S&P rates new Calpine convertible at B+, confirms other ratings

Standard & Poor's assigned a B+ rating to Calpine Corp.'s new convertible debentures due 2006 and affirmed its BB+ corporate credit and existing senior unsecured debt ratings. In addition, S&P affirmed its B+ rating on $1.1 billion of Calpine's outstanding convertible debentures. The outlook remains stable.

The BB+ corporate credit rating reflects several risks, S&P said. Current market conditions may hurt Calpine's business and stress liquidity. Lower power prices, a potential economic recession that could reduce demand growth, and the difficulty in issuing equity in the current market may collectively challenge Calpine's capitalization targets, which in turn could increase Calpine's debt service load, S&P said. Calpine has substantial exposure to the California market and the California Public Utility Commission publicly challenged the validity of these contracts, which are in renegotiating talks, S&P noted. Calpine's target of 65% leverage to total capitalization makes the company vulnerable to electricity price volatility, or even a period of sustained price depression, S&P said Calpine is also vulnerable to having stranded assets in construction if long-term electricity prices drop, S&P said.

Nonetheless, S&P said, there are strengths that adequately mitigate the risks for the BB+ rating level. Calpine's growth strategy has focused on adding assets in the U.S. and other developed markets, such as the U.K. and Canada, thereby mitigating sovereign and regulatory risk compared to a peer group that has invested heavily in Latin America and Asia, S&P noted. Calpine mitigates merchant risk through its strategy of covering two-thirds of its capacity under long-term contracts. Revenues from existing contracts over the next five years, assuming steady state conditions, cover 100% of debt service, but not at levels commensurate with an investment grade rating.

The stable outlook, S&P said, reflects expectations that Calpine will continue to construct its plants on time and within budget and that the high level of expertise of its new power-marketing group will continue to stabilize revenues. The outlook may change to positive when the political and regulatory environment in California becomes more predictable and stable, S&P said.

An upgrade to investment grade would require a higher level of equity in the capital structure or an increase in contractual revenues to approaching 90%, S&P said, adding that under the current contractual strategy of keeping two-thirds of the capacity under long-term contract, minimum FFO interest coverage would have to approach 3.0 times to achieve an investment-grade rating. If Calpine continues its growth plan without issuing equity, however, S&P said it may lower the rating.

Fitch rates new Calpine at BB+, lowers senior unsecured debt rating from BBB- to BB+

Fitch lowered Calpine Corp.'s senior unsecured debt to BB+ from BBB- and its convertible trust preferreds to BB- from BB. Also, a BB+ rating was assigned to Calpine's proposed offering of convertible debentures. The company remains on rating watch, negative.

While the company's operating fundamentals are sound, the financial profile and business strategy is aggressive and is not consistent with the current market environment, Fitch said. The negative rating watch remains in place until the company can demonstrate that it has successfully met its funding requirements for the remaining portion of the zero-coupon notes not refinanced with the new privately-placed convertible note offering, that it has adequately met its capital funding needs associated with the Calpine Energy Services energy and trading business and the company presents a credible business plan that more adequately reflects the current state of the energy markets, Fitch said.

By offering the new convertible notes, Calpine should remove significant financial uncertainty that has been overhanging the company, while giving it time to complete its power facilities under construction, that should substantially increase free cash flow, Fitch said.

It is Fitch's understanding that Calpine will be assessing all of its development activities and will likely announce a downsizing of the total capital plan (70,000 megawatts previously announced), a deferral of certain projects, cost cutting and possible renegotiations of agreements with original equipment manufacturers. Given the expected reduction in Calpine's growth plan and the uncertain consequences associated with the new strategy, some of which may be negative, Fitch plans to carefully analyze Calpine's updated business strategy before completing its rating review. Conversely, a more moderate construction program could reduce financing pressure and allow the company to bolster its balance sheet and equity ratio, Fitch said.

Positives for Calpine's credit include the company's growing fleet of highly-efficient, natural-gas fired generating units, long-term contracts for a substantial portion of its current and future output, regional diversity and assets that can be monetized during periods of credit dislocation, Fitch said.

Moody's confirms Williams ratings on debt reduction plan

Moody's Investors Service confirmed the ratings of The Williams Cos. Inc. (Baa2 senior unsecured) and its subsidiaries. Moody's also confirmed the debt rating of Williams Communications Group Note Trust, a third-party special purpose vehicle to which Williams has a contingent obligation. The rating outlook remains stable. The rating actions, Moody's said, were in response to Williams' debt reduction plan that includes a sizable reduction in capital expenditures, asset sales and a convertible issue.

