

Standard & Poor's put Aspect Communications Corp. on CreditWatch with negative implications including its $490 million zero-coupon convertible subordinated debentures due 2018 at CCC+.

S&P said the action follows Aspect's announcement that it expects to take cash-based restructuring charges when it releases its earnings results for the quarter ended Sept. 30, 2002.

Preliminary comments on results indicate that the company will take a $24 million restructuring charge to cover headcount reductions, facilities consolidation, and asset write-downs.

S&P said it is concerned that the cash-based portion of the charges, combined with weakened operating performance, will negatively affect liquidity.

Aspect faces a potential cash liability of $154 million in August 2003 from the put of its outstanding convertible bond, S&P said. The company indicated that cash balances were approximately $145 million, net of a $7 million portion of the $24 million charge, as of Sept. 30, 2002, and the company currently has access to an undrawn $25 million revolving bank line. EBITDA was at breakeven levels in the June and March 2002 quarters.

Fitch keeps Household on watch

Fitch Ratings said Household International, Inc. and its subsidiaries remain on Rating Watch Negative including its long-term debt at A.

Fitch said the Rating Watch continues in response to Household's announcement that it completed a number of transactions that will improve the company's capital base. These include issuing $400 million of new common equity and $500 million of mandatorily convertible debt, which Fitch assigns a high-level of equity credit to. In combination with these announcements, Household also stated that it is reaching agreements in principle to sell $3.2 billion of loans and $4.3 billion of thrift-related deposits.

Fitch said it views Household's announcements favorably.

However, as it stated on Oct. 11, Fitch said resolution of the Rating Watch will entail Fitch's assessment of the underlying portfolio liquidity of its asset base, with emphasis on its sub-prime real estate portfolio.

Also, Fitch will be monitoring the challenge of replenishing lost revenue it will face from the implementation of 'Best Practices'.

Finally, as Household's funding profile shifts towards more secured sources, Fitch said it will be evaluating the difference in asset quality performance between the unencumbered asset pool and the loans that have been securitized. A noticeable deterioration in performance could be a sign that Household is pledging better receivables for the benefit of investors in the securitizations to the detriment of the unsecured bondholder.

S&P keeps Carnival on watch, puts P&O Princess on positive watch, takes Royal Caribbean off watch

Standard & Poor's said Carnival Corp. remains on CreditWatch with negative implications including its senior unsecured debt at A, P&O Princess plc is put on CreditWatch with positive implications instead of developing implications, including its senior unsecured debt at BBB, and Royal Caribbean Cruises Ltd. is removed from CreditWatch with negative implications, its ratings confirmed and a negative outlook assigned. Royal Caribbean ratings affected include its senior unsecured debt and convertibles at BB+.

S&P said its announcements follow Carnival's revised offer for P&O Princess, which is subject to certain pre-conditions. The proposed offer envisages creation of a dual-listed single economic enterprise. In contrast to Carnival's earlier offer, there is no cash component. As a result of the announcement, the board of P&O Princess withdrew its recommendation that shareholders accept Royal Caribbean's offer to create a similar dual-listed structure.

Consequently, S&P said it now believes that it is highly probable that Carnival and P&O Princess will ultimately combine and that Royal Caribbean will remain independent.

Royal Caribbean's negative outlook reflects its continued high debt leverage for its rating and concerns that the global political landscape could negatively affect cruise industry performance in the intermediate term.

Moody's cuts Conseco

Moody's Investors Service downgraded Conseco Inc. and assigned a developing outlook. Ratings lowered include Conseco's guaranteed senior notes, cut to Ca from Caa2, its old senior notes, cut to Ca from Caa3, and its trust preferreds, cut to C from Ca. Conseco's preferred stock was confirmed at C.

Moody's said the Ca ratings reflects the heightened uncertainty surrounding Conseco's liquidity and financial flexibility, and the residual value of the company, a key determinant of the recovery value for debtholders.

Moody's said its expects Conseco to make a prepackaged bankruptcy filing.

The company is currently in default on its holding company bonds and has received temporary waivers on its bank loans, Moody's noted. The value received by debt holders will depend on the specifics of any capital restructuring plans as well as any events that could impact the overall value of the company.

Notwithstanding the uncertain fate of bondholders, Moody's believes it unlikely that insurance policyholders will lose value on their policies.

Aside from the specifics of a capital restructuring, Moody's believes the value of the company will be most affected by the following events: first, the longer it takes the different parties to implement a viable restructuring plan, the more likely it is that the value of the company will deteriorate; i.e. time is not on the company's side. Furthermore, Moody's said adverse publicity could make it more difficult for the company to maintain stable levels of surrender and lapse activity in the insurance companies, potentially leading regulators to intervene. Second, Moody's noted that the harsh and volatile capital market conditions of late, as well as the weak economy, create additional uncertainty and could further constrain the earnings of Conseco and the financial flexibility of the holding company. Moody's said it believes the difficult market conditions will only complicate Conseco's recently announced plans to find investors for Conseco Finance Corp.

Moody's expects bondholders will emerge from any restructuring with a majority ownership of Conseco.

Moody's cuts Interpublic

Moody's Investors Service downgraded Interpublic Group of Companies Inc., affecting $3 billion of debt. Ratings lowered include Interpublic's senior unsecured debt, cut to Baa3 from Baa1, and its subordinated debt, cut to Ba1 from Baa2. The outlook is stable.

Moody's said it cut Interpublic because its revenue, EBITDA and gross free cashflow (defined as EBITDA less taxes, interest, capex, working capital, and cash earn-out payments) shortfalls are significantly larger than Moody's anticipated for 2002 and for 2003.

In addition, Moody's believes that for 2002, the company essentially will have spent its depressed residual gross free cashflow on dividends and acquisitions, leaving no free cashflow for debt reduction.

The ultimate result, given the poor operating results is even greater leverage and further reduced financial flexibility, Moody's said.

In addition, the company faces the prospect of some refinancing risk over the next 14 months, as it needs to roll over its 364-day bank facility, and more importantly, it needs to be prepared for the prospect of a put of up to nearly $590 million of its convertible securities outstanding in December of 2003, the rating agency added.

Moody's believes that the company can meet the put obligation with internally generated gross cashflow and bank capacity, assuming management prudently and significantly reduces discretionary spending on capex, acquisitions, investments and dividends, and continues to refrain from stock repurchases, in order to build liquidity.

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