Moody's confirms GM, outlook still negative

Moody's Investors Service confirmed General Motors' long-term ratings at Baa1 and General Motors Acceptance Corp.'s long-term debt at A3. The outlook for both remains negative.

Moody's said the confirmation comes in response to GM's announcement that it plans to offer approximately $10 billion in debt securities and convertible debentures, and to use a substantial portion of the proceeds to partially fund its U.S. pension plans; these plans were $19.3 billion underfunded at the end of 2002.

Moody's said the confirmation reflects its view that the transaction proposed by GM has both modestly negative and positive implications for its liquidity and financial flexibility, but it will not, on balance, materially change the long-term cash generation, operating, or credit profile of the company.

Moody's believes that unfunded pension liabilities have considerable debt-like characteristics. Substitution of an unfunded pension liability with funded debt generally entails certain drawbacks. One drawback is that the funded status of a pension plan can be volatile depending on discount rates and equity market returns. However, once cash is contributed to a plan the company relinquishes it. If market conditions result in a plan becoming fully funded, previously contributed proceeds cannot be immediately recaptured. Also borrowing funds for this purpose replaces a potentially variable contingent pension liability with a contractual debt obligation and the related interest expense.

Notwithstanding these potential drawbacks, Moody's notes that GM's plan does have certain constructive elements.

First, the transaction will substitute relatively large intermediate-term pension plan contributions with longer-term debt maturities, Moody's said. The transaction essentially terms out a shorter-term obligation with a longer term obligation, and should enhance GM's free cash flow over the intermediate-term.

Second, due to the anticipated long-term maturity profile of the proposed securities, Moody's expects that a significant portion of the scheduled principal repayments will occur during a period in which the rating agency anticipates that GM's retiree base will be declining. This decline in the retiree base should enhance the company's future ability to make scheduled principal repayments when they become due.

Finally, GM is issuing debt at a time of record low interest rates.

Moody's believes that, on balance, GM's proposed issuance of $10 billion of debt and convertible securities to help fund its pension plan is a prudent financial decision.

S&P confirms GM, outlook still negative

Standard & Poor's confirmed its ratings on General Motors Corp. and General Motors Acceptance Corp. including its corporate credit at BBB and maintained a negative outlook.

S&P said the confirmation follows GM's announcement of a planned debt issuance totaling $13 billion, including $10 billion by GM, some of it as convertible debentures, and $3 billion by GMAC.

Completion of the proposed financings would significantly bolster GM's liquidity, or enable GM to accelerate contributions to its now massively underfunded pension plans, S&P said. GM has previously stated it would contribute about $15 billion to its benefits plans by 2007.

Concerns about the adequacy of GM's cash generation over the next few years would be alleviated by the refinancing of its near-term pension funding requirements with long-term debt issues, and S&P said it views the proposed debt issues as a prudent means of addressing these requirements. Additionally, GM would be taking advantage of historically low interest rates.

Still, the benefit to its credit profile is not sufficient to warrant a change in the rating or rating outlook, S&P said. Even with the contribution of all of the newly raised cash to its pension plans, GM could still be left with a sizable unfunded pension liability, both in the U.S. and globally, depending on near-term pension portfolio, trends in general interest rates and the outcome of upcoming labor contract negotiations.

Also, GM's overall financial leverage would not be affected.

Moreover, S&P said it believes that, given the size of the proposed financings, unsecured debt market appetite for GM-related debt issues could be limited for a period, constraining GMAC's funding flexibility, although other funding sources should still be sufficient.

Finally, S&P said it has heightened concerns about the competitive environment in the North American auto industry, affecting GM's ability to maintain satisfactory financial performance.

S&P upgrades Getronics

Standard & Poor's upgraded Getronics NV including raising its €350 million 0.25% notes due 2004 and €500 million 0.25% convertible subordinated notes due 2005 to CCC+ from CCC. The outlook is stable.

S&P said the upgrade primarily reflects an expected further €325 million reduction in the group's subordinated debt - bringing the amount outstanding to €250.1 million - after a partial early repayment to be made by the end of June 2003.

It also factors in Getronics' reduced liquidity risk and a substantial commitment from the group's management to restore ailing profitability and to improve cash flow.

