S&P cuts Amdocs outlook to negative

Standard & Poor's revised the outlook on Amdocs Ltd. to negative and affirmed the BBB- corporate credit and BB+ subordinated ratings.

S&P said the outlook status reflects challenging market conditions in the telecom industry and weaker profitability expectations.

Amdocs, a leading provider of software products and services designed to support the business operations of communications companies, has $500 million of debt outstanding.

With revenues for fiscal 2001 of $1.5 billion, Amdocs has a top-tier customer base and significant recurring revenues. Its market positions are defensible because of investments in complex and scalable computer solutions, long-term customer relationships with high switching costs and expertise in the telecom industry.

Sales growth in its existing customer base is likely longer term, while key strategic alliances, such as with Accenture Ltd. and the Certen venture, should enhance growth prospects.

Because of current slowdowns in customer buying decisions, Amdocs expects that market conditions in the third and fourth quarters will continue to be weak.

It expects to report revenue for the June quarter of about $380 million, below previous expectations of $420 million. The company expects fourth quarter revenues to be weak also, in the $350 million area.

To offset this weakness, the company plans to reduce costs about 10% over the next two quarters and take a restructuring charge.

Financial flexibility is provided by good free operating cash flow and cash balances exceeding $1 billion as of March 31, which will fund restructuring actions and growing outsourcing business and support its acquisition and moderate share-repurchase strategy.

The rating anticipates that Amdocs will maintain its market position and a financial profile with a significant cash position.

Profitability measures are expected to remain weak over the near term, but S&P expects improvement over the intermediate term as restructuring actions take hold and as the telecom industry stabilizes somewhat.

Ratings will be lowered if profitability and liquidity diminish from expected levels.

S&P rates GenCorp shelf

Standard & Poor's assigned BB senior unsecured and B+ subordinated debt preliminary ratings to GenCorp Inc.'s $300 million SEC Rule 415 shelf registration.

Also, S&P affirmed the existing ratings of GenCorp., including the 5.75% convertible due 2007 at B+.

The outlook is stable.

The ratings reflect a below average business profile, offset by manageable debt levels. The firm has moderate internal cash-generating ability and there is potential for debt-financed acquisitions.

GenCorp sold its electronics and information systems business for $315 million in October with the proceeds used to repay debt. However, acquisitions are an important part of its growth strategy and borrowings are likely to rise again.

Debt to total capital was satisfactory, in the high-40% area at May 31. Environmental issues, although significant, are expected to be manageable financially due to agreements with government agencies and potential reimbursement from insurers.

Management, although acquisitive, is expected to preserve GenCorp's financial risk profile consistent with current ratings.

S&P cuts Mail-Well to BB-

Standard & Poor's lowered the corporate credit rating on Mail-Well Inc. to BB- from BB, subordinated debt to B from B+ and senior secured and senior unsecured debt to BB- from BB.

Also, S&P assigned a BB- rating to Mail-Well I Corp.'s $300 million senior secured revolving bank facility due 2005.

The downgrade follows Mail-Well's announcement that due to continuing difficult business conditions, second quarter and full year EBITDA would be well below management's previous guidance and S&P expectations.

As a result, credit measures will not improve to previously expected levels for 2002.

Total debt outstanding is more than $800 million. The company has set aside $139 million in cash to fund the convertible note issue maturing in November 2002.

Ratings reflect a narrow business focus, competitive business conditions and weak credit measures.

Those factors are tempered by leading market positions in the Envelope and Commercial Print segments. The company is the world's largest manufacturer of envelopes and one of the largest regional commercial printers in the U.S.

EBITDA for 2002 is expected to be in the $125 million to $140 million range, a decrease from the $145 million that was previously expected. The decrease assumes no improvement in sales levels as the year progresses.

Based on this revised guidance and the new bank facility, EBITDA coverage of interest expense is expected to be around 2 times and total debt to EBITDA more than 5 times.

Liquidity is currently adequate, with approximately $150 million available under the new revolving credit facility and moderate maintenance capital expenditures.

S&P's assessment of the value of the company's discrete assets considered the market values using outside appraisals, the assets' potential to retain value over time and an orderly liquidation scenario.

Although the bank facility derives strength from its secured position, especially for the working capital, under a simulated default scenario it is uncertain that the collateral value, especially of the fixed assets, would be sufficient to cover the entire loan.

However, S&P believes there is a strong possibility of substantial recovery of principal in the event of default or bankruptcy.

Ratings could be lowered if the overall financial profile weakens from expected levels.

Fitch revises Omnicom outlook to negative

Fitch Ratings revised the outlook for Omnicom Group to negative from stable.

The senior unsecured debt, including both 0% convertibles due 2031 and 2032, were affirmed at A, and the bank credit facilities were also affirmed.

The ratings continue to balance the strength of the company's business position and solid operating performance against elevated levels of financial leverage and the lack of tangible asset protection associated with a service business.

Operating performance reflects the ability to achieve organic growth through new clients, advantageous exposure to marketing services and successful integration of acquisitions.

Omnicom achieved $1 billion of net new business in the first quarter of 2002, following $4 billion in net new business in 2001. The favorable trends in organic growth, which have been measured consistently, have been achieved amid a generally weak advertising environment.

The negative outlook reflects current leverage trends for Omnicom as key measures of cash-flow leverage have weakened recently, as the combination of acquisitions and stock repurchases has required additional debt funding.

While EBITDA has continued to grow, the ratios of funded debt/EBITDA and adjusted debt/EBITDAR have also continued to increase.

For 2002 Omnicom's yearend leverage is expected to operate in the 1.4 times debt/EBITDA range, compared to about 1 times previously and adjusted debt/EBITDAR is expected to be about 3.2 times compared with about 3 times previously.

Interest coverage will remain strong in the near term at around 20 times, attributable in part to $1,750 million of long-term debt that does not pay cash interest. However, depending on possible refinancing in 2003, interest coverage could decline.

The negative outlook also reflects concerns about the ability of the company to manage its liquidity in 2003.

A sharp fall-off in its stock price has increased the likelihood that the two large convertibles, totaling $1.75 billion, will be put on their respective put dates in February and July 2003.

The company has $2.1 billion in committed bank facilities.

After the seasonal working capital demands of the business, these facilities only appear to be sufficient to fund $1 billion of the existing convertible bonds in the event they are put back to the company.

The company is presently evaluating several options to manage its liquidity over this period.

The bond indentures also provide the option to settle the puts with stock as well as with cash. Various refinancing options would likely have a modest effect on credit metrics.

Failure by the company to meet its communicated operating and financial target will likely precipitate a rating change.

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