S&P cuts El Paso to junk, still on watch

Standard & Poor's lowered El Paso Corp.'s long-term debt, including senior unsecured debt, and subsidiaries to BB from BBB.

All ratings remain on negative watch, affecting some $17 billion in debt.

The downgrade reflects the decline in liquidity due to El Paso's need to draw down $1.5 billion from its $3 billion 364-day credit facility to post cash or other collateral, resultant increases in debt leverage that was already excessive and the paramount importance to arrest weakened credit quality, S&P said.

Of concern is the expectation that cash flow will continue to be inadequate to meet capital spending and dividend requirements in 2003, S&P added.

Even greater challenges exist for 2004, when about $3.5 billion of debt will mature.

The ability to refinance is highly dependent on regaining timely access to the volatile capital markets. Absent this access, El Paso may be forced to sell more assets and restrict discretionary spending.

El Paso has formed Travis Energy Services L.L.C. in an effort to liquidate its energy trading book, which could free up cash collateral and eliminate parental guarantees.

The effect on El Paso's credit profile from exiting trading depends on the duration and the ultimate cost of selling its positions, as well as El Paso's asset and equity contribution into the final structural and legal architecture, S&P said.

Resolution of the watch will depend on greater clarity regarding the FERC's ongoing investigation into market manipulation in California.

Current ratings assume resolution of the FERC matter in a manner that is credit neutral to El Paso.

El Paso's liquidity is supported by an about $2 billion credit facility expiring May 2003 and $500 million of capacity under its $1 billion multiyear facility expiring August 2003.

El Paso has eliminated all rating and stock price triggers from its financings.

S&P keeps Sealed Air on watch

Standard & Poor's said it is keeping the ratings of Sealed Air Corp, including the BB rated convertible preferred, on negative watch despite the recently announced resolution to all of its asbestos-related claims for about $513 million in cash and 9 million shares of common stock.

The agreement would settle all current and future asbestos-related claims and resolve the pending fraudulent transfer claims made in connection with Sealed Air's 1998 acquisition of the Cryovac packaging business from now bankrupt W. R. Grace & Co.

The pending settlement would remove uncertainty related to asbestos-related liabilities and improve the company's ability to access the capital markets, including negotiations to refinance its committed revolving credit facility that matures in March 2003.

However, the proposed cash outlays were not previously incorporated into the ratings, and will limit free cash flow availability for debt reduction, including the convertible, S&P said.

These developments will delay previously expected improvement to sub-par credit measures and will likely result in a modest downgrade.

Still, S&P said it would expect ratings to remain in the investment-grade category, subject to confirmation that management's financial policies and strategies are consistent with this conclusion.

Current ratings reflect above-average business risk profile, strong free cash flow generation and somewhat aggressive financial management.

S&P cuts Trenwick

Standard & Poor's downgraded Trenwick Group Ltd. to D. Ratings lowered include LaSalle Re Holdings Ltd.'s $75 million perpetual preferred shares series A and Trenwick Capital Trust I's $110 million 8.82% subordinated capital income securities (SKIS), both previously at CC.

S&P said the downgrade follows the announced non-payment of the preferred dividend on Lasalle Re Holdings Ltd.'s Series A preferred stock, which had a declared dividend due Monday.

Trenwick has also suspended dividends and distributions payable on all other outstanding preferred securities, including Trenwick Group Ltd.'s Series B cumulative convertible perpetual preferred shares and Trenwick Capital Trust I's 8.82% exchange subordinated capital income securities, S&P added.

S&P cuts Titanium Metals preferreds

Standard & Poor's downgraded Titanium Metals Corp.'s $150 million 6.625% beneficial unsecured convertible securities due 2026 to D from C and confirmed its corporate credit rating at B-.

S&P said the downgrade follows Titanium Metals' deferral of the dividend on its $201.2 million convertible trust preferred securities.

S&P added that the ratings reflect Titanium Metals' position as an integrated producer of titanium sponge and mill products, as well as weak profitability and cash flow protection measures stemming from very soft end market conditions.

The aerospace industry was materially affected by the terrorist attacks on Sept. 11, 2001, which led to dramatic capacity reductions, deferrals of aircraft deliveries, and aircraft order cancellations. The aerospace industry, which accounts for 50% of overall titanium demand and 55% of Titanium Metals' shipments, is expected to gradually begin recovering in 2004 but will not reach healthier levels until 2006, S&P said. Typically, aircraft deliveries tend to lag titanium shipments to the commercial aerospace industry by about one year.

Titanium Metals' financial position has been severely weakened and will remain very weak in light of difficult aerospace conditions. Indeed, the company's 2002 revenues are projected to decline about 25% to approximately $365 million, down from $487 million in 2001. Combined with a decline in capacity utilization rates to 45% in 2002 from 85% in 2001, which has caused unit costs to increase, operating margins have become severely compressed to 6% for the trailing 12 month period ending Sept. 30, 2002, from about 11% at year-end 2002, S&P said.

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