S&P puts Duke on negative watch

Standard & Poor's placed the ratings of Duke Energy Corp., Duke Capital Corp. and subsidiaries on negative watch, reflecting additional concern regarding Duke Capital's unregulated businesses, specifically its trading subsidiary.

Duke Energy has $21.5 billion of debt outstanding.

Duke Energy Trading and Marketing (A-/negative watch) on Tuesday provided an interim response to the Securities and Exchange Commission's May 31 informal request for information about round-trip energy transactions.

The magnitude of round-trip trades discovered in non-Western markets is negligible.

However, more disturbing is the continuing effort to gather information to complete the analysis of about 3,000 of the total 750,000 trades reviewed, S&P said.

The creditworthiness of Duke Energy's unregulated activities, which are projected to contribute roughly 30% of future cash flows, impacts Duke Energy's consolidated creditworthiness. On June 11, S&P updated its rating methodology for energy traders.

S&P will be using the capital adequacy model to determine an amount of capital required by the trading and marketing business that will be reflected as a debt equivalent for Duke Energy. Imputed debt will affect measures of bondholder protection, such as funds from operations interest coverage, funds from operations to debt and debt to total capital.

S&P is also analyzing expected revenues from generation portfolio, Duke Energy North America, as determined by the net revenue analysis applied to merchant generation companies. Projected revenues from the net revenue analysis could be lower than forecasts provided by the company.

Duke Energy plans to issue $1 billion of equity or equity-linked securities in 2002 to pay down the bridge financing for the Westcoast Energy acquisition.

S&P considers this commitment, as well as continued access to capital markets, important components in maintenance of current ratings.

Duke Energy's rating continues to be supported by regulated businesses, roughly 70% of expected future cash flows.

Fitch rates new Provident notes BBB

Fitch Ratings assigned a BBB rating to the $75 million offering of senior notes by Provident Financial Group Inc.

Proceeds from the offering will be used for general corporate purposes and should serve to strengthen the balance sheet.

Fitch also affirmed the current ratings for PFGI and subsidiaries. The outlook is stable.

The ratings reflect recent financial performance that has been marked by deteriorating asset quality trends and significant earnings volatility.

During 2000 and 2001, increases in nonperforming assets, loan charge-offs, loan loss provisions and charges against lease residuals resulted in earnings shortfalls. Management has taken steps to reduce earnings volatility and the risk inherent in PFGI's business mix.

However, these actions have not yet fully taken hold.

Results in early 2002 show some signs of stabilization with a decline in loan losses and meaningful deposit growth, Fitch said. The increase in nonperforming assets is centered in the $862 million subprime mortgage portfolio that remains following a decision to only originate this product for sale.

Capital has improved due to internal equity generation and a recent issuance.

Fitch anticipates further improvement in capital levels.

S&P keeps SpectraSite on watch

Standard & Poor's is keeping the CC corporate credit rating for SpectraSite Holdings Inc. and the C rating on its 10.75% notes due 2010, 12.5% notes due 2010, 12% discount notes due 2008, 11.25% discount notes due 2009 and 12.875% discount notes due 2010 on negative watch after an unsuccessful exchange offer for the senior issues.

Also, S&P revised the outlook on SpectraSite's C-rated $200 million of senior convertible notes due 2010 and CC-rated senior secured bank loan to negative from developing and is keeping those on negative watch.

With the termination of the exchange offer, the potential for a near-term bankruptcy filing by SpectraSite has materially increased.

Although a significant amount of SpectraSite's debt is not currently cash-pay, the company's ability to eventually service such debt is highly uncertain, which may increasingly motivate management to restructure its balance sheet in bankruptcy.

The exchange offer was terminated because conditions of the tender offer were not satisfied.

Most importantly, the company cited that issues raised by certain noteholders in a lawsuit challenging the tender offer remain unresolved.

The ratings had been lowered and placed on negative watch on May 17 to reflect that the offer was considered a distressed exchange, in light of the magnitude of the offer and related discount.

SpectraSite's weak financial position, exemplified by a highly leveraged capital structure, and uncertain business prospects in its tower and network services businesses also contributed to the assessment of the distressed nature of the transaction.

Fitch cuts WorldCom to C

Fitch Ratings downgraded the senior unsecured debt ratings for WorldCom Inc. to C from CC, as well as its preferred securities. Intermedia Communications senior unsecured debt also was downgraded to C from CC, as well as the preferreds. The quarterly income preferred securities (QUIPS), currently under an interest deferral, remain at C.

All ratings remain on negative watch.

The downgrades follow WorldCom's failure to make a scheduled interest payment on about $2.1 billion of debt. The company has a 30-day grace period to make the interest payment before Fitch considers it an event of default.

S&P cuts CMS to B+

Standard & Poor's lowered the senior unsecured rating on CMS Energy to B+, and lowered the corporate credit rating on subsidiaries Consumers Energy Co. and CMS Panhandle Pipeline Cos. to BB. The outlook is negative.

Michigan-based CMS Energy has about $7 billion in debt.

The downgrade for CMS Energy and subsidiaries reflects the use of the stock of subsidiary CMS Enterprises, which includes CMS Panhandle Pipeline, as security in bank facilities to obtain longer-term financing to weather its current liquidity position.

In S&P's view, CMS Energy's actions indicate that the risk of default of CMS Energy and subsidiaries is the same since the company relied on an operating subsidiary to meet its own financial commitments during a time of financial stress.

While regulators may impose fines, or restrictions if CMS Energy needs to further encumber an operating subsidiary, the immediate penalty to CMS Energy is not perceived to be severe enough to prevent action by the company if it has to preserve liquidity in another stress scenario, S&P said.

