S&P cuts WorldCom to junk, still on watch

Standard & Poor's downgraded WorldCom Inc. three notches to junk, cutting its long-term debt to BB from BBB, its preferred stock to B from BB+ and its short-term debt to B from A-3. The company remains on CreditWatch with negative implications.

S&P said it cut WorldCom because of a "significant deterioration in the company's financial condition due to a continued weakening of WorldCom's business position, which in turn will limit the company's ability to reduce debt leverage."

S&P also said it has concerns about liquidity beyond the near term.

S&P said recently granted waivers on the accounts receivable securitization program combined with prospects for a renegotiated credit facility are favorable for near-term liquidity.

While revision of the asset securitization program avoids what would have been a material negative impact on working capital, the program has nevertheless been downsized, which will require a cash outlay of about $400 million when the new terms take effect on May 23, S&P noted.

WorldCom has indicated that it anticipates it will be able to put in place a longer-term, secured bank facility within the next month. This suggests more surety regarding liquidity because $2.65 billion of bank facilities are scheduled to term out in June 2003. However, the ultimate value of a longer-term secured facility will depend on the terms of the facility, S&P said.

In particular, if financial covenants of a facility materially effectively limit drawdowns, then the additional liquidity realized from obtaining such a new facility may be limited.

Despite resolution of the securitization issue and even assuming that a new bank facility is put into place on favorable terms, material degradation in operating cash flow would jeopardize WorldCom's financial condition, S&P continued.

"New management may be able to craft a strategic approach that more effectively positions WorldCom to leverage its formidable network assets and capabilities," S&P commented.

"Nevertheless, the challenges are formidable: a still weak economic environment; continuing margin pressure in residential long distance; and the likely emergence of the Bell companies as competitors for enterprise customers as they gain interLATA entry suggest a far more competitive environment for WorldCom."

To resolve the CreditWatch, S&P said it will examine the bank agreements, potential asset sales, and a strategy to address a much more competitive environment.

S&P also said it is "particularly concerned" WorldCom's much publicized recent financial travails may negatively impact its ability to attract and retain customers.

S&P confirms Raytheon ratings

Standard & Poor's affirmed the BBB- long-term corporate credit and the BB convertible preferreds of Raytheon Co., citing debt reduction and expectations of an improved financial profile. The outlook is now stable.

The ratings reflect a very strong business risk profile, offset by a stretched financial position, S&P said.

Management has materially reduced debt, but cash flow protection measures remain sub-par. Based on earnings projections for 2002, the ratio of funds from operations to net debt is expected to be in the low-20% area, weak for the current ratings but improved from the mid-teens percentage in 2001.

Raytheon's business position is strong enough to support continued recovery in the intermediate term.

Raytheon's debt burden, net of cash, dropped to a manageable $6.3 billion at March 31from an onerous $9.1 billion at yearend 2000. Substantial improvement occurred in the first quarter of 2002, when Raytheon collected $1.1 billion from the sale of a business and received $290 million from one-time cash inflows.

However, the firm remains responsible for guarantees relating to construction projects of a divested unit. Cash outflows for the last nine months of 2002 related to discontinued operations are expected to be about $350 million.

Raytheon's balance sheet is somewhat stretched, given sub-par internal cash generation.

At March 31, borrowings were $7.8 billion and debt to total capital was in the mid-40% area, adjusted for operating leases. The company's liquidity was satisfactory, with $1.4 billion of cash on hand and $2.3 billion available under committed credit facilities. Off-balance-sheet liabilities, largely related to long-term financing extended to aircraft customers, were $1.3 billion at March 31.

This exposure is a credit concern, but has come down materially during the past two years and is expected to continue declining.

Raytheon's strongly positioned defense programs and healthy backlogs support financial recovery efforts. Management's continued commitment to strengthening internal cash generation and reducing debt is an important factor in the current ratings.

Moody's ups Quanex convertible to Ba3

Moody's upgraded Quanex Corp.'s 6.88% convertible subordinated debentures due 2007 to Ba3 from B1, among other ratings. The outlook is stable.

The upgrade reflects relatively strong performance over the last two years during a difficult time for many metals and manufacturing companies, moderate leverage and prospects for improved financial performance as the U.S. economy recovers and the company moves to strengthen its building products segment.

The ratings allow for moderate releveraging as Quanex seeks to selectively expand its core businesses.

A stable outlook balances the company's solid debt protection measurements against its relatively small size and the competitive and cyclical nature of its businesses.

While Quanex's financial results declined in the year ended Oct. 31, excluding from 2000 results the impact of asset impairment charges, the strength of the MacSteel steel bar operations was clearly demonstrated, Moody's said. Using the company's former reportable segment information, operating income from the engineered steel bars segment declined in fiscal 2001, to $42 million, but return (operating income) on segment assets was still a respectable 14.4%.

The performance of Quanex's second-largest segment, aluminum mill sheet products, declined in concert with the economy, falling by $15.6 million, to $5.9 million, and return on assets was 3%. By this measure, the smaller engineered products segment outperformed all the others (a 23% return on assets) and contributed $20 million to consolidated operating income.

For future segment reporting, the building products segment will include the former aluminum mill sheet products segment and most of the former engineered products segment.

As a result, it will be harder to monitor the performance of Nichols Aluminum, which is the business Moody's said it will be watching most closely.

In the past, Moody's ratings for Quanex have been constrained by the underperformance of one or more of its businesses, which has made the company heavily dependent on MacSteel.

These concerns have been lessened by profitable results from Piper Impact and the anticipated pick-up in income from all of Quanex's operations as the economy improves. In February, Quanex reported its best ever first quarter, led by strong performances at MacSteel and engineered products.

For its second quarter, Quanex expects MacSteel's operating income to be up more than 50%, and the building products segment's operating income to be up more than 70% compared to 2Q01.

The new corporate strategy adopted under the new president, Raymond Jean, essentially is aimed at applying the factors that have made MacSteel successful to all of Quanex. MacSteel and engineered products are core businesses. Business units that are not as strong as they should be will either be fixed or sold.

Quanex's debt has been stable over the last two years, as it has quickly paid off acquisition-related debt from operating cash flow. At Jan. 31, it had $215 million of debt and $227 million of tangible equity. Debt to LTM EBITDA was 2.1 times.

The company announced on May 9 that it will redeem the $59 million of convertible subordinated debentures on June 12. This is not expected to require cash as the debentures are in the money and should be converted to common stock.

After conversion, Quanex is expected to have less than $130 million of debt.

S&P upgrades Freeport McMoRan

Standard & Poor's upgraded Freeport-McMoRan Copper & Gold Inc.

Ratings raised include its convertible, silver-denominated and gold-denominated preferred stock, raised to CCC from CC, and its $200 million 7.5% senior notes due 2006, $250 million 7.2% senior notes due 2026 and $603.75 million 8.25% senior unsecured convertible notes due 2006, raised to B- from CCC.

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