Fitch cuts PerkinElmer to junk

Fitch Ratings downgraded PerkinElmer's senior unsecured debt rating to BB+ from BBB+, including the $490 million of 0% convertible debentures due 2020, and put the ratings on negative watch.

The negative watch is due to uncertainty associated with the possible violation of a financial covenant in the company's revolving credit facilities, timing and use of proceeds from asset sales, the put option in August 2003 on the convertible and the recovery of key end-markets affecting global sales.

PerkinElmer had no outstanding commercial paper at the end of second quarter. PerkinElmer maintains a $270 million credit facility that expires in March 2003 and a $100 million credit facility that expires in March 2006.

Fitch is concerned that the financial covenant, minimum interest coverage (rolling four-quarter EBITDA to interest of 5:1 times), listed in PerkinElmer's revolving credit facilities may be violated in the coming quarters.

The company has experienced continued lower-than-expected revenues and earnings, negatively affected by lower demand from key end-markets, such as the pharmaceutical industry, representing some 28% of the global customer base.

Fitch anticipates that the terms of the credit facility agreement may need to be re-negotiated with the current bank group in the near-term horizon.

The 0% convertibles that are deeply out-of-the-money (PerkinElmer's share price is down about 80% since the beginning of the year) and can be put to the company for cash or stock in August 2003. Fitch expects the put will be exercised on the majority of the issue, which places pressure on the company.

Fitch anticipates a further decline in the PerkinElmer credit rating if the financial covenant within the company's credit facility is not met or if the company is unable to pay or replace the convertible debt.

The company had cash and cash equivalents of about $143 million at the end of second quarter, with additional sources of cash that include proceeds from asset sales.

A potential cash outflow exists in the form of a ratings trigger in the account receivables agreement, which permits the agent bank to specify liquidation timing of all borrowings under the program ($36 million at the end of second quarter) in the event of a downgrade below investment grade.

Leverage, determined by debt-to-EBITDA, has increased over anticipated levels and is appropriate for the new credit rating.

Improvement in credit metrics is anticipated in the intermediate-term, as proceeds from the sales of the Fluid Sciences and Entertainment Lighting businesses are expected to be used for debt reduction.

The current rating accounts for weakness in various industrial markets, as well as cautiousness in capital spending from the pharmaceutical and biotechnology industries.

It also reflects the strong reputation and market leading positions in instrumentation, in addition to the benefit of the aggressive efforts of PerkinElmer to increase operating margins through working capital improvements, headcount reductions, facility rationalization and Asian manufacturing and raw materials sourcing.

S&P puts SpeedFam on positive watch

Standard & Poor's placed the CCC- subordinated debt ratings on SpeedFam-IPEC Inc. on positive watch after Novellus Systems Inc. (unrated) announced a definitive agreement to acquire teh company for about $105 million in stock plus the assumption of SpeedFam-IPEC's $115 million convertible subordinated notes.

The entire transaction is valued at about $220 million and is expected to close in fourth quarter.

Novellus, a larger supplier of semiconductor capital equipment, is acquiring SpeedFam-IPEC, a maker of equipment used to polish semiconductor wafers, to broaden its product portfolio.

While Novellus is not currently rated, S&P expects the combined company to have both stronger business and financial profiles than SpeedFam-IPEC alone, said S&P credit analyst Emile Courtney.

Fitch revises PSEG outlook to negative

Fitch Ratings revised the outlook on Public Service Enterprise Group's senior unsecured debt (BBB+) and trust preferred securities (BBB) to negative from stable.

The negative outlook also reflects the execution risk related to PSEG's plan to reduce leverage by issuing equity-linked securities later this year. Given current market conditions, it is uncertain when PSEG will be able to accomplish the planned financing.

Also, the negative outlook reflects consolidated leverage that is relatively high for the rating category, growing merchant risk and exposure to unsettled international energy markets.

Favorably, subsidiary capital expenditures peaked in 2001 and should be somewhat less burdensome over the next several years. New investment by PSEG Energy Holdings has been scaled back and PSEG Power is nearing the end of its generation expansion program, which will be largely complete in 2003. Utility capital spending is moderate.

Also, merchant risk is mitigated by PSEG's large, diversified asset portfolio, the affiliation of PSEG Power and Public Service Electric and Gas Co. and by the sourcing capability of its energy trading and marketing subsidiary, Energy Resources and Trade LLC.

