Moody's changes Gap outlook to negative

Moody's changed the rating outlook of Gap Inc. to negative from stable based on continuing negative comparable store sales, concern that Gap may not meet Moody's profit expectations in 2002 and the possibility, in Moody's opinion, that the new chief executive officer could make changes that might require currently unanticipated expenditures, charges or revisions in operations.

But Gap's ratings were confirmed, including the 5.75% convertible notes at Ba3, reflecting efforts to boost sales and profits in Gap domestic and Old Navy and solid cash position and access to bank funding.

Total comparable store sales have been negative since May 2000 and same store sales are still profoundly negative in the two largest concepts. Comparable store sales in the first two weeks of May, however, were better than the first quarter's 17% decline.

Mickey Drexler, the current CEO, announced his intention to retire as soon as the board appoints his replacement. There is thus the possibility that the new CEO could launch initiatives or execute changes that adjust the timing or the magnitude of currently expected returns.

Gap is executing a number of initiatives to boost sales and profitability. These efforts include new assortments and new advertising campaigns.

While Gap Inc. is refocusing its concepts' merchandise offering, it will be some time before it is evident whether these merchandising changes are gaining traction with the customer.

Operating cash flow has been bolstered by more disciplined inventory control, expense reductions, and the cessation of share repurchases. The planned annual square footage increase for 2002 is relatively low and Moody's anticipates that Gap will not return to its past practices of rapid store growth and share repurchases in the near term.

Liquidity has been bolstered by the issuance of $1.38 billion of convertible notes in February. Gap also has a $1.4 billion senior secured bank credit agreement.

Fitch affirms PMI Group ratings

Fitch Ratings affirmed the AA- long term and senior unsecured debt ratings of PMI Group Inc., and the ratings of its subsidiaries PMI Mortgage Insurance Co. and PMI Capital I. The outlook is stable.

The ratings reflect that PMI's recent consolidated GAAP basis operating results have been strong. The company's first quarter 2002 operating income increased 19% over the prior-year period to $86 million. For 2001, pretax operating income increased 20% to $447 million.

PMI continues to utilize a moderate amount of financial leverage and its earnings-based interest and preferred dividend coverage is strong.

At March 31, the company's ratio of debt and preferred capital securities to total capital was 20%. Earnings based interest and preferred dividend coverage is very strong averaging 20 times over the last three years.

In recent years, an increasing portion of PMI Mortgage's new insurance written has come from bulk or negotiated transactions.

Fitch believes that these transactions include a higher proportion of sub-prime loans than PMI's overall insured portfolio and that these loans default at a significantly higher rate and season more quickly than prime loans.

Although PMI Mortgage has significant expertise in pricing such transactions, Fitch believes that this trend could pressure the company's default rate going forward.

Competition in the mortgage insurance industry has increased in recent years as mortgage originators have established captive mortgage insurance subsidiaries.

Like many of its peers, PMI Mortgage has entered into a number of reinsurance agreements with captive reinsurers under which it cedes a portion of its premiums and exposure.

Fitch has industry-wide concerns about the pricing of these transactions and about their impact on the mortgage insurance industry's profitability.

Fitch cuts Providian to B from B+

Fitch Ratings lowered the senior debt rating of Providian Financial Corp. to B from B+ and senior debt rating of Providian National Bank to B+ from BB-, along with several ratings of Providian Capital I, late Thursday. The ratings remain on negative watch.

The downgrade primarily reflects heightened concerns regarding performance of the Providian Gateway Master Trust, where excess spread levels have fallen over the past few months, Fitch said.

The decline in excess spread has been driven by a sharp rise in net chargeoffs of these assets. The increase in loss rates reflects weakness in the economy that began in 2001, limitations in growth, but it is also indicative of the high-risk nature of Providian's customer base, a high percentage of which would be considered subprime under bank regulatory definitions.

Given the revolving nature of the securitization structure, Fitch is increasingly concerned that an early amortization could occur should excess spread levels continue their downward trajectory due to increasing losses.

PGMT must maintain minimum excess spread of at least 0.0%, on a rolling three month average, in order to avoid an early amortization event. At present, Fitch estimates there is approximately $10.25 billion of investor certificates outstanding in the PGMT.

PGMT is currently trapping cash in the trust to fund spread accounts. Although the company is attempting to address performance issues in the PGMT, continued deterioration of excess spread would cause further downgrades of the company's ratings.

Fitch recognizes the progress Providian has made to improve its financial condition through targeted asset sales. To date, Providian has sold its higher quality Providian Master Trust and U.K. credit card portfolio, which have alleviated near-term liquidity concerns.

In addition, the company has sold its Argentina banking operation to a local investor group and should no longer be impacted by events in that country.

Although the company's banking subsidiaries maintain significant amounts of cash and marketable securities, $6 billion at April 30, Fitch believes the potential calls on liquidity due to deteriorating performance in the PGMT, offset the benefit of the added liquidity position.

Providian continues to market its portfolio of high risk receivables through a structured transaction led by Goldman Sachs and Salomon Smith Barney. To the extent such a transaction is ultimately executed, as currently structured, the liquidity position at the regulated banks would be improved.

Absent a successful sale of the proposed securitization, ratings could be affected further, as this portfolio performance would continue to be a drain on the company's performance and would also continue to distract management's attention away from its turnaround efforts, including the origination of better-quality assets going forward.

Fitch noted, however, that under the company's regulatory agreement, Providian's banking subsidiaries are not required to sell this portfolio. Ultimately, Providian's banking subsidiaries must achieve 10% total risk based capital ratio with application of subprime guidance.

In response to the downgrade, Providian said in a statement late Thursday that it continues to expect that excess spread in its Providian Gateway Master Trust will not fall to a level that would trigger early amortization of the outstanding securitizations of the trust.

Also, the company noted that the Fitch downgrade does not result in an early amortization event in any existing securitization.

The company noted that, as previously disclosed in its 10-K for 2001 and in the 10-Q for the first quarter, early amortization for two specific series of its Providian Gateway Master Trust will occur if there is a downgrade of Providian National Bank's credit ratings below BB-/Ba3, respectively, unless Providian National Bank has entered into a back-up servicing agreement with a back-up servicer satisfactory to the investors within 60 days of the downgrade.

This ratings trigger is not tied to ratings by Fitch, but is based only on the ratings provided by Moody's Investor Service and Standard & Poor's, the company pointed out.

S&P puts CMS ratings on negative watch

Standard & Poor's placed the ratings for CMS Energy Corp., including the B-rated convertible preferreds, and subsidiaries Consumers Energy Co. and CMS Panhandle Pipeline Cos. on negative watch, reflecting heightened uncertainty related to "round-trip" electricity trades.

Michigan-based CMS Energy is a global energy provider and has about $8 billion in debt.

The effect of such trades has caused the resignation of Bill McCormick, long-time chairman and CEO of CMS Energy, an SEC investigation, plans to restate 2000 and 2001 financial statements, the establishment of a special committee by CMS Energy's board of directors to investigate matters surrounding the trades, and shareholder class action lawsuits.

S&P will resolve the watch listing after examining the full effect of the round-trip trade issue on the credit quality of CMS Energy.

Further developments that have a material, negative effect on credit quality could result in a ratings downgrade for CMS Energy and subsidiaries.

Likewise, if the situation is resolved without additional incidents, the CreditWatch listing will be removed and ratings affirmed.

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