S&P cuts Corning to junk

Standard & Poor's lowered Corning Inc.'s ratings to junk, and assigned a BB- rating to its proposed $500 million mandatory convertible preferred issue.

Senior debt was cut to BB+ from BBB-. The outlook is negative.

The downgrade reflects a somewhat weaker business position due to depressed conditions and poor prospects for recovery in the core fiber segment. In addition, continued uncertainty persists about the timing of a return to profitability, despite an already low-cost position and significant ongoing cost reductions.

The mandatory convertible augments an adequate liquidity position.

At June 30, Corning had $1.3 billion in cash and short-term investments, most of which were domestically held and available at June 30 and an undrawn $2.0 billion revolving credit facility with 18 banks that expires Aug. 5, 2005. The bank facility is undrawn, has no material adverse change clause past signing, and one financial covenant limiting total debt to total capital to 60%.

The proposed preferred stock issue is considered capital under the bank facility. Corning has no liquidity acceleration provisions due to ratings triggers.

Ratings reflect sharply deteriorated conditions in many of Corning's major markets, particularly in telecom, with no assured timing as to recovery, offset by adequate near-term liquidity.

Corning occupies strong positions in telecom and advanced materials businesses, based on technology and manufacturing efficiencies. In the telecom industry, demand has dropped precipitously since early 2001 and customers are expected to restrain capital spending until a recovery is assured.

Recovery seems unlikely to occur in 2002 and the outlook for 2003 remains weak at best, as major telecom and cable customers have slashed capital spending.

The company has responded with a series of restructuring and cost-cutting measures. Corning expects to realize annualized savings of about $265 million from both the restructuring and cost-reduction programs by the beginning of 2003. Cost savings in the second half of 2002 should be about $55 million as these programs are implemented. Capital spending should be $500 million in 2002 compared with $1.8 billion in 2001.

Second quarter 2002 sales of $896 million were about flat with the first quarter, and the operating loss, including restructuring charges of $494 million, was $613 million. Optical fiber and cable volumes were flat compared to expectations of an increase while prices declined 10%-15%. Cash from operations was $23 million in the quarter compared with negative $171 million in the first quarter, primarily due to improved working capital.

Credit protection measures will remain subpar for the rating in 2002 due to ongoing losses.

Liquidity remains an important underpinning of the rating until Corning returns to profitability.

Significant refinancing risk exists in the potential put of more than $2 billion in 0% convertible debentures in November 2005, which can also be satisfied with common stock. An important determinant of the evolution of this risk will be its progress towards profitability and resulting satisfactory access to the capital markets.

The proposed issue, along with ongoing and near-term actions on cost reductions, focus on operating cash generation, and possible disposal of non-core businesses, supports an adequate near-term liquidity profile.

The rating incorporates substantial progress towards profitability in 2003 during the remainder of 2002 through extensive cost reductions.

Ratings could be lowered further if prospects for profitability in 2003 diminish, either due to insufficient cost reductions, or weaker-than-expected end markets, or if liquidity is lower than S&P expects.

Moody's cuts Corning to junk

Moody's downgraded Corning Inc. to junk and assigned a B1 rating to its proposed $500 million mandatory convertible.

Senior debt was cut to Ba2 from Baa3. The outlook is negative.

The downgrade reflects concern that the recovery in telecom operations will be delayed until well into 2003 as end users of its products have continued to dramatically scale back capital expenditures.

While recognizing Corning's leadership position and current strong liquidity position, Moody's noted the rapid fall off of business in the telecom continues to curtail internal cash generation, prolonging cash burn.

At the same time, debt protection measures are weak and will remain so over the near-to-intermediate-term.

Moody's said that the implementation of further pre-tax cost initiatives of about $645 million, spread over the second and third quarters, represents management's resolve to "rightsize" its cost structure in an environment of declining revenues, however further actions may be required if falling revenues don't stabilize.

The outlook incorporates a view that it may be some time before telecom revenues stabilize and the timing and strength of rebuilding revenues is uncertain.

While noting that the company has aggressively attacked its cost structure to date, the rating agency said Corning's fixed asset investments in telecom are significantly underutilized, and this poor asset efficiency will result in continued poor financial returns.