The ratings continue to reflect Getronics' very low profitability (pro forma for disposals) in the currently soft IT services market and the group's leveraged financial profile, S&P said. This is offset, to some extent, by Getronics' strong position in network and desktop management services (particularly in Europe) and by its solid client base.

Moody's confirms Oneok

Moody's Investors Service confirmed Oneok, Inc.'s ratings including its senior unsecured debt at Baa1 with a negative outlook. The action ends a review for possible downgrade begun because of uncertainty regarding its acquisition of gas distribution assets in Texas for $420 million in cash.

Moody's said the confirmation reflects: financings related to the acquisition of Texas Gas Services that resulted in a slight improvement in leverage and an expected near-neutral effect on interest coverages; the acquisition's minor enhancement to Oneok's investments in regulated gas distribution, an indication of the company's renewed focus on this stable and low-risk regulated business; favorable changes regarding Westar Energy, Inc.'s ownership of Oneok, including lower dividend requirements and fewer restrictions in issuing common stock; and the expectation that the company will retain the capacity to generate free cash flows, which provides a measure of financial flexibility.

Moody's said the negative outlook reflects its concerns about the potential for earnings and cash flow variability from Oneok's fast-growing gas marketing business and the potential for large acquisitions over the medium term that could alter the company's business mix and that could again raise its leverage.

S&P says PPL unchanged

Standard & Poor's said PPL Corp.'s ratings are unchanged including its corporate credit at BB with a negative outlook on the determination by the Pennsylvania Attorney General's office that a PPL subsidiary did not violate antitrust laws in first quarter 2001.

S&P said the news is positive for the company's credit quality, eliminating uncertainty about any potential punitive fines against the company.

But S&P added that the outcome does not affect the negative outlook for the ratings on PPL at this point.

Moody's raises Amgen outlook

Moody's Investors Service raised its outlook on Amgen, Inc. to positive from stable and confirmed its ratings including its senior unsecured notes, debentures, convertible notes, and medium-term notes at A2.

Moody's said the outlook change primarily reflects stronger cash flow generation than Moody's anticipated at the time of the Immunex acquisition, as well as very favorable growth products for each of Amgen's core product franchises.

These growth opportunities result from: in anemia, the expansion of Aranesp into the oncology setting in the United States, a patient population previously served exclusively by Johnson & Johnson's Procrit; in neutropenia, the dosing advantages of Neulasta over Neupogen which provide premium pricing and usage in a greater number of patients; and in autoimmune disorders, the recent manufacturing expansion for Enbrel in Amgen's Rhode Island facility which has alleviated production constraints.

As a result, Moody's expects continued generation of strong free cash flow.

In addition, Moody's believes that relative to many large companies operating in the pharmaceutical industry, Amgen is less subject to patent expiration risk, and that the barriers to entry for generic competition are high.

S&P raises DoubleClick outlook, rates convertibles B-.

S&P assigned a B- rating to DoubleClick Inc.'s proposed $135 million convertible subordinated notes due 2023and raised the outlook to stable from negative.

S&P said the outlook revision reflects DoubleClick's improvement in profitability and discretionary cash flow.

DoubleClick's ratings weigh the effects of online ad demand, the weak economic environment and slow adoption of the internet as an advertising medium, S&P said. These factors are only partially mitigated by the company leading market share in its various niche markets and its good cash balances, which provide some cushion amid a challenging revenue environment.

The company's revenue over last few years has declined with the burst of the dot-com bubble and DoubleClick's subsequent internal reorganization, in which it refocused on its core assets and sold off several non-strategic business units, S&P said. While fiscal 2003 revenue is still expected to be down or flat compared to fiscal 2002, margins are likely to improve with ongoing cost reduction efforts.

For the 12 months ended March 31, 2003, the EBITDA margin improved to 16.6% from 14.8% a year ago. The gross margins for the technology and data business were in the low-60% and high-60% areas, respectively. The company generated positive discretionary cash flow for the first time in 2002. Gross debt to EBITDA, pro forma for the transaction, was about 2.9x at March 31, 2003.

Moody's upgrades KPN

Moody's Investors Service upgraded Koninklijke KPN NV including raising its €1.5 billion 3.5% subordinated convertible notes due 2005 to Baa2 from Baa3 and eurobonds and global bonds to Baa1 from Baa2. The outlook is stable.