Williams also plans to eliminate rating triggers contained in certain of its debt financings. Williams has over $2 billion of financings, both on- and off-balance sheet, that contain rating triggers, Moody's said. Roughly half of it is associated with a share trust financing for Williams Communications Group, a former subsidiary spun off earlier this year. Williams' plan to eliminate the rating triggers stabilizes its credit quality, Moody's said, because such rating triggers could worsen a company's liquidity or financial position at a time when its credit is faltering

The debt reduction plan will quickly address concerns about leverage that has crept up in recent years, Moody's said, and provides for future equity to support its riskier business profile. Williams' leverage is now in the low 60% range, which is high given the growing business risks of the company. Debt reduction, coupled with the new mandatory convertible, should bring down leverage to the mid-50% range.

Early in 2002, Williams plans to issue about $1 billion of mandatory convertible preferreds, which would automatically convert to common stock in a few years. The mandatory conversion will be viewed as permanent capital in the long-term, Moody's said, and will enhance Williams' leverage measures. However, until their conversion, these securities will require fixed charges that will be fully reflected in their coverage measures.

William's plan also includes a $1 billion reduction in capital expenditures for 2002 and asset sales that could range from $250 million to $750 million, with proceeds to pay down debt. The plan entails execution risk, but Moody's rating actions are based on a belief that Williams management will take actions necessary to maintain its current ratings in order to ensure that it maintains good access to capital and remains a viable counterparty in its energy trading business, which is at the heart of its growth strategy. Moody's said it would reassess Williams' ratings if the company is unable to successfully implement the plan over the coming year.

Moody's assigns Baa2 rating to bonds assumed by TXU Energy

Moody's Investors Service assigned a Baa2 senior unsecured rating to bonds assumed by TXU Energy on Jan. 1. TXU Energy will be formed Jan. 1 upon deregulation of power markets in Texas. It will assume $4 billion of unsecured debt previously issued by TXU Electric, and 21,000 megawatts of generating capacity previously housed there. The ratings constitute a one-notch downgrade for holders of senior unsecured debt previously issued by TXU Electric (A3 senior secured).

Also, Moody's confirmed the Baa3 senior unsecured rating assigned to TXU Corp. with a stable outlook. A risk weighting of dividends upstreamed from TXU subsidiaries leads to the Baa3 rating after notching for structural subordination. The analysis factors in $810 million in senior notes issued by Pinnacle One Partners (Ba1senior unsecured), a partnership formed to develop TXU's telecom businesses. Moody's notes the existence of a note trigger event that would cause the bonds to be repaid by TXU if certain remedies are not successful.

S&P puts Standard Motor Products on watch, negative

Standard & Poor's placed its ratings on Standard Motor Products Inc. on CreditWatch with negative implications, reflecting weaker-than-expected operating results and higher-than-expected debt use in the past few quarters, leading to subpar credit protection measures, and S&P's increasing concern that the company will not be able to achieve the improvement in financial measures factored into the ratings. S&P said it will meet with management to discuss near-term operating prospects and the potential for debt reduction over the near to intermediate term, and if it appears the company will not be able to achieve the improvement in credit protection measures factored into the ratings, the ratings are likely to be lowered

Moody's cuts Providian senior debt to B2 from Ba3, ratings remain on review for downgrade

Moody's Investors Service downgraded the long-term ratings of credit card issuer Providian Financial Corp. (Senior to B2 from Ba3) and its subsidiary Providian National Bank (Deposits to Ba2 from Ba1). The ratings remain on review for possible downgrade, Moody's added.

Moody's said the downgrade and continued ratings review reflect uncertainty regarding the timing of any restructuring initiatives and the implications on regulatory capital, as well as Providian's weaker earnings profile and funding challenges. The two-notch downgrade of the parent holding company's debt reflects the rating agency's expectation that parent company double leverage will increase and holding company cash flows will be reduced as a result of the company's written agreements with its bank regulators entered into on Nov. 21. The rating agency also noted that the bank continues to have access to the brokered deposit market, and has been able to successfully issue short-term private securitizations to replace some of its maturing issues.

S&P lowers ACT Manufacturing to CC from B-, keeps on negative watch

Standard & Poor's lowered its corporate credit and senior secured bank loan ratings on ACT Manufacturing Inc. to CC from B- and its subordinated note rating to C from CCC+. Ratings remain on watch with negative implications, S&P said. ACT Manufacturing was operating last week under a third limited waiver to its credit agreement with its domestic bank syndicate, which expired on Dec. 14, 2001. The domestic bank syndicate has not agreed to any additional or extended waivers under the credit agreement, and the company has fully utilized the available liquidity under the credit agreement. The company's North American operations have very limited liquidity at this time. While the company continues to pursue all alternatives, it has limited options available, S&P said.

