S&P cuts TXU, unit ratings

Standard & Poor's lowered the long-term corporate credit rating of TXU Corp. and its U.S. and Australian subsidiaries to BBB from BBB+.

Also, the long-term corporate credit ratings of TXU Europe Ltd. and subsidiaries were lowered to B+ from BBB-.

The outlook remains negative, and the ratings for TXU Europe remain on negative watch.

The downgrades follow a material deterioration in TXU's credit quality. Weakness in TXU's European operations has added pressure to its financial profile, which has been very weak for the BBB+ rating in recent years, S&P said.

Management has communicated an intent to shore up the financial profile in the short term to avoid further ratings downgrades, however. TXU will reduce debt by using cash flow and converting existing securities to common stock, as well as by securitizing $1.3 billion of regulatory assets and converting additional debt to equity.

Most importantly, financial resources of TXU will not be diverted to propping up TXU Europe, S&P added.

The outlook on TXU, however, will remain negative until it successfully executes short-term steps to stabilize the financial profile at the BBB level. It directly reflects immediate liquidity concerns at TXU Europe.

At present, the corporate credit rating gets support from a strong liquidity position. About $2 billion of annual funds from operations covers annual mandatory capital expenditures of $600 million to $700 million, leaving a significant amount of cash available for other uses, including debt reduction.

Short-term liquidity requirements are met by $2.4 billion of bank credit at TXU U.S. Holdings Co., a $138 million liquidity facility at TXU Australia Holdings L.P. and a $500 million facility at TXU Corp. The cross-default to TXU Europe on the $500 million facility has been removed.

If the position deteriorates further, a negative rating action is likely in the short term, S&P said.

Moody's cuts TXU Europe

Moody's Investors Service downgraded the senior unsecured debt ratings of TXU Europe Ltd. and subsidiaries to Caa2 from Baa3, and the ratings were left on review for further downgrade to reflect uncertainty as to whether TXU Europe will default on its debt.

The downgrades follow the announcement by parent TXU Corp. that it will not be providing the previously announced equity injection of $700 million into its European subsidiaries.

In addition, following the cut to below investment grade, a number of rating triggers have been activated and the company has severe liquidity problems that it needs to address, Moody's said.

Moody's understands that the company will attempt to shore up its immediate liquidity position in a number of ways.

Firstly, it is attempting to minimize the actual call on its liquidity through the activation of the various rating triggers.

Secondly, the company is looking to solutions to reduce its cost of purchased power.

Thirdly, it will be looking to lenders to not to put the company into administration [bankruptcy] through requiring immediate repayment of credit facilities. Banks and bondholders may enter into collective standstill arrangements if they feel that the value of their assets is thereby maximized.

Moody's noted that, should the company proceed into administration, the value of its assets is unlikely to fully cover all its liabilities, including the trading liabilities.

S&P cuts Sirius to D

Standard & Poor's lowered Sirius Satellite Radio Inc.'s corporate credit rating and the 8.75% convertible subordinated notes due 2009 to D from CCC after the company failed to make a scheduled interest payment on the convert. Sirius had $599 million in debt at June 30.

S&P views the failure to make the interest payment as an event of default, regardless of any technical grace period.

S&P recognizes that Sirius currently has ample cash to make this payment, but believes the company does not have the capacity to support its current capital structure.

Accordingly, Sirius has been in negotiations with key debtholders to exchange a significant portion of its debt for equity and is also seeking additional equity to fund its considerable cash needs.

If successful, the negotiations could improve the capital structure, near-term liquidity and interest burden, S&P said.

However, S&P added that it remains concerned that negotiations could be detrimental to debtholders and would view an exchange at less than par as tantamount to a default.

In such a case, the remaining ratings would also be lowered to D and the company would subsequently be re-evaluated based on its new capital structure.

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