Moody's puts Avaya on review

Moody's put the long-term debt ratings of Avaya Inc. on review for possible downgrade, including its 0% convertible senior unsecured notes due 2021 at Ba3.

The review reflects concerns that weakness in end markets will be deeper and more protracted than previously anticipated, Moody's said. The uncertain economic outlook is likely to result in further deferral of enterprise telecom spending, which will directly affect Avaya's revenues.

In addition, Moody's noted that although the recently concluded bank negotiations have resulted in a significant easing of financial covenants, Avaya elected to allow the $264 million 364-day facility to lapse at the end of this month.

The company's $561 million secured credit facility matures in September 2005, but was amended to provide for mandatory reductions in the commitment beginning in December 2003. Both credit facilities are currently undrawn.

The review will focus on the ability of the company to reset its cost base to allow for profitable operating results at an achievable revenue level, continue cash conservation efforts, which have minimized the impact of declining revenues, and maintain adequate liquidity.

In particular, Moody's will assess the impact of the latest restructuring charge of $150 million and resulting cost savings, which are expected to be $300 million on an annual basis.

The review will also consider financial flexibility provided earlier this year from the sale of $212 million in new equity, the conversion of a $400 million convertible preferred held by Warburg Pincus and the cash position in excess of $400 million at the end of June.

Avaya faces a possible put of $512 million on the convertible in October 2004, although it has the option to settle in cash, common stock or a combination.

S&P keeps Omnicom on watch

Standard & Poor's is keeping Omnicom Group Inc.'s ratings on negative watch based on concerns relating to its Seneca partnership, the transition to a new auditing firm and adequacy of financial resources needed to absorb the potential put on its two convertible notes.

Omnicom reported 2002 second-quarter earnings and related SEC filings eliminate uncertainty surrounding the Seneca transaction and accounting review by KPMG. Other watch considerations include achieving operating performance in-line with expectations and debt reduction, as leverage ratios are somewhat stretched for the current rating level.

At year-end, total debt to EBITDA is expected to be about 1.4 times, compared with the low 1 times range in previous years, S&P said. Total debt including acquisition-related earn-out payments to EBITDA is expected to be about 1.5 times.

S&P will monitor the financial strategies Omnicom applies to mitigate the risk of the $850 million and $900 million convertible notes putable in February and July 2003, respectively.

At June 30, liquidity is derived from borrowing availability of about $979 million under a 364-day revolving credit facility, an undrawn $500 million revolving credit facility due in 2003 and cash and short-term investments of about $454 million, which can be used to address these potential needs and working capital requirements.

The company has been a discretionary cash flow generator, subject to the extent of working capital needs, acquisitions, and share repurchases.

Indications of meaningful progress toward broadening the company's backstop liquidity is likely to lead to an affirmation of the ratings, barring any unexpected developments.

Moody's revises El Paso outlook to negative

Moody's changed the outlook to negative for El Paso Electric Co. (Baa3 senior secured), reflecting recent announcement by the Federal Energy Regulatory Commission that it has launched a formal investigation into possible violations of FERC regulations.

Among other things, the commission is investigating whether El Paso adversely affected prices and failed to file rates. The likely outcome of the FERC investigation is unknown at this time, but could potentially be severe for the company, Moody's said.

In any case, the company's access to capital is likely to become more difficult while the formal investigation is in progress.

If violations of federal law are found to have occurred, penalties could include revocation by FERC of EPE's market-based rate authority.

In the event that FERC rules, regulations, tariffs or orders are found to have been violated, the company could be ordered to disgorge any profits made while performing these activities.

If the company is found to have acted in an inappropriate manner, this also would increase the prospects for litigation by parties that claim to have been adversely affected by conditions in the wholesale power markets. The time period related to the possible conclusion of this FERC action is unknown.

S&P cuts Sirius Satellite ratings

Standard & Poor's lowered the ratings of Sirius Satellite Radio Inc., including the 8.75% convertible subordinated notes due 2009 to CC from CCC-, and placed them on negative watch.

