S&P revises Omnicom outlook to negative

Standard & Poor's revised its outlook on Omnicom Group Inc. to negative from stable, reflecting some uncertainty regarding how current controversies may affect business activities.

All ratings on the company, including the A corporate credit and two 0% convertible senior notes ratings, were affirmed.

Omnicom had total debt outstanding of about $2.9 billion and cash balances of more than $500 million at March 31.

S&P recognizes that new account wins, which have been occurring at a good pace, are linked to confidence in management and business stability.

S&P's current ratings on Omnicom are based on the soundness of the core business, appropriate accounting principles and its ability to maintain sufficient liquidity and generate healthy discretionary cash flow that can be used to fund growth objectives, debt repayment or share repurchases.

Improving disclosure will likely be important for reestablishing credibility in the capital markets.

The ratings also reflect its solid position among the top-three global advertising agency holding companies, a significant presence in diversified marketing services and steady operating performance and account gains despite a cyclical downturn in advertising, and fairly moderate financial policies.

These factors are somewhat tempered by the difficult revenue environment that could pressure organic revenue growth and margins over the near term, and ongoing acquisition activity.

S&P expects a greater use of equity to be used to help fund acquisitions and a slower pace of acquisitions, supporting key credit measures.

Omnicom's revenue growth and margins have been sustained in recent quarters, despite the depressed advertising environment, primarily due to consistent net new business wins and good cost control and cash flow management.

Account gains were respectable in the 2002 first quarter and throughout 2001, despite some slowdown in the pace of accounts coming up for review.

For the last 12 months ended March 31, EBITDA coverage of interest expense was more than 14 times, greater than S&P's target for Omnicom at an A rating of between 10.5 times and 11 times.

EBITDA plus rent expense coverage of interest plus rent expense, which S&P considers an important measure, was about 3 times for the same period.

At March 31, total debt to EBITDA was about 2.4 times.

Due to the seasonality in ad spending and working capital needs, debt levels tend to increase in the first quarter compared with year-end balances.

Liquidity is derived from borrowing capacity under the company's revolving credit facility, committed lines of credit, and cash balances of more than $500 million at the end of the quarter.

Sustaining good discretionary cash flow, which tends to build in the second half of the year, is an important ratings factor.

The ratings could be pressured if unanticipated developments negatively affect performance in the near term. Restoring investor confidence will be an important factor in re-establishing ratings stability.

S&P rates new Alltel notes at A

Standard & Poor's assigned an A rating to Alltel Corp.'s $1.5 billion multi-tranche senior unsecured notes with various maturities.

The telecom carrier's other ratings were affirmed..

Proceeds from the notes will be used to fund a portion of Alltel's $3.6 billion cash requirements for its pending acquisitions of CenturyTel Inc.'s wireless business and 600,000 access lines from Verizon Communications Inc. in Kentucky.

The affirmation reflects S&P's expectation that Alltel will be able to reduce overall debt levels through excess cash from operations sufficiently to achieve total debt to EBITDA of less than 2 times in 2003, including $1.25 billion of equity unit-related debt issued in early 2002.

Such debt reduction is achievable, given the high margins of the incumbent local exchange carrier business and ongoing growth of operating cash flows from the wireless business.

Although the company's pro forma financial profile will be initially weak for the rating, with 2002 pro forma debt to EBITDA of about 2.1 times, this deterioration is mitigated by the $1.25 billion equity that will be added to the capital structure in three years as a result of the mandatory common equity purchase contract.

The ratings reflect strength and stability of the company's ILEC business, which spans about 16 states and provides a somewhat diversified economic base.

Alltel faces the challenge of integrating both the Verizon access line properties and the CenturyTel wireless properties into its own operations.

If its execution efforts result in lower-than-expected operating cash flows in 2003, the company may not be able to achieve total debt to EBITDA of less than 2 times in 2003 and the ratings could be lowered.

Still, Alltel has demonstrated an ability to integrate acquisitions in the past, including the purchase of cellular provider 360 Communications in 1998, which represented some 2.6 million customers.

The company has initiated a comprehensive organizational effort to address the various requirements for implementing these integrations, which has mitigated S&P's concerns about the transitions.

However, ratings do not incorporate the possibility of material additional near-term acquisitions, despite the company's demonstrated appetite for such transactions.

Fitch rates new Alltel notes at A

Fitch Ratings assigned an A rating to Alltel Corp.'s proposed offering of $1.5 billion of senior unsecured notes. A significant portion of the proceeds from the offering will be used for the Verizon wireline and the CenturyTel wireless acquisitions.

All Alltel ratings are on negative watch.

The rating is supported by its strong focus as a leading rural telecom operator with solid margins and stable cash flows particularly from the rural wireline markets.

The rating also recognizes the risks associated with Alltel's increased leverage resulting from its acquisitions in an increasingly competitive telecom environment, which has been impacted by a slowing economy.

The $1.5 billion offering completes the majority of the long-term financing required in 2002 for the acquisition of the CenturyTel wireless assets and the Verizon wireline access lines.