CMS Energy's stated intent to not utilize Consumers Energy to meet its own obligations is not backed by any regulatory or legislative measures in place to prevent the upstreaming of dividends to CMS Energy from the utility, if necessary.

The ratings are supported by the business and financial profiles of the utility and pipeline holdings, Consumers Energy and CMS Panhandle Pipeline.

An aggressively financed, higher-risk global portfolio of nonregulated energy projects offsets the favorable attributes of these regulated units.

The effect of CMS Energy's shift of its business mix to a more regulated composition, about 75% of consolidated cash flow, and its intention to continue to reduce debt leverage via asset sales is beneficial to credit quality.

Still, of greater concern than adjusted debt leverage reduction is the cash flow generating ability of the updated asset mix, which is crucial for credit quality improvement, particularly with cash flow credit protection measures depleted from excessive amounts of debt and weak cash flow from certain under performing assets, S&P said.

CMS Energy's credit quality has become increasingly uncertain since the discovery of "round-trip" electricity trades conducted by its subsidiary, CMS Marketing Services & Trading Co. The round-trip trades resulted in the resignation of Bill McCormick, long-time chairman and CEO of CMS Energy, and have further eroded the firm's standing in the capital markets.

In addition, uncertainty has arisen because of an SEC inquiry into the round-trip trades, plans to restate 2000 and 2001 financial statements, Arthur Andersen's announcement that it will not comment on the company's restated financial statements, the establishment of a committee by CMS' board of directors to investigate matters surrounding the trades and shareholder lawsuits.

CMS Energy's liquidity position is stretched since current borrowings and notices of intent to borrow under the current $1.2 billion, adjusting to $1.3 billion no earlier than Aug. 31, of new bank facilities is nearly 100%.

Also evident is the glaring need for the company to complete at least the majority of pending asset sales in short order, expected at about $500 million by yearend 2002 and $400 million in 2003, and issue $250 million of equity-linked securities to reduce borrowings.

The bank facilities contain various covenants requiring CMS Energy to maintain certain leverage and interest coverage ratios, which the company is currently in compliance.

CMS Energy's key credit protection measures should benefit from debt reduction and its refocused business strategy.

On a consolidated basis, adjusted funds from operations to average total debt of about 15% and adjusted FFO interest coverage of between 2.5 times and 3.0 times are slightly weak for current ratings.

Adjusted debt leverage is expected to trend down to near 60% when the company's debt reduction goals are met.

The negative outlook reflects the uncertainty posed by the inquiries into the round-trip trades.

Additional challenges for CMS Energy include execution risk in completing planned asset sales, maintaining adequate liquidity over the near-term and generating cash flow and reducing debt sufficient enough to produce credit protection measures commensurate for its current rating.

Moody's confirms Capital One

Moody's Investors Service confirmed its ratings on Capital One Financial Corp. (senior at Baa3) and its subsidiaries, including Capital One Bank (Deposits at Baa1/P-2) and said the outlook remains stable.

The action follows Capital One's announcement that it has entered into a memorandum of understanding with its bank regulators, Moody's said.

Moody's noted that banks that enter into supervisory agreements are usually subject to greater supervisory oversight and increased limitations on their financial flexibility. While the former is usually a positive credit development, the latter is not always positive from the perspective of bondholders, Moody's added.

The affirmation of Capital One's ratings reflects Moody's view that the overall impact of the MOU on Capital One's credit profile is neutral.

Capital One's MOU reflects the increased scrutiny which U.S. bank regulators have placed on all U.S. banks and thrifts with a concentration in sub-prime lending, particularly credit card lenders that securitize sub-prime loans, Moody's commented.

Several other banks with greater sub-prime credit card concentrations than Capital One have already entered into formal supervisory agreements. By contrast with most of those agreements, the rating agency said, the terms of Capital One's MOU as described by senior management appear to be less onerous, Moody's said.

Moody's said it believes this reflects the company's stronger risk management and lower exposure to sub-prime lending than most of the other sub-prime lenders that have been subject to supervisory agreements.

In addition, based upon current disclosures, Moody's said it does not believe that the MOU is an indication of any previously hidden asset quality problems at Capital One. Furthermore, according to senior management, Capital One has already satisfactorily addressed most of the major areas of concern highlighted in the MOU on its own initiative.

S&P puts Rent-A-Center on positive watch

Standard & Poor's put Rent-A-Center Inc. on CreditWatch with positive implications. Ratings affected include Rent-A-Center's $300 million 11% senior subordinated notes due 2008 at B and $120 million revolving credit facility due 2004, $203 million term loan B due 2006, $248 million term loan C due 2007 and $125 million term loan D due 2007, all at BB-.

S&P said the action is in response to the potential significant reduction in the company's leverage due to the likely conversion of its series A preferred stock to common equity and its announcement that it prepaid $128 million of debt in the second quarter.

The conversion of the preferred stock to common equity would eliminate $205 million of debt-like preferred shares whose dividends are payable in cash in August 2003, S&P said. This would reduce the company's leverage, with pro forma total debt to EBITDA of 2.4 times compared with 3.0x.

The series A preferred stock is redeemable in August 2002 at the company's option, at a conversion price of about $29 for a total of about $205 million. Because the company's stock is currently trading at about $50, the preferred shareholders are expected to convert their shares to common equity rather than have their shares redeemed at $29, S&P noted.

Rent-A-Center also prepaid $128 million of senior debt in the second quarter after experiencing increased profitability due to higher-than-anticipated revenues and the benefit of cost-control programs, 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.