Adjusted debt leverage is about 65% of total capital as of June 30.

If the planned financing is completed, the adjusted debt ratio would fall to about 60%.

Beyond 2002, further improvements are forecasted, which are necessary to support the current rating.

PSEG unconsolidated has no long-term debt outstanding, but short-term debt as of June 30 was about $1 billion and trust preferred stock $525 million.

Moody's affirms Hutchison Whampoa ratings

Moody's affirmed Hutchison Whampoa Ltd.'s A3 rating in response to the announcement that it will, jointly with Singapore Technologies Telemedia, acquire 61.5% of Global Grossing Ltd. for $250 million. The outlook remains negative.

The affirmation of the rating reflects Moody's opinion that the proposed transaction will not pose material financing pressure on Hutchison, given its ample liquidity resulting from its large liquidity reserve pool.

Moody's further says that the impact of the acquisition on Hutchison's financial profile will be immaterial as the agency expects Hutchison will not be required to provide significant financial resources to further fund Global Crossing operations.

Furthermore, creditors have also agreed to restructure and significantly reduce Global Crossing debts to a low level of $200 million, alleviating its financing pressure.

Global Crossing, the U.S. telecom company, filed bankruptcy at the beginning of this year.

Fitch cuts Qwest senior to CCC+

Fitch Ratings downgraded the senior unsecured debt ratings for Qwest Communications International Inc., Qwest Capital Funding Inc. and LCI International to CCC+ from B.

The senior unsecured debt rating for Qwest Corp. remains unchanged at B.

The commercial paper ratings of Qwest Capital Funding and Qwest Corp. also remain at B.

The outlook for all of the ratings is negative.

The downgrade reflects Fitch's growing concern that the sale of the directories business will not generate the level of proceeds necessary to offset the reduced EBITDA and free cash flow implications of losing this high margin business.

Fitch acknowledged that Qwest will need to sell assets to generate liquidity, but Fitch believes the timing and level of proceeds could be impacted by the uncertain outcome of the ongoing investigations by the Securities and Exchange Commission and the Department of Justice as well as the timing and scale of Qwest's intention to restate its financial statements dating back to 1999.

Additional considerations include the precarious liquidity position, lack of financial flexibility and potential to violate covenants in its bank facilities.

Following Qwest's revision to its 2002 EBITDA guidance, it is likely that Qwest will violate the debt to EBITDA covenant contained in its $3.4 billion bank facility absent a significant asset sale or a restructuring of the bank facility.

Qwest has initiated discussions with its bank group to restructure the facility that would provide covenant relief as well as an extension of the facility's final maturity. In addition the company is seeking additional liquidity through a new $500 million senior credit facility at Qwest Dex.

Qwest's liquidity resources consist of balance sheet cash, potential free cash flow generation and net cash proceeds from asset sales. Qwest expects to utilize cash on hand to retire 2002 scheduled maturities.

However scheduled maturities in 2003 total about $4.6 billion, including $3.4 billion of bank debt, followed in 2004 with some $2.1 billion of scheduled maturities.

Assuming that Qwest successfully amends the bank facility covenants, Fitch believes the key to meeting debt service obligations in 2003 and 2004 rests on the timing and net proceeds generated from the directories sale.

Fitch expects that the ongoing investigations by the SEC and DOJ could delay a potential sale as well as impact net proceeds, which will further pressure Qwest's liquidity position.

While Fitch acknowledges that Qwest generated free cash flow during the second quarter of 2002, it was largely the result of reductions to capital spending. Considering the lack of EBITDA stability, Qwest's ability to generate consistent levels of free cash flow after the sale of Dex is unclear.

Factors that will contribute to a stabilization of the ratings include positive outcome of the investigations and the sale of Dex. Additional factors include stabilization of classic Qwest operations and access line losses at Qwest Corp.

S&P puts Omnicare on watch

Standard & Poor's put Omnicare Inc. on CreditWatch with negative implications.

Ratings affected include Omnicare's $345 million 5% convertible subordinated debentures due 2007 and $375 million 8.125% senior subordinated notes due 2011 at BB+ and its $495 million senior unsecured revolving credit facility due 2004 at BBB-.

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