In May, Alltel completed an offering of $1.4 billion in publicly traded equity units. Fitch expects additional funding requirements for the transactions of approximately $500 million to be met in the commercial paper market. As of March 31, Alltel had $21 million outstanding on its commercial paper program.

Pro forma debt-to-EBITDA for 2002 is expected in the range of 1.8 times to 1.9 times, taking into account the level of equity consideration with the equity units, compared to a historically strong debt-to-EBITDA over the last 12 months of 1.3 times.

Pro forma EBITDA-to-interest for 2002 is expected to approximate 7 times.

Based on the proceeds of this offering and anticipated operating performance at the time of the last transaction closing in August, Fitch anticipates removing the negative watch and to affirm Alltel's current A rating.

Credit protection measures are expected to improve going forward in 2003 due to Alltel's positive free cash flow and operating synergies. Benefiting Alltel's anticipated improvement in its credit profile is the capital funding requirements of the company.

While some $100 million is required for a CDMA overlay in CenturyTel's markets, Alltel's prudent management of its operations is reflected in its capital spending as a percentage of revenue, which has been under 20% for the last three years.

Expectations for 2002 and 2003 capital spending are consistent with current spending levels of about 16% of revenue. At around $5 per POP, upgrades to CDMA 1XRTT are significantly less than GSM/GPRS upgrades and will reflect voice capacity requirements rather than aggressive spending and deployment for a 1XRTT data network.

S&P says Amgen stock buyback program doesn't impact ratings

Amgen Inc. (A/positive watch/A-1) recently announced a $2 billion share repurchase over the next two years. The company has about $260 million left under its previous program initiated in 2000.

Standard & Poor's said that the recent announcement does not have an impact on Amgen's current postive watch listing, considering the biotech firm's net cash and investments of $2.1 billion and annual funds from operations of nearly $1.6 billion.

The watch continues to reflect Amgen's growing product diversity, as it recently launched Aranesp and Neulasta, both respective second-generation versions of its mainstay products, Epogen and Neupogen.

Also, the pending close of its proposed acquisition of Immunex Corp. (unrated) would add several additional products to Amgen's product portfolio. This acquisition is expected to be completed by late summer 2002.

Consequently, S&P anticipates a resolution of the watch in the near future.

Moody's cuts FMC senior debt to Ba1

Moody's downgraded the ratings of FMC Corp., including senior unsecured to Ba1 from Baa3, reflecting its recent cash flow performance, reduced earnings guidance for 2Q02 and Moody's concerns about refinancing risk due to upcoming bond maturities and bank facility expirations.

In addition, all ratings other than the Not-Prime commercial paper rating have been placed under review for possible further downgrade, reflecting the risk that successful refinancing may not be accomplished as currently contemplated.

The downgrade incorporates Moody's belief that FMC's operating cash flow relative to its debt is not likely to reflect investment-grade performance over the near term.

For the first quarter of 2002, FMC reported negative operating cash flow of $130 million, and after adjusting for incremental accounts receivable financing cash flow was negative $195 million.

While this figure reflects the seasonal nature of FMC's agricultural products business and the associated working capital demands which we expect to begin to reverse, this level is nevertheless below Moody's expectations.

Moody's said the reported operating cash flow was also impacted by spending on restructuring and other payments, and noted that FMC recently reduced its outlook for second quarter earnings.

Moody's believes there are additional operating risks, as well.

The ratings remain under review for possible further downgrade due to FMC's near-term refinancing requirements and the risk that it may not occur as currently contemplated.

Although Moody's views favorably the company's recent $106 million equity offering, the agency said that due to upcoming liquidity needs, FMC will be highly dependent on new debt issuance as well as successful refinancing of both its bank agreement and its accounts receivable securitization facility.

Following the equity issuance, Moody's believes that FMC needs to refinance about $350 million in 2002 and $182 million in 2003, including bond maturities of $100 million in November 2002 and $160 million in September 2003, in addition to various medium term notes and pollution control and industrial revenue bonds.

Short-term debt at March 31 included $57 million of commercial paper and $145 million under an accounts receivable securitization facility expiring in November 2002.

In 2002, Moody's expects that FMC will generate somewhat limited free cash flow after capital expenditures, thereby increasing the need for refinancing.

FMC's liquidity is primarily supported by a $240 million committed credit facility, which we believe has been substantially repaid with the equity issuance proceeds. The facility matures on Dec. 5, 2002.

While FMC stated it is currently in compliance with the bank facility covenants, Moody's believes that remaining in compliance will be dependent on anticipated seasonal improvements in operating performance.

Moody's also noted that contingent obligations - not reflected in the debt maturities above - include guarantees of customer financing, Astaris keepwell agreements (seen at $30 million in 2002) and FTI contingent financial guarantees of $159 million as of March 31.

The company has stated that it expects to issue debt securities before the end of 2002 to refinance a portion of its debt.

