Moody's cuts D.R. Horton outlook to negative

Moody's confirmed the ratings of D.R. Horton Inc., including the $381.1 million convertible zero coupon senior notes due 2021 at Ba1, and raised the ratings of Schuler Homes Inc. to conform to those of D.R. Horton following completion of Horton's $1.6 billion acquisition of Schuler, which consisted of $731 million in assumed debt, $169 million of cash and $743 million in Horton common stock. At the same time, Moody's changed the ratings outlook from stable to negative, reflecting the company's aggressive use of debt leverage despite previous indications that capital structure discipline would be maintained.

Moody's assessed Horton's commitment to debt reduction in light of management's prior indications that debt leverage would be reduced. Further, Moody's review considered the scope and scale of the combined entities and the likelihood that management would be able to realize cost savings from operating efficiencies amounting to around $30 million to $40 million per year. While Moody's said it believes that the integration of Schuler Homes should be manageable, any management misstep here could lead to a downgrade.

It is Horton's aggressive use of debt leverage that has given Moody's the most concern to date. While the company's operating performance is enviable, with 97 consecutive quarters of year-over-year earnings growth, this record has been accompanied by one of the homebuilding industry's more aggressively leveraged balance sheets. Among its peer group, Ba2 to Baa2-rated homebuilding companies, Horton consistently stands out as the most heavily leveraged yet does not stand out as the most profitable as measured by return on assets and return on equity.

For the negative outlook to be lifted, the company would have to integrate Schuler seamlessly and make substantial progress in meeting its capital structure projections. The ratings may be lowered, Moody's said, if Horton has difficulties integrating Schuler and further stresses its balance sheet, such as conducting a significant share repurchase program, making another acquisition involving a large amount of issued or assumed debt or taking a large impairment charge.

Fitch rates new Omnicom convertible at A

Fitch Ratings assigned an A rating to Omnicom Group Inc.'s new $750 million 0% convertible notes due 2032. The Rating Outlook is Stable. The ratings balance the strength of the company's business position, superior operating performance and financial flexibility against a moderate degree of financial leverage and the lack of tangible asset protection associated with a service business, Fitch said.

Significant excess free cash flow after capital expenditures and dividends provide substantial flexibility to the company. In addition to extending the maturity of Omnicom's existing debt obligations, the convertible notes provide other enhancements to liquidity. The notes do not pay cash interest and will only pay interest on a contingent basis beginning in August 2007. The holders may require Omnicom to purchase the notes beginning in August 2003, but Omnicom has the option to purchase the notes with cash or with shares of stock or a combination of the two, Fitch noted.

Despite the generally weaker operating environment for advertising agencies, Omnicom continued to show solid organic growth in 2001 and strong net new business, which offset the effects of the slower economy and the decline in advertising through traditional media, Fitch said. While year-end credit protection measures are within the range for the current rating level, Ftich said there are concerns in the rating focus on the potential for increases in leverage following share repurchases of about $280 million made in conjunction with the new debt issue. A high rate of acquisition flow in 2002 could have negative rating implications if full year measures of cash flow leverage increase above recent year levels, Fitch added.

Moody's puts Telewest on review for downgrade

Moody's on Monday put the ratings of Telewest plc under review for possible downgrade, including B2 senior unsecured bonds such as the 6% convertibles due 2005, on heightened concerns regarding Telewest's ability to grow cash flow to a level sufficient to service its growing debt burden.

While Moody's recognised Telewest's solid growth prospects, particularly for broadband Internet services, and demonstrated operating and deleveraging progress on a debt/EBITDA basis over the past year, the company's ability to grow into its capital structure appears highly uncertain. The review reflects Telewest's overall declining revenue growth trends, continued high levels of cash burn, substantially weakened access to the public capital markets and a challenging operating environment.

Of particular concern is the absolute magnitude of Telewest's growth requirements in the context of continued slow penetration and growth in its core telephony and cable TV services. Moody's notes that Telewest's significantly weakened access to the public capital markets over the past year has diminished the company's financial flexibility, although the company's current liquidity position appears strong, and likely reduced the company's ability to strengthen its balance sheet through the issuance of subordinated capital. Furthermore, the considerable decline in European cable asset valuations over the past year has likely reduced the asset protection that would be afforded to bondholders in a downside scenario.

Moody's revises Sierra Pacific outlook to negative

Moody's changed the outlook for the Baa3 senior unsecured rating of Sierra Pacific Resources and the A3 senior secured rating of its subsidiary, Sierra Pacific Power Co., to negative from stable, to reflect the outlook for the Baa1 senior secured rating of Sierra Pacific's other utility subsidiary, Nevada Power Co. The change in is intended to better reflect the potential for negative financial consequences throughout the entire Sierra Pacific family in the event that adequate regulatory support is not provided in pending regulatory proceedings for both of its utility subsidiaries, Moody's said. This holds especially true as relates to Nevada Power, Moody's said.

Moody's noted that is has cautioned fixed income investors all along that Nevada Power would face stiffer challenges in dealing with volatile energy markets. Moody's continues to caution investors about the increased public and political scrutiny being devoted to NPC's deferred energy rate filing. A harsh outcome in NPC's deferred energy case would lead to a review for downgrade of the ratings of Sierra Pacific and its utility subsidiaries, as we would expect significant negative financial consequences as a result of such action.

Fitch gives AT&T Comcast indicative BBB rating

Fitch Ratings assigned an indicative BBB rating to the senior unsecured debt obligations of AT&T Comcast, the holding company for the newly merged entity. Likewise, an indicative BBB senior unsecured rating has been assigned to the proposed restricted group, which represents Comcast Cable Communications, AT&T Broadband LLC (formerly known as. TCI Communications) and MediaOne Group. The subordinated debt and preferred securities are expected to be rated BBB- and BB+ respectively. The rating outlook is also expected to be stable.

The anticipated ratings incorporate Comcast's proposed organizational and guarantee structure and its receipt of initial commitments from five major financial institutions for $10 billion (a new $12.5 billion facility is expected in total upon closing of a syndicated loan arrangement later this spring), which will be used to fund $10 billion to $13 billion of AT&T intercompany debt, near-term debt maturities and other liabilities. In addition, Comcast Cable's current $4.5 billion credit facility will remain outstanding, providing an additional source of future liquidity.

S&P rates Merrill's Applied Materials STRIDES AA-

Standard & Poor's assigned an AA- rating to Merrill Lynch & Co. Inc.'s issue of $70.98 million 8% Callable STRIDES due 2004 linked to Applied Material Inc.

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