Moody's cuts El Paso to junk

Moody's Investors Service downgraded El Paso Corp., including cutting its convertible notes to Ba2 from Baa3 and convertible preferreds to Ba3 from Ba1, and subsidiaries. The outlook is negative.

The downgrade reflects weak cash flows, high debt levels, the likelihood that debt will be cut through asset sales and execution risks related to efforts to scale back and refocus merchant energy activities, Moody's said.

The outlook reflects uncertainties related to the Federal Energy Regulatory Commission ruling regarding alleged exercise of market power and violations of marketing affiliate rules, and other government investigations.

Ratings consider potential calls on cash as a result of the effects of collateral calls, ratings triggers and other demands on liquidity that may result from the downgrade, Moody's added.

Access to capital markets at favorable terms is uncertain given current volatility and may continue to be difficult. El Paso has paid off all its commercial paper and has about $1 billion of cash available.

The company has a $3 billion 364-day bank facility expiring in May 2003 and a $1 billion term loan expiring in August 2003. The 364-day facility has a one-year term-out option, which could provide liquidity through May 2004.

El Paso has about $2 billion of maturing debt in 2003. The company is concentrating its asset sales efforts this quarter and next to prefund the retirement of debt.

The company expects to have sold almost $4 billion of asset sales by yearend and plans to sell $2 billion more in 2003.

Fitch rates Chubb A+

Fitch Ratings assigned The Chubb Corp.'s $525 million new mandatory convertible an A+ rating. The outlook is stable.

Chubb's ratings continue to reflect a history of favorable underwriting performance, adequate capital position and a conservative investment portfolio.

For the nine months ending Sept. 30, Chubb reported a 30% increase in net written premiums attributable in large part to a considerably improved insurance pricing environment across all lines.

There was a third quarter loss due in large part to a $625 million reserve increase related to asbestos exposures. For the nine months ending Sept. 30, Chubb reported consolidated GAAP net income of $166.3 million, Fitch noted.

The new debt increases reported financial leverage as measured by the debt to total capital ratio to about 21% proforma at Sept. 30. However, given the mandatory conversion provision, this new capital receives considerable equity credit in the rating methodology, Fitch said.

Moody's rates Chubb A1

Moody's Investors Service assigned an A1 rating to up to The Chubb Corp.'s new convertible.

The rating reflects commitment to underwriting discipline, favorable outlook for internal capital generation and a solid financial profile, among other factors, Moody's said.

Strengths are tempered somewhat by incremental concerns in a number of areas including the volatility of recent operating performance, exposure to catastrophe-related claim losses and asbestos liabilities.

The outlook is stable, as Moody's believes near-term potential for top-line growth should not be a strain on capitalization.

S&P cuts EDS

Standard & Poor's lowered Electronic Data Systems Corp.'s senior rating, including the convertible to A- from A, reflecting uncertainties about its ability to improve profitability and cash flows near term in light of challenging market conditions.

The outlook is negative, reflecting other concerns such as the informal SEC inquiry.

S&P cut the ratings in September after EDS reduced its third and fourth quarter guidelines, and because of continued weakness into 2003, writedowns for customer bankruptcies and the adverse performance of some European contracts.

Despite these uncertainties, EDS ratings are supported by a large, well-positioned services business and a significant base of recurring revenues from a broad product and diverse customer base, S&P said.

EDS had about $250 million of nonrestricted cash and securities as of Sept. 30, $320 million proceeds from a recent asset sale and $1.25 billion of unutilized credit facilities that could expire in September 2004.

There is adequate liquidity to fund the October 2003 put option on the $780 million 0% convertibles from cash and available credit lines.

Debt maturities are manageable, with about $500 million of notes due in 2004 and $550 million in 2005, S&P said.

Fitch rates PacifiCare B+

Fitch Ratings assigned a B+ rating to PacifiCare Health Systems Inc.'s new $125 million convertible subordinated debentures due 2032. The outlook is stable.

PacifiCare's debt leverage of about 37% remains firmly within the range appropriate for the rating. Fitch views the financing as positive, and that it will provide the company with a more permanent and favorable capital structure.

The ratings and outlook reflect positive steps over the past two years to improve profitability and capitalization, and the elimination of short-term refinance risk by extending the maturity of bank debt.

Ratings also consider the company's large exposure to the troubled Medicare+Choice market.

Short-term strategy has focused on corrective actions designed to stop the financial losses that resulted from the platform transition and return PacifiCare to past levels of profitability, Fitch said.

PacifiCare has stabilized its medical loss ratio through a combination of pricing actions, benefit design and tightened provider contracting language.

Operating performance has been improving over the last two years after facing challenges starting in third quarter of 2000 related to capitation versus shared-risk reimbursement. PacifiCare earned pre-tax income of $162.9 million through third quarter 2002, compared with $56.5 million for the year ended 2001.

Pretax operating return on revenues has strengthened to 2.1% through Sept. 30, compared to almost break-even at year-end 2001.

Fitch anticipates improved operating performance in 2003 driven by commercial pricing discipline and operational improvements made over the past year. In the Medicare risk market, the exit from high cost markets and providers coupled with enrollment freezes in these areas has reduced membership, but greatly increased profitability.

S&P rates Omnicom bank facilities

Standard & Poor's assigned an A rating to Omnicom Group Inc.'s $1 billion 364-day credit facility and $800 million revolving credit facility maturing in 2005, plus put the ratings on negative watch.

The watch continues to reflect concern about the adequacy of resources to absorb the potential put on Omnicom's two convertibles. The $850 million and $900 million convertibles are putable in February and July 2003.

