S&P keeps Disney on watch

Standard & Poor's kept Walt Disney Co. on CreditWatch with negative implications including its BBB+ long-term corporate credit rating.

While overall EBITDA rose nearly 2% for the first half of the fiscal year ending Sept. 30, 2003, second quarter EBITDA declined nearly 5%, S&P noted.

S&P said the decline underscores its expectations of lower earnings than had been assumed in the rating, in a now more difficult environment for the company. Somewhat offsetting the theme park, media network, and consumer products operating declines; the company reported a significant pickup in studio entertainment performance, a decline in corporate and interest expenses, and improvement in conversion of EBITDA to free cash flow.

S&P said it expects downgrade potential will be limited to one notch.

The company acknowledged in March that more difficult operating conditions likely would cause a shortfall in earnings from its target of 25%-35% growth for the year ending Sept. 30. Continued sluggish travel and leisure demand are undermining potential debt reduction from free cash flow, relative to S&P's original expectations, the rating agency said. As a result, the company will need to identify further means of debt reduction, beyond its agreement to sell its baseball franchise, in order to maintain the rating.

S&P rates Comcast loan BBB

Standard & Poor's assigned a BBB rating to Comcast Corp.'s $2.75 billion senior credit facilities due 2006.

The ratings on Comcast continue to reflect the operating strength of its cable systems, which are in 17 of the 20 largest markets, and its moderate financial policy, S&P said. The ratings also benefit from the company's various programming interests, including 57% of electronic retailer QVC Inc. These factors are somewhat tempered by challenges Comcast may face in integrating the large AT&T Broadband acquisition and its underperforming systems.

Comcast became the largest cable operator following its acquisition of AT&T Broadband in November 2002 and has more than 21 million basic cable subscribers, S&P noted. The company's large scale should provide cost benefits, including bargaining strength with programmers and greater access to advertising revenue.

At Comcast's historically owned cable systems, revenue and cash flow rose by double-digit percentages in 2002, while basic subscribers increased 0.8%, S&P said. These systems have been rebuilt and are benefiting from good growth in highly profitable digital and high-speed data services. Operating cash flow margins are healthy at more than 40%. In contrast, the former AT&T systems lost 3.6% of their basic subscribers in 2002 and have subpar, mid-20% margins.

Comcast's debt to EBITDA at year-end 2002 was in the low 5x area, S&P said. This measure reflects only the company's portion of QVC cash flow, and is pro forma for the AT&T Broadband purchase. The measure also reflects debt repayment from $2.1 billion cash received in the 2003 first quarter from the unwinding of the Time Warner Entertainment LP stake. In addition, the debt to EBITDA reflects $525 million in cash received from the sale of cable systems to Bresnan Broadband Holdings LLC. Assuming the sale of Comcast's $1.5 billion in AOL Time Warner stock, leverage could drop to the low-4x area in 2003. These ratios exclude about $5 billion in debt exchangeable into various non-Comcast equity holdings.

Fitch rates Duke convertibles A-

Fitch Ratings assigned an A- rating to Duke Energy Corp.'s new $700 million 1.75% million of convertible notes due 2023. The outlook is negative.

The ratings reflect the stability of the core electric utility business and gas transmission subsidiaries along with the higher risks of Duke Capital's operations, Fitch said.

Cyclical weakness in merchant energy markets places continuing pressure on the profitability and operating cash flow of Duke Capital and thereby upon the consolidated financial condition of Duke Energy.

That, along with the uncertain financial impact of on-going investigations by the Federal Energy Regulatory Commission (FERC) and the Securities Exchange Commission (SEC) account for the negative outlook.

Duke Capital is making progress in selling non-essential assets and cutting its capital expenditure budget for future years to reduce its dependency on external funding going forward, Fitch said. Duke Capital recently announced its intention to exit speculative trading, which should reduce collateral requirements and bolster the company's already strong liquidity position.

Fitch confirms Aon, off watch

Fitch Ratings confirmed Aon Corp.'s senior debt at A- and removed it from Rating Watch Negative. The outlook is stable.

Fitch said Aon's ratings continue to be supported by its strong franchise as the world's second largest insurance broker, its leading market share in targeted markets, its improving capital profile, and its adequate liquidity position.

The ratings also consider Aon's higher, albeit declining, financial leverage position, challenges implementing a business restructuring, and potential charges associated with Aon's under-funded pension plans.

Aon significantly strengthened its balance sheet in the fourth quarter 2002 by issuing over $1.1 billion in convertible debt, debt, and equity securities, Fitch noted. Proceeds were used to pay down commercial paper, other short-term debt, and long-term debt and to repurchase a portion of Aon's trust preferred securities. These capital strengthening initiatives significantly contributed to the confirmation of Aon's debt ratings.

Adjusted debt-to-total capital at Aon was approximately 34.1% at year-end 2002. Although Aon's leverage fell from 38.5% in 2001, this level of financial leverage is slightly above Fitch's expectations of the low 30% range. Fitch expects Aon to continue to gradually decrease financial leverage over the intermediate term.

Cash flow coverage ratios (including both debt and trust preferred interest) improved to approximately 5.6x in 2002, up from 3.3x at year-end 2001, primarily reflecting improved operating margins in Aon's insurance brokerage segment. Fitch acknowledges this improvement and expects that Aon will maintain its cash flow coverage ratio in the 5.0x-7.0x range going forward.

Aon's stable ratings stem primarily from the capital raising initiatives, from the improvements in insurance brokerage operating margins, and from the expectation that incremental cash contributions from the pension expense increase will not materially exceed the $40 million that management anticipates in 2003.

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