Management announced that it is considering a number of actions, including additional layoffs at several locations and the possibility of seeking bankruptcy protection in order to preserve its assets and value. Hudson, Mass.-based ACT provides electronic manufacturing services, primarily to the telecommunications and networking markets. S&P said it will monitor management's actions to address severe liquidity concerns prior to resolving the watch placement.

Moody's puts Motorola ratings on review for possible downgrade

Moody's Investors Service placed the long-term ratings of Motorola Inc. (senior unsecured at A3) and its subsidiaries on review for possible downgrade in response to the outlook for weaker end markets for a number of Motorola's business units, which will place increased pressure on the company's operating performance. The company's Prime-2 short-term ratings are not being placed on review, Moody's said.

Moody's noted that Motorola has taken a number of steps during 2001 to enhance its financial position, including significant reductions in capital expenditures, improved working capital management, sale of investments and the issuance of $1.2 billion in mandatory convertible securities. As a result the company has materially reduced its short-term borrowings, increased its substantial liquidity position and reduced its total and net debt positions. Moody's said its review will focus on the extent and duration of the decline in certain of Motorola's end markets, the effectiveness of cost reduction efforts and the resultant impact on its operating performance.

S&P affirms Motorola, but revises outlook to negative from stable

Standard & Poor's affirmed its ratings on Motorola Inc. but revised the outlook to negative from stable, following restructuring action. The ratings on Motorola Inc. reflect S&P's concerns that industry conditions will remain challenging over the next few quarters, pressuring Motorola's ability to significantly strengthen operating profitability over the intermediate term.

The restructuring action, as well as other cost-reduction efforts in the current quarter, is targeted to yield annualized savings of $1.1 billion, much of which will become effective in calendar 2002. The action is expected to generate good profitability despite weaker revenues; earlier programs had been targeted at reducing operating costs by $2 billion. Cumulative headcount reductions from all actions will total 48,300 positions through the end of 2002. S&P noted, too, that Motorola has cut its capital expenditures to $1.6 billion this year and has improved its working capital performance, generating $1.3 billion in operating cash flows for the first three quarters, despite operating losses.

Motorola's efforts to restore operating profitability to targeted levels by the end of 2002 could be challenged by uncertain economic conditions and competitive pressures. Should the company not be able to meet its targets, ratings could be lowered. However, if the company can achieve expected levels of profitability, the outlook will be restored to stable

Fitch affirms Markel convertibles at BBB

Fitch on Wednesday affirmed and removed from negative watch the debt ratings of Markel Corp. and the insurer financial strength ratings of its Markel North America insurance operations. The BBB senior debt and convertible note ratings and the BBB- trust preferred stock rating of Markel Capital Trust were also affirmed. But Fitch downgraded Markel International Ltd.'s senior debt to BB+ from BBB-, along with cuts for other Markel units. The rating outlook is stable, Fitch said.

Markel was placed on watch to reflect Fitch's concerns that losses from the events of Sept. 11, as a percent of capital, might ultimately prove to be higher than expectations for the current rating category. Markel recorded a $75 million pretax loss from the events of Sept. 11, which represents an estimated gross loss of $325 million net of $250 million of reinsurance recoveries. Fitch said it gained comfort with this loss calculation following discussions with management who detailed the company's methodology.

The downgrades of the Markel International Ltd. debt and Markel International insurance ratings reflect Fitch's concerns that operating results at the Markel International insurance operations have not improved at the rate expected when those ratings were assigned and that the level of reinsurance recoverables is significant in relation to capital. Mitigating these concerns are the appropriate actions taken by the company's new management team to exit unprofitable lines to position the company for future profitable growth and the benefit Markel International derives from being part of a stronger parent organization.

Moody's cuts Mirant to Ba1, keeps on review for possible downgrade

Moody's Investors Service lowered its ratings for Mirant Corp., Mirant Americas Energy Marketing, LP and Mirant Americas Generation Inc. to Ba1 and Mirant Trust I to Ba2. The ratings remain under review for further downgrade pending Mirant's actions to improve its capitalization and arrangements to obtain financing.

Moody's said the downgrade reflects expectations for moderating cash flows in light of the heavy debt burden. Moody's believes Mirant's cash flow will be restricted over the coming months. Throughout this time, Mirant plans to continue funding power plant construction expenditures as well as cover ongoing interest payments and preferred dividends. Additionally, the company will require credit support for its marketing and trading operations. Mirant's near-term liquidity sources, aside from the somewhat restricted cash from operations, are $800 million of cash on the balance sheet and $850 million of unused Mirant and MAGI revolver capacity, according to Moody's

S&P upgrades Lukoil convertibles

Standard & Poor's upgraded the $350 million of convertibles due 2003 issued by the LukInter Finance BV units of LUKoil OAO to B+ from B.

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