S&P cuts WorldCom QUIPS to C

Standard & Poor's lowered the rating on the MCI Capital I's 8% cumulative quarterly income preferred securities to C from CCC+ due to WorldCom Inc.'s announcement that it will defer interest payments on the issue.

The rating remains on negative watch, along with the B+ long-term and C short-term corporate credit ratings on WorldCom.

WorldCom had about $30 billion total debt outstanding as of March 31.

When the interest payment on the QUIPS is missed on June 30, the rating will be lowered to D. No other ratings on WorldCom or related entities are affected.

Fitch cuts WorldCom senior to B

Fitch Ratings downgraded the senior unsecured debt ratings for WorldCom Inc. to B from BB. WorldCom's preferreds were lowered to CCC+ from B+ and the 8% quarterly income preferred securities to C from B+. Intermedia Communications' senior unsecured debt was lowered to B- from BB- and the Intermedia convertible preferreds to CCC from B.

All the ratings were placed on negative watch following WorldCom's announcement to defer interest payments on the QUIPS.

While recognizing WorldCom's effort to conserve cash through the deferment of payments, the elimination of the MCI dividend, reduction of capital expenditures and the exit of the wireless reseller business, Fitch believes it points to the company's troubles.

Current difficult industry dynamics coupled with the potential for continued customer network re-grooming and churn are pressuring WorldCom's ability to generate free cash flow to the level of the company's guidance.

Generation of free cash flow will be critical for the company to service upcoming debt maturities.

The company will have some $3.2 billion of maturities, including about $1.5 billion of re-marketable or putable securities maturing in 2003, and another $2.6 billion in 2004.

Fitch anticipates that, in the current circumstances, the company will have limited access to capital markets constraining its financial flexibility.

Absent significant improvements in free cash flow, Fitch acknowledges the potential for a restructuring, given the significant maturities in 2003, 2004 and beyond.

While the company indicates that it is making good progress with negotiating its bank facility, the process has taken longer than expected, elevating the potential risk that the company may not be able to obtain a facility with the size and terms that were previously indicated.

Moody's cuts WorldCom senior to B1

Moody's downgraded the ratings of WorldCom Inc. senior unsecured to B1 from Ba2 and has kept the credit on review for possible further downgrade.

The downgrade was prompted by the company's announcement that it will be deferring the quarterly interest payment on the 8% cumulative QUIPS issued by MCI Capital I.

While the company has adequate cash to make the payment, the deferral reflects a more aggressive management of cash resources and a heightened need to address even modest cash outflows.

WorldCom also has announced plans to further reduce its capital spending in 2002 and lower its cost structure, necessary to maintain the expectation of $1 billion in free cash flow in 2002, in the face of ongoing operating pressures.

The continuing review will focus on the company's ability to successfully conclude present negotiations for a new $5 billion secured bank credit facility.

Moody's would view very favorably the successful restructuring of the bank facility, which will be the first step in addressing the company's limited financial flexibility. In addition Moody's will continue to closely monitor developments in the SEC investigation of WorldCom's accounting practices.

S&P affirms Fleming ratings

Standard & Poor's affirmed the BB corporate credit rating on Fleming Cos. Inc. following the completed acquisition of Core-Mark International Inc.

The ratings are based on positive operating and financial progress over the past two years and the potential for an improved business position following its acquisition of Core-Mark.

These factors are mitigated by continuing uncertainty over business prospects for Kmart Corp., one of Fleming's key customers.

The acquisitions of Core-Mark and Head Distributing, completed on June 18, have a combined purchase price of $430 million funded with $200 million of senior notes, 9.2 million shares of common stock bank borrowings.

Fleming recently refinanced its bank facilities, consisting of a $425 million six-year term loan and a $550 million five-year revolving credit facility.

The company's use of equity to help fund these acquisitions reflects management's intention to moderate its relatively aggressive financial policy. Pro forma for the acquisitions, the new capital structure slightly improves debt leverage.

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 $550 million revolving credit facility provides good flexibility for ongoing operations. Under the new capital structure, Fleming has no maturities until 2007.

Continued modest improvement in cash flow protection is incorporated into the rating on Fleming.

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 expects to raise L-3 ratings

Standard & Poor's stated it anticipates raising the corporate credit rating on L-3 Communications to BB+ from BB after its proposed $900 million common stock and $750 million senior subordinated debt offerings, and assuming that any pending acquisition activity is on a scale that can be accommodated by its enhanced financial resources.

Also, the subordinated debt would be raised to BB- from B+.

The outlook would be stable.

Proceeds from the offering are expected to refinance and pay down debt related to L-3's recent $1.1 billion purchase of Raytheon Corp.'s aircraft integration services division and restore itscapital structure.

Ratings on L-3 reflect a slightly below average business risk profile and somewhat elevated debt levels, but credit quality benefits from an increasingly diverse program base and efficient operations.

Acquisitions are very important for revenue growth, and the balance sheet has periodically become highly leveraged because of debt-financed transactions. However, management has a good record of restoring financial flexibility by issuing equity.

Some well-supported programs, with a high percentage of sole-source contracts, mitigate L-3's exposure to a challenging competitive environment.

L-3's revenues have grown rapidly through numerous acquisitions and the latest positions L-3 to better compete in the growing intelligence, surveillance, and reconnaissance market.

The acquisition of AIS followed a series of smaller acquisitions in late 2001 and early 2002, substantially consuming L-3's debt capacity.

Debt to total capital was elevated to the mid-60% area at March 31, but will likely decline to under 50% by the end of 2002.

After the proposed equity sale, L-3 will have the flexibility to pursue debt-financed acquisitions almost as large as AIS and will have over $400 million in cash and some $600 million in available borrowings under its credit facility.

Goodwill accounts for almost 50% of L-3's total assets, but this is expected due to the nature of the high intellectual capital businesses it acquires. Earnings in 2002 will benefit from the elimination of goodwill amortization due to recent changes in accounting rules.

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