S&P keeps AOL Time Warner on watch

Standard & Poor's kept AOL Time Warner Inc. on CreditWatch with negative implications including the senior unsecured debt of the parent and subsidiaries at BBB+ and subordinated debt at BBB.

S&P originally put AOL Time Warner on CreditWatch on Aug. 21, 2002 because of the additional $2.1 billion of debt involved in its restructuring plan for Time Warner Entertainment Co. LP, which pressures already weak credit measures for the rating, as well as uncertainty related to the ongoing SEC and Department of Justice investigations of its America Online Inc. business unit.

S&P added that the ratings downside is currently expected to be one notch.

The continuation of the CreditWatch follows AOL Time Warner's announcement that restatements primarily associated with its America Online business unit will reduce previously reported revenue by $190 million and reported EBITDA by $97 million from the third quarter of 2000 through the second quarter of 2002.

Although the extent and materiality of the restatements will not meaningfully affect the current ratings, S&P noted that the SEC and DOJ inquiries are ongoing. In addition, current ratings incorporate the expectation that a likely substantial goodwill impairment charge will not result in a violation of the $50 billion net worth covenant under its credit facilities.

Still, deteriorating operating performance of its AOL business unit and the formidable management challenge associated with stemming lagging growth rates, implementing a broadband growth strategy, and countering market share erosion, remain major rating concerns, S&P said.

Including the Time Warner Entertainment Co. (TWE) transaction, credit measures are outside of the expected levels for the current rating as pro forma net debt plus all debt-like equivalents (guarantees, expected new headquarters investment, present value of operating leases, securitization debt, AOL Europe redeemable preferred) to EBITDA plus lease rent is 3.8 times, S&P added. Net debt, without including equivalents, to pro forma EBITDA is about 3.3x.

S&P cuts ONO

Standard & Poor's downgraded Cableuropa SA and its ONO Finance plc subsidiary and assigned a negative outlook. Ratings lowered include ONO's $200 million 14% bonds due 2011, $275 million 13% notes due 2009 €125 million 13% notes due 2009, €150 million 14% exchangeable bonds due 2011 and €200 million 14% notes due 2010, all cut to CCC- from CCC+.

S&P said the downgrade reflects increasing concerns about Cableuropa's ability to achieve the organic growth rates the company requires to adequately service its very high levels of debt in the medium term and to remain compliant with covenant tests providing access to its credit facility, particularly in the second half of 2003.

Cableuropa achieved positive EBITDA of €854,000 in the second quarter of 2002, S&P noted. The company is highly leveraged, however, with debt of €1.2 billion, and incurred heavy negative free cash flow of €333 million in the first half of 2002, due mainly to heavy interest costs and capital expenditures.

Cableuropa needs to increase earnings very quickly in order to be in a position to service its debt adequately and to meet the covenant tests of its credit facility, the headroom of which will become tight in the second half of 2003, S&P said.

Furthermore, the strong earnings growth required needs to be achieved within a challenging competitive and economic environment. Specifically, Cableuropa faces tough competition, depressed consumer demand linked to the general economic slowdown, and very poor capital market conditions, S&P added.

Fitch confirms Best Buy

Fitch Ratings confirmed Best Buy Co.'s bank credit facility and senior unsecured convertible debentures at BBB and convertible subordinated debentures at BBB-, affecting $830 million of debt. The outlook is stable.

Fitch said the ratings reflect Best Buy's strong brand position and market share, solid operating margins and liquid balance sheet.

Offsetting strengths are continued weakness in consumer spending, challenges the company has faced with some of its Musicland stores - specifically Sam Goody - as well as a decline in certain sectors of its business, particularly music and appliances, the rating agency said.

Best Buy continues to face challenges with the stores it acquired in its Musicland acquisition due to the fall off in mall traffic and declining music sales, Fitch said. Best Buy will likely monitor store performance and remaining lease terms to evaluate potential store closures. Importantly, Musicland stores represents just 8% of total revenues.

Despite the difficult retail and economic environment, Best Buy's financial profile remains relatively strong, Fitch continued. Though it lowered its earnings guidance for the year due to a slowdown in sales, profitability is expected to remain solid as the company is pursuing significant cost savings to manage its business to a slower selling environment.

For the 12 months to Aug. 31, 2002 total adjusted debt/EBITDAR was 2.8 times and EBITDAR/total interest plus rents was 3.3x, Fitch added.

S&P says Getty Images unchanged

Standard & Poor's said Getty Images Inc.'s ratings remain unchanged including the corporate credit rating at B+ and the stable outlook.

S&P's comment follows Getty Images' announcement that it plans to buy back $50 million of its common stock over the next six months.

For the last nine months, the company has generated $45 million in free cash flow, S&P noted. Getty also estimates it will be able to generate free cash flow of more than $50 million by fiscal year-end 2002.

S&P said it views the company's free cash flow along with its cash balances of approximately $62.3 million and full availability under its $85 million revolving credit facility as providing enough liquidity for this stock repurchase plan.

However the rating agency cautioned that additional stock repurchase programs may challenge the company's financial profile enough to warrant an outlook revision. Capital spending has been significant, but has tapered off and should be much lower in the future.

S&P confirms International Paper, rates notes BBB

Standard & Poor's confirmed International Paper Co.'s ratings and assigned a BBB to its new $750 million of senior unsecured notes due 2012. Proceeds are expected to be used primarily to refinance existing debt. Ratings confirmed include the senior secured debt of International Paper and its subsidiaries at BBB, senior unsecured debt at BBB and preferred stock at BB+.

S&P said its assessment of International Paper reflect its above-average position as the world's largest forest products manufacturer, broad product diversity, and moderate financial policies.

Company performance has been suffering from economic-related demand weakness as well as continued oversupply conditions within paper and wood products markets, S&P noted. However, aggressive capacity rationalization and other steps to improve operating efficiency, together with overhead cost reductions and initiatives to upgrade the product mix, are beginning to prove beneficial. The company expects this year to meet its longstanding goal of non-price improvement in return on investment of four percentage points.

Total debt of about $12.7 billion has been reduced by about $3 billion, mostly with asset sales proceeds, since the primarily debt-financed acquisition of Champion International Corp. in mid-2000, S&P said. The asset disposal program IP initiated at that time has been substantially completed, except for further sales of non-strategic timberlands, which could occur during the next few years. Discretionary cash flow is expected to be used primarily to repay debt as meaningful additional debt reduction is necessary to achieve credit measures that support the current ratings.

Debt to capital of about 50% will increase as a result of an estimated fourth-quarter reduction in shareholders' equity of $1.5 billion necessitated by the expected shift in the company's defined benefit pension plans to an underfunded position and a goodwill writedown in the $1.1 billion to $1.4 billion range, S&P said. Both of these items are noncash and will not affect the company's bank loan covenants, which include minimum consolidated net worth of $9 billion and maximum debt to capital of 60%. Management believes that the probability of required cash contributions to the pension plan over the next several years is low.

S&P says Allergan unchanged

Standard & Poor's said its ratings on Allergan Inc. are unchanged at a corporate credit rating of A with a stable outlook.

S&P's comments follow news that Allergan has reached a settlement in principle with Pharmacia Corporation and Columbia University resolving all outstanding patent litigation surrounding Allergan's glaucoma treatment, Lumigan. Allergan will pay $120 million and future royalties.

S&P said the settlement removes a significant uncertainty surrounding Lumigan's sales prospects.

Moreover, Allergan has more than $750 million in cash on hand and a solid product portfolio led by the growing sales of Botox, factors that allow it to incur a $120 million charge without detriment to the rating, S&P said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.