Moody's believes the need for further initiatives to adjust cost base could be necessary before Corning's telecom revenues rise. Although the company's goal is to be cash flow neutral for the remainder of the year, Moody's cautioned that cash burn would likely continue and absent asset sales or capital market transactions liquidity would weaken.

The outlook also reflects concern regarding potential future cash payments with respect to contingent liabilities associated with the bankruptcy of Pittsburgh Corning.

The rating agency noted that the convertible issue, if successful, will enhance liquidity and provide some equity cushion as the company weathers the current weakening environment in fiber, cable and photonic demand. These securities have a conversion premium of 18-22%, and must be converted into Corning's stock at the end of three years. In addition, in order to enhance marketability, approximately $100 million of the proceeds will be used to buy treasuries that will be held in escrow for the payment of the preferred dividends. The remaining $400 million will be available to Corning for general corporate purposes.

The rating agency said that although Corning is diversified into three distinct business segments-telecom, advanced materials and information display, the main driver of revenues and operating profit stems from fiber, cabling and photonic products serving the telecom market where demand has fallen dramatically.

While volume growth is expected in the use of fiber in metropolitan areas and for local access, total demand is expected to be a fraction of last years' production. Although Corning's other business segments provide meaningful earnings and cash flows, such cash flow contributions will not offset negative financial results anticipated in the telecom segment well into 2003.

Moody's noted that Corning has historically maintained a sound liquidity position. As of June 30, Corning had $1.3 billion of balance sheet cash, $2.0 billion of available term bank credit facilities and limited near-term debt maturities.

Moody expects that reduced capital expenditures and expected benefits of current cost savings measures will enhance cash flow in 2003.

However, cash flow generation will be nominal until business prospects improve.

Corning credit metrics have weakened and may deteriorate further.

For the latest 12-month period ending June 30, Corning had an operating loss of about $685 million before impairment and restructuring charges of about $1.45 billion, down significantly from an operating profit of about $860 million for the 12 months ended June 30, 2001.

Meanwhile, for the same two periods, interest coverage deteriorated to -5.2x from 7.05x, and leverage rose to about 46% from 42%, mainly due to net losses developing in the telecom sector.

Moody's affirms TXU, puts TXU Europe on review for downgrade

Moody's placed the debt ratings of the TXU Europe group of companies under review for downgrade but the ratings of TXU Corp. was affirmed at Baa3 with a stable outlook.

The action follows continued weak operational performance, particularly in the UK electricity sector which constitutes the majority of TXU Europe's operations.

Whilst the group's vertically integrated business model has helped protect it from the full impact of low wholesale electricity prices, it has not been able to fully insulate it in what is structured as a competitive market. Moody's has previously discussed this in a detailed report on TXU Europe issued in June 2002.

It appears increasingly unlikely that the group will be able to achieve a financial profile that is consistent with a Baa1 rating, factoring in the group's increased business risk profile following the disposal of the networks business.

Ratings of TXU Europe take into account the group's commitment to the Baa1 rating level, which it has demonstrated a number of times. In addition, Moody's noted the support of parent, TXU Corp., which has provided equity to fund expansion and has not required any dividends.

Moody's expects that the parent will provide some additional support to TXU Europe by way of equity injection, which may be used to restructure certain long term contracts. This could put the operations of TXU Europe on a sounder footing going forward.

However, Moody's has placed the ratings under review for downgrade as it is unclear whether the financial profile will be consistent with a Baa1 rating even after the financial injection. In addition, Moody's assumes that there is a finite limit to the extent of support that TXU Corp. is prepared to extend to its overseas subsidiaries.

Moody's cuts NRG to junk

Moody's lowered the senior unsecured debt rating of NRG Energy Inc. to B1 from Baa3, reflecting very tight liquidity, weaker prospective cash flow and continued uncertainty surrounding plans to acquire generating assets of First Energy.

Moody's also lowered the senior unsecured debt rating of parent company, Xcel Energy to Baa2 from A3 due to Xcel's efforts to provide capital and liquidity support for NRG.

Both ratings remain under review for possible downgrade.

Liquidity pressures have been exacerbated by a rating trigger requirement to post a total of $1.1 billion in collateral for creditors at subsidiary project financings and NRG's construction revolver.

NRG intends to post the necessary collateral at each of the subsidiary project financings over the next 30 days and is seeking an amendment from the construction revolver bank group to defer the posting of such collateral until it can raise funds from asset sales.

