Moody's cuts Tyco, still on review

Moody's Investors Service downgraded Tyco International Ltd. long-term debt to Baa3 from Baa2 and short-term debt to Prime-3 from Prime-2 and kept the company on review for possible further downgrade, affecting $25 billion of debt. Moody's also confirmed CIT Group's long-term debt at A2 and short-term debt at Prime-1, affecting $34 billion of debt.

Moody's said it cut Tyco because of the potential for the proceeds from the sale of CIT to fall short of earlier expectations - although Moody's said it expects the sale to go through.

"As a result, debt reduction will not be in line with prior expectations and the company will likely require a greater provision against its carrying value of CIT," Moody's commented.

Moody's also said it has growing concern about the potential implications for Tyco of recent developments, including required management changes and emerging corporate governance issues, as well as the possibility of additional adverse developments as an internal review of the past use of company funds by the former CEO progresses.

These issues could divert management focus from the core business and hinder the company's ability to restore confidence of its customers, suppliers and investors, Moody's said.

For CIT, Moody's said it believes the company's underlying franchise remains sound despite its need to tap alternate sources of liquidity and control its growth, as well as despite the management and employee distraction from the issues faced by its parent company.

Additionally, Moody's said a critical factor is its expectation that CIT will be completely separated from Tyco in the very near future, as early as the end of June.

S&P cuts Tyco, still on watch

Standard & Poor's downgraded the long-term ratings of Tyco International Ltd. and its subsidiaries but left the short-term ratings unchanged. All ratings remain on CreditWatch, where they were placed on Feb. 4, 2002 with developing implications but the implications are now negative. Ratings affected include Tyco's senior unsecured debt, cut to BBB- from BBB, subordinated debt, cut to BB+ from BBB- and preferred stock, cut to BB from BB+. As part of the action, S&P also cut CIT Group to BBB+ from A- and kept it on CreditWatch with developing implications.

S&P said it cut Tyco because of continued erosion in management credibility and investor confidence following the indictment of former CEO Dennis Kozlowski on tax evasion charges and the related ongoing investigation by the Manhattan District Attorney, continuing delays in effecting a separation of its finance subsidiary CIT Group Inc. and heightened refinancing risk, with S&P concerned about Tyco's ability to access capital markets or bank financing, given increased management and board of director turmoil.

S&P said it could cut Tyco further in the coming days or weeks if there are further negative developments in connection with the ongoing criminal investigation, the CIT IPO is not launched within the next two weeks or does not close within a month after the launch, or if proceeds are insufficient to significantly improve Tyco's liquidity, or business or competitive conditions worsen.

If Tyco does not sell CIT, it would have to seek alternative financing arrangements to meet financial obligations beginning early in calendar-year 2003, S&P said. During the next 18 months, the company has public and bank debt maturities totaling about $7.7 billion, plus the potential put of two zero-coupon debt issues totaling about $5.9 billion. (Tyco has the option to satisfy $2.3 billion of the latter amount in stock at the February 2003 put date. However, given the share price collapse, this would be highly problematic.)

As of March 31, the company had about $4 billion in cash, S&P said, adding that this sum would be sufficient to refinance obligations that would become due or financing arrangements that would terminate if S&P or Moody's lowered the company's ratings below investment-grade.

Moody's puts Parker Drilling on uncertain review

Moody's placed Parker Drilling's ratings under review, with direction uncertain, including the 5.5% convertible subordinated notes due 2004 at B3, pending the potential $108 million acquisition of Australian Oil & Gas Corp. Ltd.

Before this event Parker's ratings were confirmed May 1, Moody's noted, with a negative outlook due to the slow pace of reduction of high debt levels.

If Parker is successful in the competitive bidding for AOG at its current bid price of $2.50 per AOG share and $1.30 for unexercised listed AOG stock options, it would pay roughly $88 million of cash to AOG shareholders and assume AOG's $20 million of debt.

The cash outlay would rise if competitors counter with higher bids and Parker chooses to re-counter with a higher bid. Parker intends to issue equity sufficient to fund or refund cash expended to buy AOG.

If Parker wins AOG, and is successful in raising equity sufficient to generally cover its cash outlay for AOG, the ratings could be confirmed.

