S&P cuts Briggs & Stratton to BB+

Standard & Poor's lowered its corporate credit, senior unsecured debt and bank loan ratings on Briggs & Stratton Corp. to BB+ from BBB- followed reported operating performance and credit protection measures that were below S&P's expectations.

The downgrade reflects weaker than expected credit measures following its 2001 acquisition of Generac Portable Products Inc. and S&P's increased concern that financial performance and credit measures will not recover to or be sustained at levels appropriate for a low investment grade rating over the medium-term, despite some expected improvement in the fourth fiscal quarter.

The outlook is stable. The company had about $635 million of total debt outstanding as of March 31.

The ratings reflect the company's position as the world's largest producer of air-cooled gasoline engines, products used primarily for the mass merchandized lawn and garden power equipment.

This is offset by the mature and competitive nature of the company's end markets, the high degree of seasonality in its business and its weakened financial profile following the acquisition of Generac.

Briggs & Stratton's credit measures have been hurt by the shift to lower horsepower and lower priced engines despite management's efforts to improve financial and operational performance.

As a result, for the 12 months ended March 31, EBITDA coverage of interest weakened to about 3.3 times, whereas S&P had expected coverage to approach more than 4 times by this time.

In addition, total debt to EBITDA of nearly 4.5 times for the last 12 months fell short of S&P's expectations of about 3 times.

The company's cash on hand (about $65 million as of March), combined with no debt amortization requirements during the next few years, provides Briggs & Stratton with adequate liquidity to weather fluctuations in operating performance and fund select moderate-sized acquisitions within the revised rating category.

Additional financial flexibility is provided by the company's $300 million revolving credit facility.

The outlook reflects expectations that the company will be able to stabilize operating performance and sustain credit measures appropriate for the revised rating category.

S&P rates new Fleming notes at BB-

Standard & Poor's assigned a BB- rating to Fleming Cos. Inc.'s proposed $200 million senior unsecured note issue due in 2010 and a BB+ rating to the proposed $950 million senior secured bank loan.

The bank facility consists of a $600 million five-year revolving credit facility and a $350 million six-year term loan. Financial covenants include a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum asset coverage ratio, and a limitation on capital expenditures and acquisitions. Pricing is based on a total leverage ratio. The facility is secured by inventory, accounts receivable and all stock and equity interests owned by Fleming.

S&P's assessment of the value of the company's discrete assets considered the assets' potential to retain value over time and an orderly liquidation scenario under a default scenario. The bank facility is rated one notch above the corporate credit rating, based on S&P's belief that the security interest in the collateral offers reasonable prospects for full recovery of principal if a payment default were to occur.

The ratings are based in part on positive operating trends and solid financial progress over the past two years and the potential for an improved business position following the completion of its pending acquisition of Core-Mark International Inc. The acquisition of Core-Mark and the completed acquisition of Head Distributing have a combined purchase price of $430 million.

S&P believes Fleming's use of equity to help fund these acquisitions reflects management's intention to moderate its relatively aggressive financial policy. The new capital structure should improve debt leverage.

Still, the acquisitions are sizable, increasing Fleming's sales base by 24% and adding 21 distribution centers. Unforeseen problems in integrating the acquired companies could increase business risk in the intermediate term.

The ratings are supported by its operating progress, which provides some cushion to enable it to get through a period of adjustment related to the bankruptcy filing of Kmart Corp., its largest customer. Further support is provided by Fleming's designation as a critical vendor for Kmart by the bankruptcy court, giving it priority in payment over other vendors; the expectation that Fleming will continue its supply contract with Kmart; and the belief that Kmart will emerge from bankruptcy.

EBITDA covered interest expense 2.8 times in fiscal 2001, up from 2.6 times in fiscal 2000. Moderate growth in cash flow in fiscals 2002 and 2003 should allow coverage to improve. The company's $600 million revolving credit facility provides good flexibility for ongoing operations.