Moody's said the upgrade factors KPN's managements continuing efforts to reduce financial risk, as well as the assumption that KPN will, for the foreseeable future, operate with a relatively conservative balance sheet and continue to generate improved levels of free cash flow.

Moody's has assessed KPN's continuing operations in the light of the significant reduction in debt during 2002, as well as a significant improvement in operational cash flow through 2003 into 2004 and beyond.

While €1.1 billion of €3.9 billion of operating cash flow in 2002 came from working capital initiatives, the impact of which is not expected to be repeated, Moody's believes that KPN will continue to benefit from having created an operationally more efficient structure than was previously the case.

Furthermore, Moody's expects that KPN will continue to reduce headcount via the "Social Plan" as well as from natural attrition.

Moody's considers KPN's management will continue to focus on KPN's core businesses, and cost initiatives within them, allowing for sustainable free cash flow generation which Moody's expects to be between €1.5 billion to €1.6 billion per annum. In the immediate term, Moody's expects that this free cash flow will be mostly used to continue to reduce debt below the company's €10 billion net debt target, although it does expect that modest dividend payments are likely to recommence from mid 2004.

S&P lowers outlook on Omnicom senior unsecured debt

Standard & Poor's lowered its outlook on Omnicom Group Inc.'s senior unsecured debt to negative including its $550 million zero-coupon notes due 2033, $750 million zero-coupon senior unsecured notes due 2032, $750 million zero-coupon LYONs due 2031 and €152.45 million 5.2% senior notes due 2005 at A-.

S&P said the outlook revision on the holding company senior debt recognizes that these creditors are in a potentially disadvantaged position relative to the creditors of the subsidiaries, whose claims rank before the parent's creditors. Structural subordination becomes an issue when parent debt is fully or partially serviced by cash flow from subsidiaries, and when subsidiaries' obligations are sufficiently large that they may reduce cash or asset value available to the parent.

Omnicom had previously indicated to S&P that it would provide a mechanism sufficient to mitigate structural subordination concerns prompted primarily by operating liabilities at its operating subsidiaries.

Recently, however, Omnicom indicated to S&P that implementation of the mechanism may not be possible until the 2003 10-K filing date. If Omnicom is unable to execute this plan for the 2003 10-K, the holding company senior unsecured debt likely will be lowered one notch to BBB+.

S&P cuts EDS

Standard & Poor's downgraded Electronic Data Systems Corp. including cutting its $1.4 billion Feline Prides, $962.3 million zero-coupon convertible senior notes due 2021 and other bonds to BBB from A-. The outlook is negative.

S&P said the downgrade reflects weak operational performance in each of EDS' major lines of business because of cost disadvantages, several significant contractual problems and industry pressures that makes a significant improvement in profit levels over the mid-term challenging, despite announced restructuring efforts.

The investment-grade ratings for EDS, however, reflect a globally diverse portfolio with deep vertical expertise, a substantial backlog of business, and an improving cash flow outlook over the longer term as $1.7 billion of the unbilled receivables balance (as of March 31, 2003) reverse by 2006, S&P said.

EDS' first-quarter operating margins were 5%, down sharply from 11% a year earlier, reflecting delivery issues in outsourcing, market pressures in the consulting sector, declines in higher margin discretionary IT services spending, and the renegotiated General Motors Corp. sector agreements.

EDS experienced further slippage in the seat-deployment schedule for the NMCI contract, which also included a decline in the average seat price and a delay in the crossover point to becoming cash-flow positive. In addition, EDS remains exposed to several other problematic contracts, and will continue to be challenged by large telecom and airline customers with weak credit profiles.

To address these issues, EDS management is refocusing on its core business and on execution, which includes improving cost structure and efforts to renew growth and to strengthen the balance sheet, S&P said. The plan includes cost-reduction actions resulting in a pretax restructuring charge in the $475 million range, organizational realignments, asset sales, and improved risk management procedures.

While S&P views these actions positively, the associated implementation risks, longer-term investment requirements needed to bolster the business process outsourcing business and other initiatives, and the time frame required to evolve the business profile are unclear, since this occurs against the backdrop of an increasingly competitive environment.

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