Moody's cuts Aquila to junk

Moody's downgraded the debt of Aquila Inc. and the issuer rating of Aquila Merchant Services to Ba2 from Baa3, reflecting a view that poor returns from investments outside the regulated utility business in the U.S. have resulted in a significant deterioration of operating cash flows. The rating outlook is stable.

The Ba2 rating incorporates execution risk associated with asset sales as Aquila transitions from a diversified merchant energy company into a mostly regulated utility company with some unregulated generation assets, Moody's said.

With about 95% of projected future earnings coming from regulated assets, a restructured Aquila generates cash from operations that support capital spending and dividends but leaves little cash flow to service debt.

The rating outlook reflects Moody's expectation that asset sales will occur and that the proceeds will be used to repay a significant level of debt. Proceeds below expectations could negatively impact liquidity and outlook.

S&P cuts Vitesse to B

Standard & Poor's lowered Vitesse Semiconductor Corp.'s 4% convertible due 2005 to B from B+, reflecting depressed operating profitability and expectations that business conditions will remain challenging intermediately. The outlook remains negative.

Following a series of restructuring actions, Vitesse is sizing to achieve net income breakeven at $60 million in quarterly revenues, although it cannot be determined when that will be achieved, S&P said.

Revenues have been about $40 million for the last four quarters, versus peak revenues of $165 million in December 2000. While Vitesse has sustained R&D expenses at historical levels to assure its market position when conditions improve, at current depressed revenue levels, R&D is approximately 90% of sales.

Thus, EBITDA has been negative since June 2001 and is likely to remain so in the intermediate term. Vitesse's cash burn rate has averaged about $50 million per quarter following the downturn, S&P noted.

Vitesse has maintained adequate financial flexibility, with financial assets totaling $480 million at June 30, while debt levels totaled $488 million. Vitesse has repurchased debt when market conditions have warranted.

If the company cannot stabilize its financial profile in the intermediate term, ratings could be lowered, S&P said.

Fitch affirms Costco ratings

Fitch Ratings affirmed Costco Cos. Inc.'s 0% convertible due 2017 at A, reflecting solid growth in existing and new markets as well as above average credit protection measures. The outlook is stable.

Concerns include competition, potential for aggressive international growth and risks associated with losing its value perception with consumers, Fitch said.

Costco maintains low operating costs due in part to its efficient point of sale and warehouse systems that enable it to track inventory, labor and shrinkage.

Bondholder protection measures continue to strengthen with EBITDAR/total interest plus rents increasing to 12.4 x from 10.5x in fiscal 1999 and total adjusted debt/EBITDAR holding steady at 1.2x for the latest 12 months ended May 12, Fitch added.

In addition, Fitch views Costco's high percentage of store ownership of some 80% as a positive.

Key to long-term success will be its ability to maintain updated stores and innovative concepts that meet changing consumer demand.

Moody's cuts Alpharma

Moody's downgraded Alpharma Operating Corp., reflecting lower operating earnings among other factors. The outlook is negative.

Other factors in the downgrade include ongoing acquisition integration risks associated with rapid growth from debt and equity financed acquisitions, Moody's said, noting 12 acquisitions were made since 1995.

The downgrade further considered significant working capital requirements for a high inventory level and numerous global facilities, foreign exchange fluctuation risk, a weak balance sheet with high leverage, negative tangible book equity, low retained earnings, low return on assets and modest interest coverage, Moody's said.

The ratings continue to recognize relatively low operating margins of Alpharma's human generic products that comprise about 65% of total sales and the fact that its animal health products, which account for 26% of first half 2002 revenue and 17% of operating income, are affected by cyclical poultry, swine and beef supply and demand factors.

As of June 30, using annualized six month earnings, the company is highly leveraged with debt of $950 million equal to 83% of sales, debt/EBITDA of 5.1x, negative tangible book equity and low retained earnings. EBIT/Interest was 1.4x, EBITDA-capex/interest was 1.5x and EBIT/assets was 4%.

Leverage is higher when operating leases are considered, Moody's noted.

S&P cuts Avaya ratings

Standard & Poor's lowered Avaya Inc.'s senior secured debt to B+ from BB- and senior unsecured debt rating to B from BB-, reflecting concern that profitability pressures could continue along with reduced financial flexibility stemming from diminished liquidity. The outlook is negative.

Profitability pressures, driven by a significant tightening in customer spending activity, have eroded debt-protection measures. Quarterly EBITDA has fallen to $50 million-$60 million over the past three quarters from $120 million-$200 million in fiscal 2001, S&P said.

Risks remain that Avaya's actions to reduce costs will not be sufficient in terms of size and timing to stem further declines in EBITDA and that debt-protection measures will remain high for the rating level, S&P commented.

Total debt to EBITDA levels have steadily increased in recent quarters, reaching 5.2x at June 30. EBITDA recovery is necessary to restore debt protection metrics that are more consistent with the current rating level.

Access to external sources of liquidity is also uncertain, S&P said.

Access to Avaya's $561 million bank credit line, currently undrawn, is dependent upon meeting financial covenants, including a cumulative four-quarter minimum bank-defined EBITDA targets of $100 million in the December quarter and increasing thereafter.

Avaya reduced the size of its senior secured bank facility, which has priority over the senior secured notes, to $561 million from $825 million in August, which improves the prospect of recovery for senior secured note holders.

Failure to stem profitability and liquidity declines could cause the rating to be lowered further, S&P said.

Moody's cuts Teck Cominco notes

Moody's Investors Service downgraded Teck Cominco Ltd. including cuttings its 3.75% convertible subordinated debentures to Ba1 from Baa3 and 3% subordinated debentures exchangeable for Inco Shares due 2021 to Ba1 from Baa3. Moody's also assigned a (P)Baa3 rating to Teck Cominco's

$500 million shelf for senior unsecured debt securities.

Moody's said the downgrade of the subordinated rating reflects the weakened position of the subordinated debt instruments in Teck Cominco's capital structure due to the increased debt obligations at the parent company level and structural enhancements provided to some senior unsecured debt instruments.

The downgrade also reflects the earnings pressure on the operations that directly support the subordinated debt instruments, Moody's added.

Teck Cominco was formed by the acquisition of the former Cominco Ltd., now known as Teck Cominco Metals Ltd. by Teck Corp., which subsequently changed its name to Teck Cominco Ltd. Under the new corporate structure, the company intends to migrate debt issuance, over time, to the parent level, Teck Cominco Ltd., Moody's said. In the interim, the company has taken various actions to create parity between senior debt obligations at Teck Cominco and Cominco. Most notably, these include the providing of a downstream guarantee to the Teck Cominco Metals Ltd.'s 6.875% debentures due in February 2006 and the providing of an upstream guarantee from Cominco for Teck Cominco's $425 million bank credit facility. Moody's estimates that approximately 50% of total debt at June 30, 2002 (including the convertible and subordinated exchangeable debentures as debt) is senior debt and benefits from access to the consolidated assets and cash flows. However, Moody's noted that the subordinated debt instruments of Teck Cominco do not benefit from any cross guarantees or other structural enhancements.

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