Continued modest improvement in cash flow protection is incorporated into the rating. Unforeseen difficulties in integrating Core-Mark or further negative developments from the Kmart alliance, including additional store closings or an inability to compete successfully in the discount industry, could negatively affect Fleming's business and financial position.

S&P keeps Tyco on developing watch

Standard & Poor's ratings on Tyco International Ltd. and its industrial subsidiaries remain on watch with developing implications following the announcement that Dennis Kozlowski has resigned as Tyco's chairman and CEO and stepped down from the board of directors.

Ratings on Tyco could be raised to BBB+ if the planned IPO of CIT is successful or CIT is sold to a third party for cash, Tyco uses proceeds to reduce debt, the company expands availability under its bank lines, Tyco appoints a new CEO committed to a business and financial profile consistent with a higher rating and industry and competitive conditions do not worsen.

The board has reiterated its commitment to the complete monetization of CIT and significant debt reduction. These would all be positive factors for credit quality.

If Tyco does not sell CIT, it would have to seek alternative financing arrangements to meet financial obligations beginning early in calendar 2003. The inability to access capital markets in the next several months could result in a ratings downgrade.

In the next 18 months, the company will have public and bank debt maturities totaling about $7.7 billion, plus the potential put of two 0% debt issues totaling about $5.9 billion, of which one in the amount of $2.3 billion Tyco has the option to satisfy in stock. As of March 31, the company had about $4 billion in cash.

Tyco recently reduced its earnings and free cash flow estimates for this fiscal year, the latter to $3.0 billion to $3.5 billion from $4 billion.

Reduced earnings and cash flow estimates reflect difficult market conditions in the company's electronics and telecommunications businesses. The write-down of telecom assets is largely related to the company's sizable investment during the past two years in plans to construct an undersea cable network.

Although future prospects in this business are uncertain, S&P has not expected this segment to be a significant cash flow contributor during the next few years.

In the quarter ended March 31, the company also took pretax charges totaling $3.3 billion, primarily to write down fixed assets, inventories and investments in its telecommunications business. Included in this amount are about $300 million of after tax cash charges for severance and facility closures.

Even after the $3.3 billion charge and a large anticipated loss on the sale of CIT, Tyco is expected to remain well within the maximum debt to capital covenant of 52.5% under its bank credit facilities. These facilities, which historically had been used exclusively for commercial paper backup, were drawn down in full in February 2002, reducing financial flexibility and prompting a downgrade of Tyco's ratings and the watch.

Tyco has accounts receivable securitization programs ($506 million outstanding as of March 31), ¥30 billion ($225 million) of notes due 2030 and various interest rate swaps that contain rating triggers.

If ratings are lowered below investment grade by S&P or Moody's, the securitization would terminate, the debt would become payable and the swaps would unwind.

S&P affirms Reliant Energy

Standard & Poor's affirmed its BBB+/A-2 corporate credit rating of power and gas giant Reliant Energy Inc. The outlook is stable.

Houston, Texas-based Reliant Energy has about $4.5 billion of long-term debt, excluding $749 million of bonds securitized by regulatory assets and $1 billion securitized by AOL TimeWarner stoc,) and $3.8 billion of short-term debt outstanding.

S&P expects Reliant Energy to receive SEC approval to restructure and subsequently spin off the common stock of Reliant Resources Inc. to shareholders of CenterPoint Energy Inc. - the new holding company to be formed in the restructuring.

S&P also expects that $4.7 billion of bank credit facilities will be renewed before they expire on July 12 and that Reliant Energy will recover all regulatory assets in 2004-2005, as allowed under Texas law.

The stable outlook for Reliant Energy (CenterPoint Energy) extends out through 2005, which is beyond the current one- to two-year horizon because it is based on the timing incorporated in the Texas law that deregulates the retail electricity market.

