S&P puts Omnicom on negative watch

Standard & Poor's placed the ratings of Omnicom Group Inc., including the single-A long-term rating, on negative watch due to concerns about shareholder lawsuits and the SEC's request for information about two independent board members' departures and the severing of its audit firm, Arthur Andersen.

The company has engaged a new audit firm and is taking other steps to help ameliorate concerns.

Even so, these developments raise concerns that two convertible debt issues of $850 million and $900 million will be put to the company in February and July 2003, respectively.

S&P cannot predict the likelihood or timeframe in which the company's stock price could recover and relieve the risk of the put on the convertibles.

Current resources to address these potential needs, plus outstanding commercial paper, include cash balances of roughly $500 million as of March 31 plus some $900 million of availability under a 364-day facility, last renewed in April 2002, that has a one-year term-out feature at the company's option. In addition, an unused $500 million revolving credit facility is available until its June 2003 maturity.

S&P will monitor developments with regard to the shareholder suits, SEC requests, and the likely adequacy of financial resources as well as Omnicom's underlying business health, in evaluating the effect, if any, on credit quality.

The watch listing could be resolved in one to four weeks, depending on these issues.

S&P rates Symantec convertible at B

Standard & Poor's assigned a BB- corporate credit rating to Symantec Corp. and a B rating to its $600 million of convertible subordinated notes due 2006. The outlook is stable.

The ratings reflect Symantec's niche position in the fragmented and competitive security software market, offset by good levels of cash flow and liquidity.

Symantec's main business, security software, operates at various network entry points and is sold to both consumers and businesses, S&P said. It is a highly fragmented industry, with the top five competitors sharing about 45% of the market.

Symantec's installed customer base is somewhat defended by its ability to provide software updates to protect against emerging security threats.

Symantec's position in the consumer security software market is solid.

However, its growth strategy centers on its installed enterprise customer base, S&P continued.

In 2000, the company acquired intruder detection and firewall software, adding to its well-known Norton Antivirus and pcAnywhere software, supporting its move to provide an integrated set of enterprise security products.

Still, Symantec faces strong competitors that also offer complete security solutions or are able to partner with other vendors to complete their offerings.

While cash in excess of debt is currently greater than $700 million, Symantec may continue to use acquisitions to position its product base for growth.

Debt-to-EBITDA was 2.4 times for the fiscal year ended March 2002.

Gross margins consistently exceed 85%, and operating profitability is near 30%.

Cash flow is good, with EBITDA interest coverage exceeding 15 times and free cash flow greater than $350 million in fiscal 2002.

Cash balances of $1.4 billion at March provide adequate liquidity for its growth strategy.

While Symantec's good financial profile lends support to the ratings, the evolving and competitive market in which it operates limits potential upside for now.

Fitch cuts Mirant to BBB-

Fitch Ratings lowered the ratings of Mirant Corp., including the 2.5% convertible senior notes due 2021 to BBB- from BBB and convertible trust preferred securities to BB from BBB-. The outlook is negative.

Since late 2001, Mirant has strengthened its balance sheet by issuing $759 million of equity, reducing capital expenditures and operating expenses and completing the sale of abut $2 billion of assets, realizing $1.4 billion of net proceeds.

The downgrade reflects that despite these favorable developments, consolidated debt leverage ratios remain high, Fitch said. Also, higher costs of posting margin on bilateral contracts and the continued unsettled market conditions affecting all participants in merchant generation and wholesale energy trading business.

The ratings also incorporate concern about high percentage of consolidated cash flows coming from two large power projects in the Philippines and the company's inability to maintain insurance cover on these two projects at the level required by its project finance debt providers.

Other concerns are the company's exposures to U.S. and California governmental inquiries into market behavior of generators and outstanding law suits facing Mirant relating to its activities as a generator in the western U.S. power markets in 2000-01, Fitch said.

The senior debt remains investment grade because of the large proportion of cashflows (over 80%) from operations derived from the physical asset portfolio, diversity of cash flow and assets, relatively low level of debt and obligations maturing in 2002-2003, and the viability of its plan to reduce debt and improve capitalization over the period 2003-2006.

Other factors from which Fitch said it draws comfort are Mirant's marketing and trading skills, risk management policies and practices, good operations and development capabilities, positive operating cash flow coming from North American power and gas integrated energy businesses and the recent reduction in committed capital expenditures and investments after 2003.

The ratings are predicated upon Mirant managing its liquidity requirements successfully such as a maturing bank facility described below, as well as the liquidity needs of its wholesale energy marketing and trading business.

As Mirant is a parent holding company, parent level debt is effectively subordinated to the individual debt and obligations of operating subsidiaries.

