S&P cuts Williams to junk

Standard & Poor's lowered The Williams Cos. Inc. corporate credit rating two notches to BB+ from BBB, and senior unsecured debt was lowered to BB from BBB-.

The company's other ratings and its subsidiaries were also lowered.

Also, the ratings were placed on negative watch.

The action was based on the deteriorating liquidity position of Williams, especially in the near term.

The fall in the company's stock price after announcing a severe dividend cut makes the possibility of issuing equity in the near term unlikely. The inability to issue equity means that the debt reduction must be accomplished through assets sales alone, which increases execution risk.

Additionally, Williams' inability to renew the $2.2 billion 364-day revolver, which expires Tuesday, on an unsecured basis, is not commensurate with an investment grade rating. S&P had expected the line to be renewed on an unsecured basis within the $1.5 billion to $1.0 billion range, which would have mitigated the current liquidity crunch.

In addition, current market conditions have added substantial execution risk to Williams planned $3 billion debt reduction over the next year.

The watch is focused on the events of the next two months, where liquidity is tight.

About $800 million of debt at Williams and Transco mature in late July and early August 2002 and about $180 million could come due from existing ratings triggers. Additionally, margin calls ranging from $175,000 to $600,000 may come due because of the sub-investment grade rating of the company.

To meet these cash requirements, Williams plans to fully draw on the existing $700 million revolver and execute asset sales of about $120 million. If the margin calls come in at the higher level, Williams has a number of options to meet the liquidity needs, including closing and drawing on the secured revolver, a potential bridge financing on asset sales or other options.

Assuming that Williams is able to weather the financial stress over the next two months, the rating could be removed from watch.

In addition, a number of potentially positive credit events are on the horizon, including success in its planned asset sales, joint venturing or selling its marketing and trading business and the settlement of the issues in California.

The disposition of the trading and marketing subsidiary in particular, will have a great impact on the Williams' need for liquidity and the overall business risk.

Moody's confirms Macerich convertible at B1

Moody's confirmed the B1 subordinated debt rating of The Macerich Co.'s euro convertible.

The rating action follows the REIT's acquisition of the Oaks Mall in Thousands Oaks, Calif., for $152.5 million in cash and the Westcor portfolio of nine regional malls and 18 urban village centers primarily located in Arizona for $1.475 billion in cash and assumed debt.

The rating outlook remains stable.

The rating reflects the increase in size and scope of Macerich's established regional mall franchise in the western U.S.

With these transactions, Macerich has increased its regional leadership, allowing for increased economies of scale and enhanced leverage in tenant lease negotiations.

However, further geographic concentration heightens the REIT's vulnerability to regional economic cyclicality, Moody's said.

The rating confirmation also incorporates the rating agency's expectation that the REIT will successfully execute a financing and disposition strategy to reduce short-term debt exposure resulting from financing the acquisitions.

Moody's anticipates Macerich will be able to raise capital from asset sales and capital market activities to pay down scheduled near term maturities on both the transaction financing and convertible notes, which come due in December 2002.

The ratings also incorporate the REIT's highly leveraged capital structure and largely encumbered asset base.

Rating improvement will depend on Macerich's ability to reduce levels of overall and secured leverage, decrease geographic concentration of its portfolio and the successful integration of Westcor's management team, including its development expertise.

Fitch rates new Anthem notes at BBB+

Fitch Ratings assigned a rating of BBB+ to Anthem Inc.'s proposed issuance of $950 million in senior notes. The rating is on positive watch.

Proceeds are expected to be combined with internal cash and common shares of Anthem to fund the pending acquisition of Trigon Healthcare Inc., which was announced April 29.

The watch reflects Fitch's expectation that the rating will be upgraded to A- following completion of the merger.

Fitch said it has a positive view of the proposed transaction, which is consistent with Anthem's strategy of expanding through the acquisition of Blue plans. Trigon is the largest managed health care company in Virginia and does business primarily as Trigon Blue Cross Blue Shield with about 2.1 million members.

S&P revises Lear outlook to positive

Standard & Poor's revised its outlook on Lear Corp. to positive from stable.

Also, S&P affirmed the BB+ corporate credit rating on Lear and the BB+ rating on its 0% convertible notes due 2022.

Lear's total debt, including operating leases and sold accounts receivable, is about $2.9 billion.

The outlook revision reflects the potential for an upgrade within the next one to two years if the company continues to generate solid free cash flow and reduce debt levels.

Lear has reduced debt by about $1.3 billion since its $2.3 billion acquisition of UT Automotive in 1999. The company made 14 acquisitions for $4.6 billion from 1994 to 1999, but has not made any significant purchases since 1999.

Lear is expected to refrain from making significant debt-financed acquisitions for the next few years in order to improve its credit profile to a level consistent with an investment-grade rating.

Lear could be upgraded if the company continues to report solid operating results and improves its credit statistics such that total debt to EBITDA will average below 2.5 times and funds from operations to total debt averages 25% to 30%, S&P said.

Potential impediments to a higher rating would be deterioration in the operating environment, difficulties in executing the company's current restructuring program, or large acquisitions.