The outlook is based on S&P's expectation that Reliant Energy will recover its investment in plant costs as allowed by Texas law, that Reliant Energy will receive SEC approval to spin off Reliant Resources and will successfully renew its bank facilities prior to the July 12 deadline.

S&P affirms Freeport-McMoran Copper & Gold ratings

Standard & Poor's affirmed its ratings on Freeport-McMoran Copper & Gold Inc. and assigned a B rating to Freeport's $734 million in secured bank facilities. Ratings confirmed include Freeport's senior unsecured debt at B- and preferred stock at CCC.

The bank loan is rated the same as the company's corporate credit rating. To the extent a default scenario would occur, S&P believes it is highly uncertain whether the bank creditors would realize the value of their security interests.

The outlook reflects the expectation that the company will continue to face a difficult operating environment including considerable country risk but will meet the liquidity and debt maturity challenges it faces in the near future.

Moody's confirms Newfield Exploration ratings

Moody's confirmed Newfield Exploration's ratings, including the $144 million of 6.5% convertible trust preferreds at Ba3, reflecting its pending purchase of EEX Corp. for roughly $640 million.

The outlook is stable.

Newfield hopes to justify the high price with subsequent volume upside in EEX's deepwater Gulf of Mexico plays, deep horizon shallow water GOM Treasure Island play and onshore Texas properties. NFX was also attracted to EEX's deepwater GOM seismic database, higher position on the deepwater GOM learning curve and onshore Texas team.

The ratings are supported by a history of sound funding and business strategies, acceptable leverage for the ratings as long as Newfield materially reduces effective debt in 12 months, larger reserve scale and diversification, attractive margins before funding and high reserve replacement costs and Newfield's ability so far to internally fund high reserve replacement costs with effective up-cycle hedging to bolster downcycle cash flow.

The ratings are restrained by Newfield's high total unit costs due to high three-year average reserve replacement costs of $10.45/boe and resulting reduced cash-on-cash returns, much higher effective debt burden on proven developed reserves ($5.25/boe), higher pro-forma unit interest and preferred dividend burden likely to exceed $2.25/boe, potentially significantly reduced pro-forma liquidity, financial and reinvestment risk attendant to a short PD reserve life (5 years), the potentially higher front-end costs, risks and lead times associated with NFX's move into deepwater GOM exploration and development activity, and ratings flexibility needed for additional strategic moves.

The ratings reflect the challenges and rising costs of building a North American exploration and production firm.

Fitch cuts AT&T senior ratings to BBB+

Fitch Ratings downgraded the senior unsecured debt rating for AT&T Corp. to BBB+ from A-. The F2 commercial paper rating remains unchanged. The long-term rating remains on negative watch, however, pending the close of the Comcast merger.

Additionally, Fitch has assigned an indicative BBB+ rating to the senior unsecured debt obligations of the remaining entity consisting of AT&T Corp.'s consumer and business telecommunications business (AT&T Communication Services). Fitch expects to assign a commercial paper rating of F2 to AT&T Communication Services.

AT&T Communications Services consists of AT&T Corp.'s remaining voice and data businesses following the separation of AT&T Broadband and its subsequent merger with Comcast. Incorporated into the indicative rating of AT&T Communications Services is Fitch's anticipation that the merger will gain necessary bondholder consent, shareholder and regulatory approvals, and the terms and conditions of the merger will not be changed in a materially adverse manner.

Fitch also anticipates that AT&T Communication Services' capital structure will reflect substantially reduced leverage following the assumption by AT&T Comcast of approximately $10 billion of AT&T Broadband debt obligations plus certain exchangeable notes, the repayment of approximately $9 billion of intra-company debt, the exchange of $5 billion Microsoft QUIPS into shares of AT&T Comcast, and that the company will successfully replace its current $8.0 billion 364-day revolver in a credit neutral manner.

