S&P confirms Lucent, off watch

Standard & Poor's confirmed the ratings of Lucent Technologies Inc., including the convertible preferreds at CCC-, and removed it from CreditWatch with negative implications on reduced operating losses and stabilizing cash flows.

The outlook is negative, recognizing significant challenges in a very uncertain communications marketplace.

Financial flexibility, beyond cash on hand, is limited. Cash balances declined by $700 million in the December quarter.

In October, Lucent cancelled an undrawn $1.5 billion revolver and a $500 million accounts receivable sales program, rather than go into default. It plans to negotiate a new, smaller credit facility, although no agreement is imminent.

While some progress has been made, if the company does not continue to bolster its profitability and other debt protection measures, ratings could still be lowered, S&P said.

S&P puts Chesapeake on positive watch

Standard & Poor's put Chesapeake Energy Corp. on CreditWatch with positive implications including its senior notes at B+, convertible preferred stock at CCC+ and bank facility at BB.

S&P said the positive watch follows Chesapeake's announcement that it has signed agreements to purchase oil and gas E&P assets from El Paso Corp. and Vintage Petroleum Inc. for a total consideration of $530 million.

Chesapeake is acquiring properties with low cost structures in its core Mid-Continent operating area that have a high degree of overlap with Chesapeake's operations, which should provide cost-reduction opportunities, S&P noted.

In addition, S&P said Chesapeake intends to fund the transactions with a high percentage of equity; Chesapeake has announced an offering of 8 million common shares (about $160 million of net proceeds are expected) and $200 million of convertible preferred securities with the balance funded with debt. Based on the cash flow characteristics of the acquired properties (which are reinforced by commodity price hedges), Chesapeake effectively will be adding the properties at a debt to EBITDA ratio of about 1.0x.

Chesapeake has hedged a high percentage of its 2003 production, which in combination with a favorable outlook for natural gas prices in 2003 will assure the company of ample cash flow for debt service, reserve replacement capital spending, and capital for growth, S&P said.

Chesapeake is issuing $300 million of new notes, which will improve financial flexibility by extending its debt maturity profile; following the expected financing, Chesapeake will have an undrawn $225 million revolving credit facility that matures in 2005, no material debt maturities until 2008, and a capital budget that should be funded internally, S&P added. Nevertheless, Chesapeake still remains highly indebted (about $0.72 per million cubic feet equivalent pro forma the El Paso and Vintage transactions) and intends to continue growing aggressively through acquisitions.

Fitch ups Chesapeake outlook

Fitch Ratings changed Chesapeake Energy Corp.'s outlook to positive and affirmed its BB- senior unsecured notes and B convertible preferred ratings following its announced acquisition of natural gas assets from El Paso Corp.

The ratings reflect the conservative nature in which the transactions have been funded, Chesapeake's long-lived, focused natural gas reserve base and its modest but improving credit profile, Fitch said.

Chesapeake has generated credit metrics consistent with its rating over the last 12 months. Interest coverage for 2002 was about 4.4x and debt-to-EBITDA was around 3.2x.

Fitch noted, however, that Chesapeake's debt on both an absolute ($1.9 billion with the proposed offerings) and a proven barrel of oil equivalent ($4.32 per BOE for the acquisitions and bond offering) basis is high for the rating.

S&P confirms Devon ratings

Standard & Poor's confirmed the ratings of Devon Energy Corp., including senior debt at BBB, on its merger agreement with Ocean Energy Inc.

The ratings reflect its position as a very large independent oil and gas exploration and production company but with substantial, albeit improved, debt leverage and a mediocre historical record of internal growth, S&P said.

The acquisition will improve Devon's credit profile modestly as debt to capitalization, which was 62% at yearend 2002, falls to 53% on closing and should drop below 50% by the end of 2003.

Liquidity is adequate, supported by full availability under its $1 billion in credit facilities as of Dec. 31.

Devon's cash position and cash generating ability are satisfactory. Free operating cash flow for 2003 should exceed $500 million and cash on hand pro forma for the acquisition was $292 million as of Dec. 31. Devon has increasing, but manageable, debt maturities over the intermediate term, with $100 million due in 2003, about $350 million in 2004, and $900 million in 2005.

The outlook is stable, reflecting S&P's expectations that Devon will repay near-term debt maturities with excess cash flow and fund a significant portion of maturities in 2005 and 2006 with internally generated cash.

Fitch confirms Devon ratings

Fitch Ratings confirmed Devon Energy Corp.'s senior unsecured debt rating at BBB following the announcement that it was acquiring Ocean Energy for $3.5 billion in stock and assumed debt.

The outlook remains stable.

The affirmation is based on Devon's size and diversity, Fitch's confidence in management, progress to date in improving the credit profile and expectations of continued improvement in the near to intermediate term.

Moody's puts Photronics on review for downgrade

Moody's Investors Service placed Photronics, Inc.'s ratings, including the 4.75% converts at B2, on review for possible downgrade following the sequential and year-over-year first quarter revenue decline and the operating loss for the quarter.

The review will take into account the company's outlook beyond the ensuing quarter, and the prospects for debt leverage, which was a moderate 3.1x last 12 months EBITDA.