If Parker raises equity covering significantly more than its cash outlay for AOG, there is a possibility the ratings could be upgraded.

If Parker raises no equity to cover acquisition costs, or raises insufficient equity, the ratings could be downgraded.

The review will assess the level of cash flow available for debt reduction, forthcoming EBITDA potential in the 2002 to 2004, debt reduction potential, the quality of AOG's rig fleet and international diversification gained and the challenging political risk environments of some of the countries in which Parker and AOG do business.

Moody's ups Six Flags ratings

Moody's upgraded Six Flags Inc.'s senior unsecured debt from B3 to B2 and its preferred stock to B3 along with assigning a Ba2 rating to its $1.05 billion bank credit facilities. The outlook is stable.

Proceeds of the bank facilities will be use to repay and terminate existing indebtedness under the company's current $1.2 billion bank facilities.

The upgrade of the $1.7 billion of senior unsecured debt and $288 million of preferred stock results from the simplification of its capital structure as $295 million of intermediate holding company debt has been repaid.

The rating reflects concern over high total leverage and limited asset coverage ratios that result from the company's debt financed acquisition and upgrade strategy and the expectation that Six Flags will continue to acquire, upgrade and integrate regional theme park properties in the U.S. and abroad.

While the company's diverse portfolio of properties mitigate regional volatility, operating performance may be impacted by a protracted economic slow down, adverse national weather effects or public safety scares.

The rating outlook would be negatively impacted if the company were to return to previous levels of negative free cash flow.

The rating is supported by a leading market position, geographic diversity of properties, strong brand image and awareness, limited direct competition and positive long term operating trends.

While Six Flags has a degree of discretion with respect to its capital budget, Moody's expects it to continue to invest extensively in expanding its franchise including acquisitions, leaving it with limited free cash for debt reduction.

S&P revises Comverse Tech outlook to negative

Standard & Poor's revised its outlook on Comverse Technology Inc. to negative from positive to reflect the continuing deterioration in operating performance and profitability measures resulting from the prolonged slump in investment spending by wireless and wireline telecom network operators.

Comverse's $600 million 1.5% convertible debentures due 2005 are rated BB.

The rating reflects a leading position in messaging software, offset by poor results recently.

Comverse revenues in fiscal first quarter ended April 30 fell to $211 million, or 20% sequentially, an acceleration of the two previous quarter's sequential declines of 10% and 5%, respectively. Comverse expects an estimated 10% sequential revenue decline in fiscal second quarter when the net loss is expected to widen to about $22.5 million from $8.2 million in fiscal first quarter.

Cash flows from operations in fiscal first quarter were $1.1 million, excluding an $8.1 million restructuring charge, versus $56.9 million in the previous quarter.

About 80% of Comverse's revenues are generated from sales in the telecom vertical end market, which continues to delay purchases of non-essential equipment. While Comverse has responded with cost-cutting efforts, it has not offset the significant revenue declines.

The weak profitability is offset by a highly liquid balance sheet that includes nearly $1.9 billion of cash compared to total outstanding debt of $600 million.

Further deterioration in operating performance and/or a prolonged delay in recovery in demand in Comverse's end market could cause the rating to be lowered.

Moody's cuts Williams ratings

Moody's downgraded the ratings of The Williams Companies Inc., cutting senior unsecured debt from Baa2 to Baa3 and the convertible preferreds from Baa3 to Ba1, and its affiliates. The outlook is negative.

The downgrades reflect weak cash flow generation relative to Williams' debt and business risks and low asset returns.

Despite the steps taken to date, Williams' net debt reduction has been minimal, because the debt paid down has been largely offset by certain obligations that Williams recently assumed from its former subsidiary, Williams Communications Group Inc.

Furthermore, Williams' capacity to support debt has decreased as its cash flows have become increasingly variable. Although the company owns a variety of assets that could generate relatively stable cash flows, its total cash flow from operations has been relatively weak and uneven.

One reason for this is Williams' large energy marketing and trading (EM&T) operation, which is working-capital intensive and difficult to forecast.

The downgrades follow an analysis of Williams' recently announced plan to reduce its debt by $3 billion through a combination of $1 to $1.5 billion of additional asset sales and a $1 to $1.5 billion common stock issuance.