Assuming that operating performance improves and that FMC is able to successfully issue new debt, Moody's would likely confirm the company's Ba1 ratings and remove the ratings from the watchlist.

However, if financing is not accomplished or if operating performance does not improve, the debt rating may be lowered.

S&P revises Masco outlook to stabe

Standard & Poor's revised its outlook on Masco Corp. to stable from negative, reflecting prospects that its credit measures will remain at recently improved and appropriate levels following a significant common equity issue, despite periodic acquisitions.

S&P affirmed the BBB+ corporate credit and senior unsecured debt ratings, which includes the 0% convertible due 2031.

Management is expected to fund prospective acquisition activity with greater financial discipline, which should prevent the deterioration in credit quality experienced in recent years.

Masco's ratings incorporate healthy competitive positions in a broad range of consumer products for the home improvement and home construction markets, strong brand name recognition and superior marketing and distribution capabilities.

These strengths are partially offset by business cyclicality and the company's moderate financial policies.

A strong business profile has enabled Masco to generate operating margins in the respectable 16% to 19% range for many years, although meaningful erosion occurred in 2001 because of the slowing economy.

Operating earnings should continue their upward trend, helped by acquisitions and strength in the home remodeling markets, with operating margins strengthening from the current 15.5% to 16% range.

The issuance of roughly $600 million of common equity in May enhances prospects that funds from operations as a percentage of total debt will average 30% to 35%, versus 24% in the previous year.

EBIT interest coverage is satisfactory in the 5.0 times to 5.5 times range.

Since acquisitions are a key element of the company's long term growth strategy, financing of prospective transactions with a significant equity component will likely remain necessary to preserve credit quality.

Market share gains, new product introductions, a substantial presence in key distribution channels and acquisitions that expand the breadth and geographic diversity of the product lines are positives in the long term earnings picture.

Moreover, funding of the company's active acquisition program is expected to be well-balanced between debt and common equity.

S&P keeps Tyco on negative watch

Standard & Poor's ratings on Tyco International Ltd. (BBB-/negative watch/A-3) and its industrial subsidiaries remain on watch with negative implications following the news that Tyco has received SEC approval to launch the IPO of The CIT Group Inc.

S&P plans to issue an update regarding its ratings on CIT shortly.

The ratings on Tyco incorporate expectations that this transaction will close in about a month and that substantially all proceeds will be used for debt reduction.

If so, concerns regarding the company's liquidity, the primary reason the ratings remain on watch, would diminish.

If it does not, ratings would likely be lowered.

If Tyco does not sell CIT, it would have to seek alternative financing to meet financial obligations beginning early in calendar 2003.

During the next 18 months, the company has public and bank debt maturities totaling about $7.7 billion, plus the potential put of two 0% convertibles totaling about $5.9 billion.

Tyco has the option to satisfy $2.3 billion on the convertibles in stock at the February 2003 put date. However, it may not choose to do so because at the current low share price this would cause significant dilution.

Cash balances, which totaled about $4 billion as of March 31, should be sufficient to refinance obligations potentially triggered by recent rating downgrades.

These include accounts receivable securitization programs of $530 million outstanding as of March 31, ¥30 billion ($225 million) of notes due 2030, partly offset by proceeds expected from the potential termination of various interest rate swaps.

The ratings could be lowered if there are further negative developments in connection with regulatory or law enforcement agencies' investigations into potential misuse of corporate funds, CIT proceeds are insufficient to significantly improve Tyco's liquidity, or business or competitive conditions worsen.

In addition, depending on the company's future capital structure, the ratings on obligations that S&P currently rates within investment grade could be lowered even if the corporate credit rating remains unchanged.

Even if the CIT IPO is successfully completed, Tyco will face significant challenges, including establishing a credible and consistent business strategy, regaining access to capital and bank markets or selling assets to meet debt maturities in the second half of calendar 2003, stemming any damage recent events have had on customer, supplier, or employee relationships, senior management changes and the apparent need to strengthen corporate governance.

S&P rates Odyssey Re BBB-

Standard & Poor's assigned a BBB- rating to Odyssey Re Holdings Corp.'s $100 million 4.375% senior unsecured convertible debentures due 2022.

Proceeds are expected to be used to refinance existing debt, leaving financial leverage unchanged, S&P said.

The rating on Odyssey Re Holdings Corp., which owns Odyssey Reinsurance Corp. and Odyssey America Reinsurance Corp., is based on the company's improving market position and profit outlook, strong capitalization, and majority ownership by Fairfax Financial Holdings Ltd.

Traditionally, Odyssey Re has been known as a midsized broker/market reinsurer, providing pro rata and excess-of-loss property/casualty reinsurance to U.S. insurers. In recent years, the company has successfully expanded its operations in Europe and Asia, but Odyssey Rewill remain at a market disadvantage compared with larger and more established competitors, S&P said.

The rating agency added that it expects the dislocation in today's global reinsurance market to favor ORH in the next year as management employs its underwriting strategy.

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