The actions were based on the company's announcement that it is in discussions with key debtholders regarding exchanging a significant portion of debt for equity, S&P said. No agreement has yet been reached with debtholders regarding the terms of the exchange.

S&P added that it is concerned that a debt restructuring could be significantly detrimental to bondholders and would consider the completion of an exchange offer at less than the par value as tantamount to a default.

Cash and marketable securities balances as of June 30 were $320 million, which the company estimates will be sufficient to fund operations into the second quarter of 2003.

Sirius Satellite Radio anticipates that additional funding needs through the end of 2003 will be about $300 million. The company is also discussions with affiliates of Apollo Management and the Blackstone Group regarding a further equity investment.

Moody's cuts Pegasus ratings

Moody's lowered the ratings of Pegasus Communications Corp., including the $104 million of 12.75% (14.75%) cumulative exchangeable preferreds due 2007 to C from Caa3. The outlook continues to be negative.

The downgrade reflects concerns about the company's ability to continue operating under its current capital structure and Moody's belief that a restructuring will most likely be needed, and that loss severity will be greater than originally anticipated under its revised expectations, the rating agency said.

Moody's noted that Pegasus has underperformed relative to both original and revised management projections over the last two quarters.

Moreover, when the outlook was revised to negative in December, Moody's said it specifically cited the risks posed by the proposed EchoStar-Hughes merger as potentially disrupting if not jeopardizing the future business prospects and/or viability of Pegasus.

Moody's said those risks and uncertainties remain subject to regulatory and judicial review and are still very evident.

Additionally, the proposed refinancing transaction failed to get completed as anticipated, leaving the stub Pegasus Media & Communications Inc. subsidiary notes outstanding and resulting in a reduced boost to liquidity.

Although these were not deemed to be that significant at the time, the company's recent term loan placement and security repurchases, specifically that for the preferred and common stock, in conjunction with the perceived plateauing of its business growth prospects, have caused Moody's to significantly alter its view of the underlying credit profile.

Moody's said recent actions taken by management serve to suggest their own recognition, as well, that the company will be unable to grow into its balance sheet and ultimately service its substantial debt burden.

At the same time, however, Moody's questions the appropriateness of redeeming junior (some very junior) instruments with senior debt, particularly at a time when capital preservation is so important to the company.

Additionally, Moody's is somewhat troubled by the partial Pegasus Media & Communications notes redemption from an "unaffiliated holder" at par value when the company's securities are broadly trading at very distressed values.

Moody's also noted the unusual money flow of late between Pegasus and the Pegasus Satellite Communications Inc. subsidiary, and are concerned that the unit's balance sheet now reflects a large note payable and premium interest payments to Pegasus, even though substantial monies in excess of the payable amount even were recently reverted from the former to the latter.

While recent attempts to grow cash flow by curtailing marketing expenditures and improving credit screening measures have been admirable, Moody's believes that the competitive environment will continue to dictate the requisite spending levels and that all-in subscriber acquisition costs have grown and remain too high for the company to support over an extended time period.

Further, the cost to merely replace subscriber churn and/or to retain subscribers is significant enough by itself to consume a meaningful amount of EBITDA such that very little remains for debt service requirements, particularly after interest expenses are paid and even under the reduced interest burden on a pro forma basis for the recent debt repurchases.

S&P says Nextel unchanged

Standard & Poor's said Nextel Communications Inc.'s ratings and outlook are unchanged on the announcement that it has retired $733 million in debt and preferred securities since June 30 in exchange for 33 million common shares and $205 million in cash. S&P assigns a B+ corporate credit rating to Nextel with a negative outlook.

S&P said it views the repurchase favorably because the company did not use a material amount of liquidity to accomplish this moderate reduction in total debt.

But the rating agency added that intense competition in the wireless industry and the fact that Nextel remains highly leveraged somewhat offset the impact of this move.

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