The company may also reconsider its common dividend rate.

This plan is a second round in Williams' ongoing efforts to strengthen its financial position in order to maintain an investment grade rating. Since last December, Williams has so far raised over $1.7 billion from asset sales and raised $2.6 billion of long-term capital, and has applied those proceeds to pay down debt and to boost liquidity.

Williams' investment-grade rating reflects the substantial value of its hard assets, in particular gas pipelines.

Williams has a leading business position as the second largest pipeline operator in the U.S.

The gas pipeline segment is stable and consistently generates excess cash. Williams' total retained cash flow should sufficiently cover a reasonable minimal level of capital expenditures needed to sustain its business.

Other businesses benefit from vertical integration with one another, and, through hedging and entering into long-term contracts, have shown relatively steady earnings growth.

Moody's believes that a full implementation of the new plan would help mitigate the recent increase in debt and fixed charge obligations and improve its position in the Baa3 rating category.

However, the negative outlook reflects a number of uncertainties that Williams faces in the near term - execution risk, financing risk and litigation event risk - that could materially affect its cash flow and financial position.

Moody' recognizes that Williams' management has endeavored to respond quickly to a changing and often difficult business environment by raising large amounts of capital and rapidly selling assets.

Williams' new debt reduction plan would result in lower leverage that is more in line with its expected cash flows and business risk.

However, reaching the $1 to $1.5 billion debt reduction target may be a challenge. The asset sale timing, proceeds and cash flow impact are uncertain.

In regard to financing risk, Moody's will watch for the consummation of a common stock issuance in the range of $1 to $1.5 billion, expected this fall, and the application of those proceeds to debt reduction.

Williams has litigation event risk stemming from WCG's bankruptcy and its energy trading activities during the California power crisis two years ago. Along with other energy traders, Williams' trading practices and contracts are being investigated by the FERC. Ratings may be affected should any of these contingencies result in a material financial liability.

The energy-trading sector is undergoing an upheaval as a result of legal and regulatory challenges, adverse financial market conditions and retreat by some major players. These developments could rapidly alter the competitive landscape and have a negative impact on the business prospects of Williams, which draws a significant amount of its earnings from that group.

Full implementation of the new plan would restore its cash flow coverages to near their 2001 levels if Williams is successful in offsetting cash flow lost from asset sales with cash flow from organic growth.

There are a number of pipeline expansion projects coming on-line, which would account for much of that growth. However, its cost of borrowing may be higher than before, so that its fixed charge obligations may change little despite a big drop in leverage.

Debt reduction will enhance Williams' retained cash flow-to-debt and capitalization ratios. Moody's noted, however, that cash flow measures for 2002 are expected to be unusually weak because of numerous non-recurring items related to assuming WCG's obligations.

Moody's rates J.C. Penney's loans Ba1, cuts notes

Moody's Investors Service assigned a Ba1 rating to J.C. Penney Company Inc.'s new $1.5 billion senior secured credit facility and downgraded its notes.

The rating for the loan is based on strong asset coverage due to the store's quality and catalog inventory and the low level of expected usage, Moody's said. The rating outlook is stable.

In addition, Moody's confirmed the Ba2 senior implied rating and lowered the company's senior unsecured debt, medium-term notes and issuer rating to Ba3 from Ba2 and convertible subordinated notes to B1 from Ba3.

Moody's said it lowered the notes because asset coverage for senior unsecured note holders and other unsecured creditors is diminished by the granting of security to the banks.

Penney's operating performance has begun to show improvement as the company begins to achieve benefits from its turnaround initiatives, Moody's said.

Changes at the department stores have included the move to a centralized merchandising organization and improved assortments, selection and in-store display. Eckerd is benefiting from a new pricing strategy and a redesign of its stores which has reemphasized key categories in the front-end, non- pharmacy segment of the business, the rating agency added.

As a result of these initiatives, operating profit through the first quarter of 2002 has risen by 36% over the prior year. This comes after several years of declining trends that culminated in significant operating losses in the second half of 2000. Moody's said it expects that Penney's will continue to improve is profitability and cash flow generation and that credit metrics will show improvement with each passing quarter.

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