Moody's cuts Agere to B3

Moody's Investors Service lowered the ratings of Agere Systems Inc.'s 6.5% subordinated convertible notes due 2009 to B3 from B2. The outlook is stable.

Even though Agere had $1.2 billion of cash on hand at June and manageable bank debt maturities, the new rating reflects the negative aspect of unprofitable operations and negative cash flow from operations for an extended period of time, notwithstanding good execution so far of its cost reduction efforts, Moody's said.

Total debt of $832 million at June includes the $410 million convertible, about $220 million of secured bank borrowings and about $165 million of borrowings from accounts receivable securitizations due January 2003.

Bank borrowings mature Sept. 30, 2002 unless the company achieves an additional $90 million of fund raising as defined in the bank facility.

Should Agere not achieve the necessary fund raising, Moody's expects it will pay off the bank facility with cash on hand.

Moody's considers Agere's plan to exit the optoelectronics business and sell its Florida plant to be beneficial from a longer term strategic standpoint.

Upon finalizing the exit, planned by June 2003, Agere expects to save about $190 million per quarter plus cost savings from the related employee reduction.

The prospect of achieving the planned cost reductions over time is good, given Agere's experience in moving and requalifying similar products in earlier restructuring efforts and that some of the consolidations and headcount reductions have already been completed.

S&P revises Valero outlook to negative

Standard & Poor's revised the outlook for Valero Energy Corp. and affiliates to negative, but affirmed its ratings, including senior unsecured at BBB and preferred at BBB-.

The negative outlook revision reflects a potential downgrade, possibly before year-end, S&P said.

Reasons for a downgrade include industry conditions that could prevent expected debt reduction targets, potential violation of a financial covenants, weakening liquidity and reduced cash flow.

Amid a more severe downturn in industry conditions than expected, Valero Energy incurred debt in the first half of 2002 to fund capital expenditures and working capital requirements.

Under its bank facility, Valero must maintain trailing 12-month EBITDA interest coverage of 2.75 times.

Liquidity could diminish if Valero does not renew a $750 million, 364-day bank credit facility that matures in December. However, S&P believes it is likely to be renewed.

Unless Valero Energy experiences diminished access to its bank credit facilities and capital markets, S&P believes it has adequate near-term liquidity.

As of June 30, Valero had about $1.2 billion available on its principal credit facilities and $361 million of cash on hand.

Maturing balance-sheet debt of $790 million for the remainder of 2002 and 2003 is manageable, including about $500 million drawn on the line of credit.

While the company has some $1 billion of off-balance sheet financings that are maturing or available for refinancing, S&P believes the vast majority of these obligations are likely to be renewed.

The outlook could be revised to stable if industry conditions strengthen.

S&P puts Life Re on watch

Standard & Poor's put Life Re Corp. on CreditWatch with negative implications.

Ratings affected include Life Re's Life Re Capital Trust II $136.6 million Adjustable Conversion-rate Equity Security Units (ACES) at AA-.

S&P puts Swiss Re on watch

Standard & Poor's put Swiss Reinsurance Co. on CreditWatch with negative implications.

Ratings affected include Swiss Re America Holding Corp.'s $1 billion convertible bonds due 2021 rated AA and Pearl Holding Ltd.'s €1 billion 2% convertibles bonds due 2010 rated AAA.

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