S&P puts Manpower on negative watch

Standard & Poor's placed the ratings of Manpower Inc. on negative watch, including the BBB-rated 0% convertible due 2021, based on S&P's postponed expectations for credit measures returning to BBB levels.

Manpower, based in Milwaukee, is the world's second-largest temporary staffing firm, with key operations in France, the U.S. and the U.K. Total debt as of June 30 was $919 million.

The watch is based on declining 2002 first half results and expectations of a weak cyclical rebound in profitability. S&P believes the downgrade potential is limited to one notch, to the BBB- level.

Profitability is sensitive to economic weakness in its core markets and geographic diversity provides only modest protection of overall profitability. Sales declined 7% in the six months ended June 30, while EBITDA fell 37% as a result of a sharp decline in U.S. and U.K. performance and unabsorbed overhead.

Manpower has announced that it expects earnings per share will modestly decline in third quarter to be in the range of 43c to 47c versus 50c last year.

Operating profit in France, which accounted for the majority of total profitability, declined 11% in the first half of 2002 as a result of the slowing French economy. The French market is dominated by the cyclical industrial staffing business.

S&P is concerned that a weak French economy might offset a potential fourth quarter rebound in U.S. operating performance.

Fixed charges have increased because of acquisitions totaling $296 million in 2001 and new office openings in Europe and Asia.

Also, the company bought $31 million of its own common stock and made $30 million of acquisitions in the first six months of 2002.

EBITDA plus rent expense over interest plus rent expense declined to about 2.2 times in the 12 months ended June 30 from 2.5 times in 2001.

S&P puts Interpublic on negative watch

Standard & Poor's placed the ratings of The Interpublic Group of Cos. Inc., including the BBB+ and BBB rated convertibles, on negative watch due to concerns relating to the postponement of its second quarter results to accommodate its audit committee.

New York-based Interpublic is one of the world's leading advertising agencies. At March 31, total debt was about $2.89 billion.

The watch reflects some uncertainty regarding the level of earnings and ability to deliver results in line with expectations amid a somewhat depressed advertising environment.

S&P said its current ratings on Interpublic are based on progress being made in restoring cash flow, profitability and margins despite a challenging ad spending climate, appropriate accounting principles and the company's ability to maintain sufficient liquidity.

Liquidity is primarily derived from borrowing availability of about $841 million under the company's credit facilities and cash balances of about $575 million at March 31.

There is little cushion in current ratings for unanticipated developments, weaker than expected operating performance, further restructuring charges, or additional debt capacity.

S&P cuts Level 3 ratings

Standard & Poor's lowered the ratings of Level 3 Communications Inc. senior unsecured and subordinated debt, which includes the two convertible notes, to CC from CCC-.

After accounting for the recent private issue of $500 million in junior convertible subordinated notes due 2012, proforma total debt as of July 31 was about $6.4 billion.

The downgrade was based on S&P's assessment that Level 3 will not be able to generate substantial cash flows to materially reduce leverage due to poor fundamentals of the data transport industry. The industry is expected to remain weak for many years due to excess capacity, slow demand for long-haul data services and potentially increased competition from service providers that may emerge from bankruptcy.

Given Level 3's substantial leverage, weak interest coverage and limited liquidity, the company is not well positioned to deal with such weak industry fundamentals.

The rating was originally placed on negative watch in January due to concerns that Level 3 would violate its minimum telecom revenue bank covenant. The company has been able to meet this covenant through additional revenues gained from two software companies that were acquired in the first half of 2002.

Based in part on the company's guidance of $400 million in consolidated adjusted EBITDA for 2002, debt to EBITDA leverage is projected to be about 16 times at year-end 2002, with EBITDA interest coverage of less than 0.8 times for the year.

Liquidity of about $1.5 billion in cash and $650 million in availability under a revolving bank facility on July 31 provides only a limited safety margin after adjusting for future capital expenditures, working capital requirements and more than $500 million in annual interest expense.

With Level 3 now positioning itself as an industry consolidator, additional acquisitions have the potential to further strain liquidity.

The company has taken active measures to stabilize its operations, including focusing on financially solid customers, reducing overhead, cutting capital expenditures and selling assets.

In addition, the company has sought ways to reduce leverage and improve liquidity. In October 2001, $1.7 billion in senior and convertible subordinated notes were repurchased for about $731 million. In July, $500 million in junior convertible subordinated notes were raised from a group of well-known private investors.

Although these steps are in the right direction, S&P remains concerned they are not sufficient to eliminate the possibility of a distressed debt exchange or bankruptcy filing.

Level 3 operates in an industry that is likely to experience long-term capacity oversupply and weak demand.

The potential for execution risks has also increased due to interest in making acquisitions.

Given these factors, S&P does not believe the company will have the ability in the foreseeable future to generate material free cash flow relative to its $6.4 billion in total debt.

S&P revises Office Depot outlook to positive

Standard & Poor's revised the outlook for Office Depot Inc. to positive from stable based on the company's stabilized operations.

Also, S&P affirmed the BBB- senior and BB+ subordinated ratings. Office Depot has about $850 million of rated debt.

If Office Depot continues to improve performance and generate significant free cash flow, thus establishing a sufficient track record of improved credit ratios, an upgrade could be considered.

S&P said the ratings reflect a meaningful position in the North American office products industry, strong balance sheet, diverse distribution channels and recent operating stabilization.

Those factors are mitigated, somewhat, by a decline in operations from 1999 to 2001 and the competitive nature of the office supply industry.