NRG anticipates raising about $1.5 billion from the sale of international generation assets and a portion of its domestic assets, which are anticipated to close by yearend.

The downgrade also incorporates continued uncertainty surrounding NRG's plan and ability to acquire First Energy's generating assets. The purchase was originally announced in November 2001 and received a

conditional approval from FERC in June but it remains in question due to NRG's liquidity position and limited prospects for accessing the capital markets.

Last week, NRG disclosed that it has begun discussions with First Energy that are intended to modify the terms and conditions of the purchase agreement.

Xcel's ability to provide additional support for NRG is currently capped at $400 million due to regulation that limits the amount of investment in electric wholesale generators and foreign utility companies to retained earnings. Moody's noted that an Xcel could cut its common dividend to increase its retained earnings.

Xcel's downgrade reflects the extent to which the parent has provided capital and liquidity support to NRG operations. Xcel has infused $500 million of capital into NRG, provided guarantees for NRG's marketing and trading book and could provide an additional $400 million of capital to NRG.

Xcel's ability to provide this incremental capital to NRG could be constrained since an uncured NRG event of default is an event of default under Xcel's revolving credit facility. Xcel intends to eliminate the potential cross default by attempting to amend this revolving credit agreement.

Moody's revises Lear outlook to stable

Moody's confirmed the Ba1 senior unsecured debt rating of Lear Corp. and changed the outlook to stable from negative, reflecting strong cash flow, debt reduction and enhanced financial flexibility despite difficult end-markets and an uncertain global economy.

The revised outlook also incorporates an expectation that Lear will continue to outperform industry peers and generate solid levels of free cash flow for further debt reduction.

Moody[s noted that Lear's recent relatively strong financial results will be enhanced by sizable net new business awards, a low fixed cost structure, a growing trend toward increasing content per vehicle and the company's emergence as a complete interior systems integrator.

Positive factors are partially offset by Lear's reliance on the North American-based automakers, ongoing pricing pressure from original equipment manufacturers and the high leverage position stemming from multiple debt-financed acquisitions over the past decade.

Moody's noted that 2002's production volume increases may be attributable to aggressive sales incentives on the part of OEMs, creating the possibility of pulling sales from 2003 into 2002.

Nonetheless, year-to-date North American production volumes are tracking stronger than originally anticipated and in conjunction with the additional new business awards, Moody's expects Lear to generate an improved financial performance relative to 2001's results.

Lear's focus on growth prospects and cash generation characteristics of its product portfolio in the midst of a challenging operating environment has enabled the company to pay down around $970 million in debt since the 1999 acquisition of UT Automotive.

The company generated free cash flow of $318 million, retained cash flow-to-total debt of 21% and EBIT-to-interest expense of 2.1 times in 2001 despite the industry downturn.

Through the first half of 2002, Lear has generated free cash flow of $204 million net of $28 million of cash restructuring charges.

Lear also faces intense pricing pressure from OEMs who continually seek to drive down costs through requested annual price reductions from suppliers. This constant pressure could potentially result in weaker profitability, however, increasing content per vehicle and a restructuring program expected to yield ongoing annual savings in excess of $50 million beginning in 2003 should help offset pricing impacts.

Lear's leverage position remains elevated despite significant debt reduction since December of 1999.

Debt-to-capitalization at the end of 2001 improved to 61%, down from over 70% in 1999 and total debt-to-EBITDA was 2.68 times at year-end.

Strong cash flow generation has enabled the company to pay down approximately $245 million of debt through the first half of 2002.

However, the adoption of FAS 142 resulted in a $311 million goodwill impairment charge to equity that kept the year-to-date leverage ratio flat at 61%. Excluding the impairment charge, debt-to-capitalization would have improved to 59%.

Proceeds from non-core asset sales could further augment the strengthening of debt protection measures if not utilized for share repurchases. However, Moody's notes that the potential for bolt-on acquisitions remains a part of the company's ongoing operating strategy.

The rating agency added that stronger than projected production volumes could result in accelerated debt reduction and a significant improvement in credit metrics that could have a favorable impact on the current rating.

Conversely, continued uncertainty in the North American market and a prolonged downturn in the Western European market in 2003 could delay further, meaningful improvement in the company's credit metrics.

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