Roughly one third of the over $9 billion total debt and fixed obligations, including off balance sheet items, is comprised of parent level debt or debt guaranteed by Mirant.

The remaining two-thirds includes obligations of core and non-core businesses. Non-core businesses are predominantly financed without any recourse to the parent, providing Mirant some optional flexibility.

Mirant has three outstanding revolving credit facilities totaling $2.7 billion, of which roughly $900 million is estimated to remain undrawn. One of these facilities, totaling $1.125 billion, expires on July 17, 2002 but is eligible for a one-year term-out. The others expire in 2004 and 2005.

Management may renegotiate the maturing revolving credits, replace them in part with term debt, or avail itself of the term-out provision. Other refinancing needs for the balance of 2002-2003 are primarily at subsidiaries and are manageable.

S&P confirms NRG senior at BBB-

Standard & Poor's confirmed the BBB- senior unsecured debt rating for NRG Energy Inc. and raised its corporate credit rating to BBB from BBB-. The outlook is negative.

NRG has about $9 billion in outstanding consolidated debt.

Now that NRG is a 100%-owned subsidiary of Xcel Energy Inc., it is rated based on the consolidated credit rating of Xcel and all of Xcel's other subsidiaries. Xcel' s tender offer was completed in June 2002.

On a stand-alone basis, NRG's credit metrics are weak, with highly speculative grade characteristics.

The current rating is contingent on execution of deleveraging of the NRG balance sheet.

If execution of the previously announced asset sales plan is not completed as set forth by management on a timely basis, or if Xcel does not employ alternate measures of delevering or credit strengthening, a downgrade could occur.

The rating reflects structurally subordinated debt and high parent company leverage.

Recourse debt to recourse capitalization is high at 61% as of March 31. Consolidated debt leverage was at 79% as of March 31.

Debt maturing in 2005 ($1.2 billion) and 2006 ($2.8 billion) could prove difficult to refinance if power market conditions do not improve from where they are now.

For 2001, consolidated FFO/I was low at 1.9 times and FFO/consolidated principal and interest was only 1.37 times. Cash available to service corporate debt was also low and covered corporate recourse interest expense by only 1.47 times.

Projected coverages should improve, but much of the improvement will come from the asset sales, with proceeds used to repay corporate NRG debt, and/or the advanced construction projects that may suffer from start-up problems or may not contribute cash flow as projected.

NRG's liquidity position could be strained should a trigger even occur. NRG may need to collateralize up to $1.4 billion by year end if a downgrade event occurs.

However, a diverse portfolio mitigates risks.

Also, NRG has exhibited a stable and strong operating record with plant availability at over 90% for the past three years, S&P said.

NRG should be able to fund all collateral calls if a trigger event occurs.

Even if NRG needs to issue long-term debt to cash collateralize short-term obligations under the construction revolver, the long-term debt is not new debt, but rather an exchange of long-term financing for short-term financing resulting in slightly lower coverages.

In the shorter term, the negative outlook reflects significant execution risk on the part of the Xcel management to successfully integrate a nonutility subsidiary and complete an aggressive asset sales plan that will pay down project and corporate level NRG debt and bring the capital structure more in line with the rating.

Over the longer term, a demonstrated and successful ability to operate in a volatile merchant power market will be needed for any ratings upgrades.

Moody's confirms FPL ratings

Moody's confirmed the credit ratings of Florida Power and Light Co., including the convertible preferreds at A3, and FPL Group Capital Inc.

The outlook for the ratings of FPL is stable and negative for FPL Group Capital following a review of debt at FPL Group Capital to finance its unregulated generation portfolio, in particular FPL Group's purchase of 88.2% of the 1,161 MW Seabrook nuclear generation station for $836.6 million.

The ratings of FP&L reflect strong coverage ratios, among the best in the industry, good cost controls, favorable demographics, a highly residential service territory and constructive regulatory relations, Moody' said.

Debt levels at FP&L have remained relatively stable in recent years with low total debt to capitalization of 33.7% at Dec. 31. The stable outlook reflects Moody's expectation that leverage at FP&L will remain moderate and that this strong financial performance will continue.

The negative outlook on FPL Group Capital reflects exposure to the increasingly uncertain merchant generation market.

Over the past several years, FPL Group has executed a fundamental shift in strategy from being predominantly a Florida utility with limited unregulated operations to a national player engaged in independent power, wind energy, merchant energy and unregulated nuclear generation through its FPL Energy subsidiary.

Most recently, Seabrook will increase the company's unregulated generation capacity by over 20% and was acquired on a fully merchant basis, with no new power purchase agreements between FPL Energy and any of the former owners of Seabrook included as part of the transaction.

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