The ratings are supported by adequate cash flow protection and moderate leverage. EBITDA coverage of interest of 3.6 times is expected to improve to the mid-4.0 times area in 2002 due to operating initiatives and the redemption of $245 million of convertibles. Total debt to EBITDA of 3.2 times is also expected to improve from the initiatives.

Liquidity remains sufficient for the rating as Office Depot generated significant free cash flow of $540 million in 2001 and has a $600 million revolving facility that matures in 2005.

Office Depot is expected to continue to generate free cash flow as it focuses on improving operating efficiencies and slows store growth.

Moody's affirms Chesapeake convert at Caa1

Moody's confirmed the existing ratings of Chesapeake's Energy Corp., including the $150 million of 6.75% convertible preferreds at Caa1, and assigned a B1 rating to its new $250 million senior unsecured notes due 2012.

The ratings outlook is positive, taking into account the potential over time for Chesapeake to grow its asset base relative to its debt burden on proven developed reserves through reinvestment of excess cash flows.

Chesapeake's cash flows have benefited from $167 million of cash hedging gains in 2001 through the first half of 2002 and $35 million of cash premiums received on hedging activities in second quarter, supporting investment spending levels.

Moody's noted that while assets appear to have grown, debt also has increased to $1.5 billion at June 30, pro forma for the new note, from $1.3 billion at Dec. 31, and leverage reduction on reserves to date has been modest.

Because Chesapeake is not seeking to reduce leverage through direct paydown of debt, the pace and degree of additional leverage reduction is subject to the productivity of Chesapeake's investments.

The ratings outlook could become tempered if asset additions over the next year do not materially enhance the proven developed reserve base relative to debt levels.

Chesapeake's ratings are limited by high financial leverage, a high interest and preferred dividend burden on production and aggressive growth objectives that entail potential for acquisition activity, including possibly large, leveraged acquisitions.

The ratings are supported by the growth in overall scale of Chesapeake's asset base, its intensified focus on longer-lived, proved natural gas reserves in the Mid-Continent region, reduced production reliance on short-lived assets in the Gulf Coast region and unit operating costs and full cycle economics that should allow for internal funding of reserve replacement during periods of moderately weak natural gas prices.

In addition, focused Mid-Continent acquisitions that continue to add scale to and intensify Chesapeake's reserve base in that area could enable overall prospect highgrading, which could be supportive to sustaining favorable reserve replacement productivity and production trends, as well as positioning Chesapeake for cost efficiencies.

The $150 million convertible preferred has no cash call, the dividend can be deferred by Chesapeake and Chesapeake can force automatic conversion beginning in November 2004 if its stock price exceeds 130% of the conversion price.

The preferred is convertible at any time by the holder.

The non-cash call, or perpetual maturity absent conversion, deferrable dividend and preferred liquidation claim provide some equity benefits to Chesapeake's capital structure.

S&P affirms Shaw ratings

Standard & Poor's affirmed the ratings of The Shaw Group Inc., including the convertible at BBB-. The outlook remains stable.

The rating affirmations follow Shaw's announcement that it has reached a tentative agreement with NRG Energy Inc. to acquire the assets of the LSP-Pike Energy LLC project and forgive NRG obligations of about $62 million. Additionally, Shaw will pay NRG $43 million in cash for the Pike Energy project.

S&P assumes that Shaw will be able to recoup its $43 million investment and should be able to recover most of the $62 million, which was owed to the company, by either completing the power plant project or by selling the existing equipment.

If the current agreement falls through and Shaw is unable to recover its investment from NRG, there could be an adverse effect on Shaw's cash flow, earnings, and credit protection measures. However, Shaw's management has indicated that it is confident that the transaction will be approved.

Shaw continues to experience a healthy backlog of business of about $6 billion. S&P assumes that Shaw will not experience material problems or substantial cancellations of projects associated with the company's current backlog.

The ratings reflect a leading market position, ample financial flexibility and moderate financial policy.

Shaw's commitment to maintain ample liquidity and a moderately leveraged financial profile helps to temper business risk, a key underpinning to the ratings.

Total debt to capital, adjusted for operating leases, was about 55%, and cash and equivalents were about $535 million at May 31.

Although Shaw is expected to have significant revenue growth in the intermediate term, moderate fixed capital needs should enable the firm to generate some free cash flow, although cash generation may be "lumpy" from quarter to quarter given the timing of large projects.

With excess cash on hand and expected moderate free cash flow generation, Shaw has a moderate amount of liquidity to pursue external growth initiatives at the current ratings.

In the intermediate term, EBIT to interest coverage should average in the 6 times to 7 times range and should average at least 4 times over the business cycle. Total debt to capital is expected to average in the mid-50% area.

A leading business position, focus on risk management and the expectation of a moderate financial policy limit downside risk.

Modest end-market diversity and the potential for acquisitions, with inherent integration risks, restrain upside ratings potential.

S&P cuts Telewest

Standard & Poor's downgraded Telewest Communications plc and kept it on CreditWatch with negative implications.

Ratings lowered include Telewest Communications Networks Ltd.'s £250 million senior secured bank loan due 2008 and £2 billion senior secured bank loan due 2007, both cut to CCC- from B, Telewest Communications plc's various notes and debentures, cut to C from CCC-, and Telewest Finance (Jersey) Ltd.'s $500 million 6% convertible bonds due 2005, cut to C from CCC-.

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