Fitch expects that the company will use proceeds from the settlement of the AT&T Broadband intra-company note to reduce short-and long-term debt. Pursuant to the terms of the merger agreement to effect its close, AT&T will seek consents from bondholders holding approximately $12.7 billion of AT&T debt. Additionally the company may opt to exchange AT&T Corp. debt for AT&T Broadband debt or redeem or otherwise retire debt obligations.

Fitch's indicative rating of AT&T Communication Services reflects the company's strong credit protection metrics, pro forma the merger and relative to its debt rating, the expectation of further reductions to debt levels through the generation of strong near term free cash flow, and the company's strong market position to provide voice and data telecom services. These strengths are balanced against the risks inherent in the long distance sector as discussed above.

The company's obligation to purchase the remaining stake of AT&T Canada was approximately $3.2 billion at the end of 2001. The obligation accretes 4% each quarter. Fitch expects the obligation will be funded primarily through the issuance of equity securities. Fitch's rating conservatively incorporates the consolidation of AT&T Canada's debt into AT&T Communication Services capital structure even though this debt is non-recourse to AT&T Corp. The business model of AT&T Canada was not materially improved with the CRTC's decision to reduce access rates. In light of this decision, AT&T Canada's strategic importance to AT&T Corp. remains unclear.

The negative watch on AT&T Corp.'s debt rating will be resolved upon the closing of the separation of AT&T Broadband and the subsequent merger with Comcast. A rating outlook will also be assigned to AT&T Communication Services at that time.

Fitch cuts J.C. Penney senior notes to BB

Fitch Ratings lowered J. C. Penney Co., Inc.'s senior unsecured notes to 'BB' from 'BB+' and convertible subordinated notes to 'B+' from 'BB-', given their subordinated position to the new bank facility.

Also, Fitch assigned BB+ rating to J.C. Penney's new $1.5 billion secured bank facility

The bank facility is secured by Penney's department store and catalog inventory, which totaled $2.9 billion as of year-end. In addition, the B commercial paper rating is withdrawn.

The outlook was revised to stable from negative, reflecting progress Penney has made in turning around its drugstore and department store operations and the expectation that it will continue to make gradual progress in improving profitability from currently weak levels.

Penney's operating performance began to improve in 2001 as the company has begun to execute its turnaround plans and restore profitability. Changes made have included the transformation to a centralization of the merchandising function at the department stores, which is leading to improved assortments and more timely movement of goods into the stores.

In addition, Eckerd is implementing new pricing and marketing strategies, and is reconfiguring its stores to boost sales of higher margin general merchandise.

As a result of these initiatives, after deteriorating for several years due to weak operations, Penney's credit measures began to improve in 2001. EBITDAR (before restructuring and other charges) coverage of interest plus rents increased to 1.7 times from 1.2 times in 2000 and leverage, as measured by lease-adjusted debt to EBITDAR, improved to 5.9 times in 2001 from 7.8 times in 2000.

While these levels are weak for the rating category, Fitch expects them to strengthen over the medium term as profitability and cash flow improves. In addition, Penney's liquidity remains strong, with $2.3 billion of cash remaining after the recent repayment of a $700 million debt maturity.

The ratings continue to reflect the unsure economic outlook and the competitiveness of the drugstore and department store sectors. The ratings also incorporate the uncertainty regarding the ultimate success of its new operating strategies.

S&P rates AK Steel notes BB

Standard & Poor's assigned a BB rating to AK Steel Corp.'s planned $550 million senior unsecured notes due 2012 and confirmed its existing ratings on AK Steel Corp. and parent AK Steel Holding Corp. The outlook is stable.

The proposed notes will provide some interest cost savings and enhance AK Steel's debt maturity schedule, S&P said.

AK Steel Holding's ratings reflect its fair business position as a midsize, value-added, integrated steel maker with high exposure to the automotive market, low sensitivity to spot prices, and its burdensome legacy costs totaling $1.4 billion, S&P said.

