S&P rates AES' new loan, notes at BB

Standard & Poor's assigned a BB preliminary rating to AES Corp.'s proposed $1.62 billion senior secured bank facility and $350 million senior secured exchange notes.

The AES corporate credit rating of B+ remains on negative watch.

S&P views the default risk of the bank facility and exchange notes as B+, but the two-notch elevation of the ratings on these instruments reflects a high degree of confidence that the collateral package provides enough value for lenders to realize 100% recovery in a likely default or stress scenario.

The collateral package consists of 100% of AES' equity interests in its domestic businesses and 65% of the equity in its foreign businesses. The analysis assumes a bankruptcy court would accord priority to the senior lienholders in a bankruptcy, S&P said.

In addition to the liens granted, 50% of the proceeds of the Cilcorp sale, which are not included in the collateral calculation, are to be used to pay down the bank facility.

However, because of the all-in coverage provided solely from U.S. assets, S&P said it does not believe that the priority given to the bank lenders warrants a differentiation in the ratings of the bank facility and the exchange notes.

The successful execution of this transaction would give AES much needed flexibility by eliminating the immediate liquidity pressure and pushing out any substantial maturities until 2005, S&P added.

However, reliance on bank financing could present risks as banks could exert increasing control over AES' financing and operations should AES be unable to reduce its debt burden to a more manageable level by selling assets.

If the transaction is successful, the corporate credit rating would remain B+, reflecting the cash flow profile relative to debt burden, and the outlook would likely be negative, reflecting the continued need to sell assets and pay down debt.

When the transaction is executed, S&P will rate all unsecured debt B-, reflecting a disadvantaged position in a bankruptcy, and there will be no differentiation between senior and subordinate issues. Trust preferreds would be rated CCC+.

Moody's rates Level 3 liquidity SGL-1

Moody's Investors Service assigned Level 3 Communications an SGL-1 speculative-grade liquidity rating, saying cash and expected cash flow will be more than sufficient to support its funding requirements over the next 12 months. The senior implied rating is Caa2.

The reflects strength in the short-term liquidity, comprised of restricted and unrestricted pro-forma cash equivalents of $1.5 billion at the end of June 2002 plus $50 million immediately available for letters of credit under its recently amended and reduced revolving bank credit facility, Moody's said.

With sufficient cash flow, Moody's does not expect any need to tap alternative liquidity sources, including the stock of Commonwealth Telephone Co. with a current market value of approximately $225 million, plus $50 million of bank revolver availability.

In August, Level 3 amended its bank facility to provide flexibility for future acquisition activity, eliminating two revenue-based covenants. In return Level 3 agreed to reduce the size of its undrawn bank revolver from $650 million to $50 million immediately.

If the company meets certain conditions, availability will increase to $150 million in one year. In addition Level 3 covenanted to maintain a minimum cash balance generally equal to $525 million, of which $400 million is pledged as security to bank lenders.

As a result of the amendments, Moody's anticipates no short-term covenant pressure.

S&P cuts Interpublic

Standard & Poor's lowered its ratings on The Interpublic Group of Cos. Inc., including the 0% convertible senior note due 2021 to BBB from BBB+ and 1.87% convertible subordinated note due 2006 to BBB- from BBB.

The ratings remain on negative watch. Total debt at June 30 was about $3 billion.

The downgrade reflected recent weakness in operating performance and a lackluster earnings outlook for the remainder of 2002. Losses at its non-core Octagon motorsports unit have added to the company's operating challenges.

S&P said any further downgrade should be limited to one notch. S&P is monitoring developments with regard to the health of the core business and its reassessment of motorsports holdings, and plans for meeting the potential put of the 0% convertibles.

Liquidity is primarily derived from borrowing availability of roughly $800 million under its credit facilities.

However, the company may be required to redeem the 0% convertibles for cash on Dec. 14, 2003, at the accreted value of $587 million.

There is little cushion in current ratings for unanticipated developments, weaker than expected operating performance, or additional debt, S&P said.

Moody's puts TXU on review

Moody's Investors Service placed TXU Corp. (senior at Baa3) and its U.S. subsidiaries on review for potential downgrade.

Moody's action follows developments in the past week that saw a rapid deterioration in the credit profile of TXU Europe, with particular concern about the potential write-downs or write-offs stemming from TXU Europe's difficulties, as well as any financial impact of legal actions against the company.

On Oct. 14, parent management withdrew its commitment to invest up to $700 million of equity into TXU Europe and announced an 80% reduction in the annual common stock dividend, plus a $300-$400 million cut in growth capital expenditures for a total annual savings in the range of $850-$950 million.

Cash will be used to reduce debt at TXU Corp. and elsewhere in North America.

Subsequently, cross-default provisions and financial covenants were eliminated in the $500 million drawn working capital bank facility available to TXU Corp.

This week, TXU Europe missed an interest payment on a bond and Moody's lowered ratings to Ca senior unsecured and Caa2 senior implied.

TXU Corp. has taken steps to solidify its liquidity position. Last week TXU drew the remaining $2.6 billion of its domestic bank lines which total $3.7 billion.

S&P keep EchoStar on watch

Standard & Poor's said its ratings on EchoStar Communications Corp. (B+/positive watch), Hughes Electronics Corp. (BB-/negative watch) and PanAmSat Corp. (BB-/negative watch) all remain on watch pending receipt of further clarity on mergers involving the three companies.

The FCC recently decided not to approve the proposed merger between EchoStar and Hughes and designated the merger application for administrative hearing. Although the likelihood of a merger is diminished, the companies can still continue working towards gaining approval. But, given the FCC's unanimous declining vote, it could face long odds in obtaining approval even with concessions, S&P said.

Under existing deal terms, EchoStar could be required to purchase PanAmSat, for about $3.4 billion plus about $2.55 billion of existing PanAmSat debt, whether or not the EchoStar and Hughes merger is completed.

And EchoStar may also be obligated to pay a $600 million breakup fee to Hughes if the merger is terminated.

S&P believes the corporate credit rating of a combined EchoStar and PanAmSat could be higher than B+, based on the improving business and credit profile of EchoStar and PanAmSat's strong business position and comparatively lower leverage.

Should the terms of the deal change and result in EchoStar not purchasing PanAmSat, upside rating potential for EchoStar may still exist, given EchoStar's strengthening business and financial profile. EchoStar is also generating positive discretionary cash flow.

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