Moody's revises Arrow outlook to negative

Moody's Investors Service confirmed the Baa3 senior unsecured ratings of Arrow Electronics and changed the ratings outlook to negative.

The change reflects the use of balance sheet liquidity for the $285 million acquisition of assets from Pioneer-Standard Electronics Inc. and the prospect for continued weakness in IT spending that will cause credit metrics to remain sub par the rating.

The rating incorporates the expectation that integration of the acquired assets should not represent a material operational risk given Arrow's track record of integrating acquisitions combined with the fact that Arrow is not buying any meaningful facilities nor any IT systems, Moody's said.

However, operating profitability is likely to remain depressed while free cash flow diminishes, as working capital reduction benefits have been significantly realized.

Going forward, operating profitability will significantly drivefree cash flow, which is likely to remain at low levels. To the extent that operating results show signs of weakening, the rating would likely come under pressure.

Moody's cuts Ahold

Moody's Investors Service downgraded Koninklijke Ahold NV including cutting its senior unsecured debt to B1 from Baa3 and subordinated debt to B2 from Ba1. The ratings remain on review for downgrade.

Moody's noted it began the review for downgrade after Ahold announced a material accounting restatement and continuing investigation into accounting irregularities at its US Foodservice operations.

The downgrade reflects Moody's view that the accounting announcement and related management turnover create significant uncertainty for debt holders.

Additionally, Moody's said it believes that Ahold has a large amount of short-term debt outstanding that relies on the continued and uncertain availability of bank lines as a source of alternate liquidity.

Moody's said the disclosure of accounting irregularities at US Foodservice and the expected impact on group operating earnings create considerable uncertainty about the company's future levels of earnings and cash flows. Further the disclosures may result in Ahold no longer being able to draw under its existing $2 billion syndicated committed term credit facility. Moody's notes that the company has stated that it has obtained €3.1 billion of commitments from a new syndicate of banks, of which €2.65 billion relates to a 364-day dual-tranche credit facility comprising secured and unsecured tranches.

Moody's considers the conditions precedent under the €2.65 billion facility may prove challenging for the company to satisfy given the ongoing accounting investigations at US Foodservice and the financial reporting requirements which comprise part of the conditions precedent. Without access to the existing $2 billion term credit facility or the new €2.65 billion 364-day facility, Ahold will be wholly reliant upon rolling over drawings under its existing uncommitted facilities, its operating cash-flows and cash balances.

Moody's cuts MeriStar

Moody's Investors Service downgraded MeriStar Operating Partnership, LP's senior unsecured debt to B2 from B1 and MeriStar Hospitality Corp.'s subordinated debt to Caa1 from B3. The action ends a review begun in October 2002 in response to the REIT's continued underperformance and weakened liquidity position amid a stalled recovery in the lodging business. The outlook is stable.

Moody's said it lowered MeriStar's because it expects that the REIT's ability to service its debt will continue to be constrained by its high leverage, strained liquidity and weak operating performance due to a difficult and an increasingly uncertain lodging environment.

The lodging industry - the upscale full-service segment in particular - continues to be pressured by the weak economy and geopolitical uncertainty on business and international travel, which is pressuring occupancies and room rates, Moody's added. MeriStar's operating performance is also crimped by its exposure to certain markets, such as San Francisco, which have been disproportionately affected by weak demand.

The REIT has been operating with highly stressed credit statistics and weak liquidity for over a year, and is unlikely to experience any improvement in its debt protection measures until well into 2004, even if it is able to meet its expectations for flat top-line growth in 2003 and moderate revenue and margin improvement in 2004, Moody's said. Refinancing risk related to MeriStar's October 2004 convertible bond maturity is a negative rating factor given the REIT's weak access to public capital, and uncertainty about the market for mortgage finance for hotels.

S&P cuts Aquila, on watch

Standard & Poor's downgraded Aquila Inc. and put it on CreditWatch with negative implications. Ratings lowered include Aquila's senior secured debt, cut to B+ from BB, subordinated debt, cut to B from BB- and preferred stock, cut to B- from B+.

S&P said the action reflects concerns resulting from uncertainty surrounding the extension of Aquila's bank credit facility and waiver, which expire on April 12, reliance on asset sales to reduce debt levels, and weak cash flows from non-regulated operations.

As the date for extending or replacing its maturing credit facility nears, Aquila has still not completed its negotiations with the lenders, S&P noted. In particular the renegotiated terms of the credit facility, i.e. the provisions for security, remain undetermined at this time.

Should the waiver not be extended beyond April 12, Aquila would face tremendous liquidity pressures and with weak cash flow from operations, Aquila would not have the ability to repay its maturing debt obligations, S&P said.

In order to shore up its balance sheet and reduce debt, Aquila will need to continue to divest assets. However, weak market conditions may lead to increased execution risks for future asset sales, as evidenced by the delay in the sale of Avon Energy Partners Holdings, S&P added.

These near term concerns are exacerbated by depressed power prices and negative spark spreads which will continue to be a drag on Aquila's cash flow from operations on the regulated side of the business, S&P added. In addition, Aquila will face restructuring expenses in 2003 as it continues its transition to a traditional utility. This will lead to a further drain on cash flows.

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