The company benefits from having a higher value-added product mix than many of its peers, with only minimal exposure to commodity steel markets, S&P added. AK sells most of its product line to automakers and appliance customers demanding high quality and specification for their products. This focus on high-quality, high-margin steel insulates AK somewhat from the threat of low-cost minimills, which, although they have saturated the commodity steel segment, have trouble meeting the quality demanded by AK's customer base.

Approximately 75% of AK's steel shipments are under fixed-price contracts, but quantity is still subject to cyclical demand, S&P said. As a result of these contracts and the company's enhanced product mix, AK's financial performance is less volatile than its peers'.

"Recent tariffs implemented by the U.S. government's section 201 investigation have led to lower supply levels, enabling the industry to implement needed price increases. Because only 25% of AK's sales (mostly cold-rolled steel) are tied to the spot market, the company is expected to benefit only slightly from these price increases during 2002," S&P commented.

However it added that AK has benefited from very strong automotive sales in the past few years. Although the U.S. economy slowed significantly in 2001, automotive sales reached their second-highest level at about 17 million units. Currently, auto sales are tracking in excess of 16 million units for 2002, which is still relatively strong and above the 15.5 million-unit forecast. In addition, AK increased its market share with some automotive manufacturers when competing suppliers filed for bankruptcy.

Moody's rates AK Steel notes B1

Moody's Investors Service confirmed the senior debt ratings of AK Steel Corp. at B1 as the company announced its proposed issuance of $550 million of senior notes to be guaranteed by parent AK Steel Holding Corp. The outlook remains negative. Moody's also confirmed the senior secured debt at Ba2 and AK Steel Holding Corp. series B $3.625 convertible preferred shares at B2.

Moody's said its confirmation reflect AK Steel's significant leverage; reduced interest coverage; and underfunded pension and retiree health care obligations.

Additionally, the company's return on assets, based on EBITA, weakened to about 2% for the four quarters ended March 31, from comparatively low rates of return in the mid-single digits during the prior two years, Moody's said.

AK Steel's operating margins have been negatively impacted by industry conditions that reduced its fixed asset turnover and average selling prices, although both improved in the first quarter 2002, the rating agency commented. Compounding its low overhead cost absorption was AK Steel's acceleration of a planned maintenance outage at its Middletown facility.

Prospectively, operating income may remain challenged by AK Steel's high proportion of fixed price sales contracts (comprising about 75% of total sales) that may limit its ability to fully realize the benefits of improving spot prices, Moody's said.

While the company's cash flow will benefit from several unusual gains in 2002, uses of cash are projected to be significant and include a likely increase in working capital needs to support projected higher shipments; scheduled debt service payments; payments for fees and call premiums on the refinanced debt; and modest acquisition costs associated with management's intention to expand coated steel product capacity by as much as one million tons, Moody's added.

In Moody's opinion, the likelihood that AK Steel may be obligated to make a significant cash payment in 2003 to fund up its pension plan is increasing. Of AK Steel's $1.74 billion pension and OPEB liabilities at year-end, $1.47 billion relate to OPEB.

S&P rates JC Penney loan BBB-

Standard & Poor's assigned a BBB- rating to J.C. Penney Co. Inc.'s $1.5 billion senior secured bank facility, which expires in 2005 and confirmed J.C. Penney's BBB- long-term corporate credit rating. The outlook is negative.

The new facility replaces an existing $1.5 billion unsecured credit agreement that was due to expire later in 2002, S&P noted. Although the new loan is secured by all of the company's domestic department store and catalog inventories, under a liquidation scenario we do not see enough excess value to provide 100% recovery to lenders, the rating agency added.

Moreover, under a distressed enterprise value scenario, we believe there is not a material advantage to being secured because the value the Eckerd drug stores would not be included, S&P said.

Because of the company's strong liquidity, S&P said it does not believe that J.C. Penney will use the credit facility in the foreseeable future and, therefore, that there is no disadvantage to existing unsecured debt holders.

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