Borrowing capacity under the new credit facilities should enable Omnicom to finance the first potential put and fund ongoing business operations.

Assuming bondholders elect not to put the $850 million bond issue back to the company in February 2003, Omnicom could satisfy the potential July 2003 put and seasonal working capital. Under that scenario, the ratings are likely to be affirmed, S&P said.

However, if the first note issue is put back to the company, it is highly likely that Omnicom will need to complete additional financing in the next 12 months. In that case, the ratings will depend on Omnicom's financial strategies.

At yearend, EBITDA coverage is expected to be more than 22x. EBITDA plus rent expense coverage of interest plus rent expense is expected to be over 3x. Total debt to EBITDA is expected to be about 1.5x, S&P said.

Issuance of low coupon convertible debt has helped the company to maintain strong interest coverage but that has become stretched for the rating and deleveraging is a key ratings consideration.

S&P cuts Dynegy, still on watch

Standard & Poor's downgraded Dynegy Inc. and kept it on CreditWatch with negative implications. Ratings lowered include Dynegy's corporate credit rating, cut to B from B+, and notes and bank loans, cut to CCC+ from B-.

S&P said the downgrade reflects its analysis of Dynegy's announced restructuring plan, financial condition, and available liquidity to meet near-term obligations.

Dynegy has taken concerted steps to bolster its financial liquidity and reduce the burden of debt leverage by divesting assets throughout 2002, S&P said. Still, expected cash flow from Dynegy's reconstituted business plan is insufficient to fully offset the massive amount of debt leverage retained from the prior failed business strategy.

Also, the new plan does not provide a sizable amount of discretionary funds as net cash flow after maintenance capital expenditures for 2003 is about $100 million.

The sales of Northern Natural Gas Pipeline, U.K. gas storage, and the Illinois Power Co. transmission assets have improved Dynegy's liquidity, S&P noted. However, the firm is still challenged by substantial refinancing risk related to debt obligations coming due in 2003. In addition, the sale of these assets diminishes the firm's ability to generate stable cash flow and increases their business risk.

Dynegy's near-term obligations include about $74 million in debt and bank facilities due to mature or expire by year-end 2002; $1.8 billion coming due through the second quarter of 2003; $300 million due in the third and fourth quarters of 2003; and the $1.5 billion preferred stock held by Dynegy's largest shareholder, ChevronTexaco Corp., which is redeemable in November 2003.

S&P said it estimates Dynegy's current cash and bank-line capacity is about $700 million, mostly stemming from the August 2002 sale of Northern Natural Gas Pipeline. The U.K. gas storage sale provides another $500 million in cash proceeds. Also, Dynegy has announced the sale of Illinois Power's transmission assets for $239 million, which is targeted to repay obligations at Illinois Power.

Moreover, even if Dynegy is able to meet all of its near-term obligations, its remaining liquidity, which is estimated to be threadbare at the end of second quarter 2003, may not be sufficient to support other ongoing operations, S&P said.

S&P cuts CMC Magnetics

Standard & Poor's downgraded CMC Magnetics Corp. including cuttings its $100 million zero-coupon convertible bonds due 2007 to BB- from BB. The outlook is stable.

S&P said the downgrade reflects CMC Magnetics' weakening operating performance over the past three quarters as a result of an industry capacity glut, which has led to continually falling prices for its major product, compact disks-recordable (CD-Rs) since early 2002.

The downgrade also reflects S&P's view that despite recent signs of recovering CD-R prices, CMC's overall profitability, cash-flow generation, and debt protection measures will not return to levels consistent with the previous rating over the medium term.

CMC is one of the world's largest CD-R producers. It also produces floppy disks, compact disks-rewritable (CD-RWs), digital versatile disks-recordable (DVD-Rs), and video compact disks.

In recent years, the use of CD-Rs for data and media storage has grown rapidly; however, the price of CD-Rs has also dropped substantially, particularly over the past three quarters, due to low barriers to entry, strong competition, and oversupply, S&P said. In addition, the cost of raw materials increased in 2002.

S&P cuts Spherion

Standard & Poor's downgraded Spherion Corp. and removed it from CreditWatch with negative implications. The outlook is stable. Ratings lowered include Spherion's $98 million 4.5% convertible subordinated notes due 2005, cut to B- from B+.

S&P said the action reflects higher business risk, poor profitability, and S&P's expectations of a weak cyclical rebound in operating performance.

In 2001, Spherion sold its Michael Page Group LLC business in an IPO for $710 million, using the proceeds to eliminate bank debt, S&P noted. The reduction in debt, however, does not fully compensate for decreased operational diversity, lower critical mass, poor operating performance of its remaining three business, and the company's goal to rapidly grow its outsourcing business (currently about 16% of revenues).

Revenues for the nine months ended Sept. 27, 2002, dropped 15% while EBITDA declined roughly 60% reflecting a drop in the company's core recruitment, technology, and outsourcing businesses, S&P said. Outsourcing revenues declined 12% in the nine months of 2002 due to volume decreases at a major customer and the net loss of business.

The company is expanding its selling organization to support its outsourcing initiative, but S&P said it is concerned about future returns on this investment.

Spherion has implemented a number of cost-containment initiatives, including staff reductions and office consolidations. However, these measures are offset by the soft economy, strained information technology budgets, and the company's outsourcing initiative. EBITDA coverage of interest expense plus rent declined to about 1.7 times for the 12 months ended Sept. 27, 2002, from 2.2x in 2001, S&P said.

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