The ratings reflect Lear's heavy debt load and below-average credit protection measures, which more than offset its above-average business position as a leading global automotive supplier.

Lear has a heavy debt load with debt to capital of 65% and debt to EBITDA of 2.8 times.

Funds from operations to total debt is about 17%.

Lear's cash flow generation has been solid, with free cash flow totaling more than $300 million during 2001 and $200 million during the first half of 2002.

Lear expects free cash flow to total $300 million - $350 million during 2002, which will be used primarily for debt reduction.

Fair financial flexibility is provided by access to capital markets, ample borrowing availability under bank credit lines and the ability to sell assets.

Continued favorable market conditions and a disciplined growth strategy should permit continued debt reduction, which could lead to a higher rating.

Moody's puts Sanmina-SCI on review for downgrade

Moody's placed under review for possible downgrade the ratings of Sanmina-SCI Corp., including the Ba2 ratings for the $1.66 billion of 0% convertible subordinated debentures due 2020, $350 million of 4.25% convertible subordinated notes due 2004 and $575 million of 3% convertible subordinated notes due 2007.

The review is prompted by the erosion in Sanmina-SCI's operating margins and last 12 months EBITDA, which have resulted in a substantial escalation of the debt leverage to 6.6 times.

On a pro forma basis, last 12 months revenues have declined 27% to $9.81 billion from a total $13.53 billion recorded individually by Sanmina and SCI Systems, which was merged into Sanmina on Dec. 6, over the identical period a year earlier.

Although inventory and fixed asset turnover have increased over each quarter in 2002, coverage of interest requirements and return on invested capital, based on proforma EBITA, have fallen precipitously over the last 12 months.

Low utilization rates for both company's electronics manufacturing services operations and printed circuit board fabrication have contributed to this performance.

The review will take into consideration Sanmina-SCI's leading end markets, among which personal computing accounted for 39% of revenues during FY2002Q3, while telecom accounted for another 31%.

While the company acknowledges significant variance among the projections for the second half of 2002 shared with it by certain OEM customers, the near-term outlook for spending by corporations on enterprise IT and service providers on wireline telecom is not comforting.

Immediate plans and intermediate prospects of key OEM customers such as Hewlett-Packard, IBM, Alcatel and Nortel will also be taken into consideration.

Guidance suggests another quarter of modest earnings, which is likely to lead to further deterioration in debt and fixed charge coverage metrics.

Liquidity, with nearly $1.2 billion of cash and investments on the June 29 balance sheet and availability under the company's revolving credit facility and a $200 million asset securitization agreement, is good, even to the extent that Sanmina-SCI remains active in the acquisition of divested OEM platforms.

However, barring additional equity funding under an existing $2 billion shelf registration, the company would have to demonstrate its ability to manage with a considerably heightened leverage profile in this competitive, and increasingly uncertain, business environment.

This is of particular concern to the extent that the company adheres to its objective of retaining the complement of infrastructure, including most of its printed circuit board capacity, set out in the plan it adopted for the SCI Systems integration.

Fitch confirms Lowe's ratings

Fitch Ratings affirmed Lowe's Cos. Inc.'s senior notes and debentures at A, including the 0% convertible due 2021 and 0.86% convertible due 2021. Approximately $3.8 billion of debt was outstanding as of May 3.

The outlook is stable.

The ratings reflect a strong number two position in the home improvement retail market, solid operating performance and relatively conservative financial profile, Fitch said.

Those factors are balanced against risks associated with managing an aggressive expansion program and the longer-term potential for overbuilding in the sector.

Despite the challenging retail environment, Lowe's comparable store sales growth gained momentum in the second half of 2001 and was a strong 7.5% in the first quarter of 2002.

Gross margins have also been expanding, increasing 100 basis points in the 12 months ended May 3 from fiscal 2000, reflecting improved buying power and a shift in the sales mix away from opening price point offerings. Lowe's success can be attributed to the strong housing market, as well as its strategy of differentiating itself through a customer-friendly store format and offering more upscale brands.

Fitch said it expects demand for home improvement products will remain solid, though growth rates could be affected longer-term should mortgage rates move materially higher.

Lowe's continues to expand its store base aggressively to take advantage of market growth and capture market share. The company plans an additional 125-130 stores over each of the next three years, on top of 115 stores built in 2001.

At the same time, Home Depot plans to build 200 stores annually over the next three years. While Lowe's and Home Depot currently represent less than 20% of the home improvement market, there is the potential that their combined growth could begin to create overcapacity in the warehouse segment of the market in the next few years.

Lowe's strong operating performance has helped to support modestly improving credit protection measures, despite growth in debt levels.

In the 12 months ended May 3, Lowe's interest coverage improved to 6.4 times from 5.8 times in fiscal 2000, while leverage improved slightly to 2.0 times from 2.2 times over the same time period.

Looking ahead, Lowe's is expected to be able to internally finance an increasing proportion of its capital requirements. As a result, the company should be able to gradually reduce leverage over the longer-term.

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