S&P cuts Pegasus

Standard & Poor's downgraded Pegasus Communications Corp. and removed it from CreditWatch with negative implications. The outlook is negative. Ratings lowered include Pegasus Satellite Communications Inc.'s $100 million 9.75% senior notes due 2006, $115 million senior notes due 2005, $155 million 12.5% notes due 2007, $175 million notes due 2010, $192.835 million 13.5% senior subordinated notes due 2007 and $195 million 12.375% senior unsecured notes due 2006, cut to CCC- from CCC+, Pegasus Communications' $300 million 6.5% convertible preferred stock series C, cut to CC from CCC, and Pegasus Media & Communications Inc.'s $225 million senior secured bank loan series B due 2005 and $275 million senior secured bank loan due 2004, cut to B- from B+, and $83.2 million 12.5% notes series B due 2005, cut to CCC- from CCC+.

S&P said the downgrade is in response to increased concerns about the adequacy of Pegasus' liquidity.

Discretionary cash flow remained negative for the 12 months ended Sept. 30, 2002, but scaled back growth enabled Pegasus to generate positive cash flow in the 2002 third quarter, S&P noted.

Longer-term cash flow growth is expected to be constrained by considerable churn and the meaningful cash outlays required to retain and replace subscribers amid intense competition, S&P said.

Absent financial transactions, liquidity is likely to become more strained in the near term, S&P warned. Debt maturities substantially will rise in 2004 and 2005, and the company's 13.5% discount notes will require cash interest payments in 2004.

Pegasus did not declare the semiannual cash dividend payable July 1, 2002, on its 12.75% debt-like, exchangeable preferred stock. The company also did not declare the scheduled quarterly dividends payable on its Series C preferred stock for three quarterly periods.

At the 2002 third quarter end, Pegasus had borrowing availability of approximately $117 million under its reducing revolving credit facility maturing in 2004. Cash balances declined to approximately $48 million at Sept. 30, 2002.

S&P said it had viewed the company's cash cushion as an important source of intermediate-term liquidity. Potential divestitures of Pegasus' broadcast television assets could provide modest alternative sources of liquidity.

S&P confirms Aspect Communications

Standard & Poor's confirmed Aspect Communications Corp.'s ratings including its $490 million zero-coupon convertible subordinated debentures due 2018 at CCC+ and removed it from CreditWatch with negative implications. The outlook is stable.

S&P said the confirmation follows the announcement that Aspect has successfully completed the private placement of $50 million of Series B convertible preferred stock.

S&P said it believes Aspect will be able to meet the put option on its subordinated convertible debentures in August 2003. Based on the current amount outstanding, the debentures will have an accreted value on the put date of approximately $129 million, and the put option can be settled in cash or stock or a combination of the two. Aspect's cash balances, with the $50 million of newly raised capital, are approximately $196 million.

The rating continues to reflect the difficult IT spending environment and Aspect's reliance on a niche product offering, offset by adequate cost controls and improving financial flexibility, S&P said. Revenues of $97 million for the quarter ended Dec. 31, 2002, were flat sequentially and down 13% year-over-year. New license revenues as a component of total revenues were 21% in the December 2002 quarter, down from 24% in 2001 and 36% in 2000, reflecting depressed levels of new business.

S&P said it does not expect Aspect's operating performance to improve significantly until enterprise-spending activity recovers.

S&P cuts Getronics, on watch

Standard & Poor's downgraded Getronics NV and put it on CreditWatch with negative implications. Ratings lowered include Getronics' €350 million 0.25% notes due 2004 and €500 million 0.25% convertible subordinated notes due 2005, cut to CCC+ from BB-.

S&P said the action reflects the potentially adverse impact of share price erosion on Getronics' planned refinancing of its subordinated convertible bonds.

Since the group's refinancing offer to the holders of its 2004 and 2005 subordinated convertible bonds, announced on Jan.10, which includes a predetermined number of equity shares, Getronics' share price has fallen by more than one-half. As a result, the current refinancing offer has significantly shrunk in value and seems unlikely to be accepted, S&P said

Moreover, S&P said a scenario in which bondholders are left with few alternatives but to accept the refinancing offer at a very significant loss could be characterized as a default under the rating agency's criteria.

Getronics' convertible bonds are currently trading significantly below pre-refinancing offer prices, S&P noted. The bonds are also trading slightly below the minimum value implied by the refinancing offer, indicating a market perception that the deal may not be accepted. The minimum acceptance threshold set by the group for the offer is 57.5%.

Fitch rates Sempra notes A

Fitch Ratings assigned an A rating to Sempra Energy's new senior notes due February 2013. The outlook is stable.

Proceeds will be used to reduce short-term debt outstanding, primarily related to capital expenditures at unregulated subsidiaries.

Sempra's ratings reflect the solid cash flow from regulated utility subsidiaries San Diego Gas & Electric and Southern California Gas, as well as risks associated with an increasing focus on unregulated businesses, including power generation, energy marketing and trading, energy services and international investments, Fitch said.

For the nine months ended Sept. 30, 2002, the California utilities together contributed 79% of operating earnings before interest, taxes, depreciation and amortization and 72% of net income, while energy trading, non-regulated generation and other lines of business contributed the remainder, Fitch noted.

SDG&E has generally faced lower financial and business risk than other investor-owned utilities in California. Recent proceedings at the California Public Utilities Commission to determine power procurement plans and rate mechanisms should allow for relatively predictable cost recovery for SDG&E in the future as power purchasing responsibility transitions back to the utility.

Capital expenditures have been significant in recent years, primarily associated with the building of new unregulated generating facilities in the Western United States to support power sales to the California Department of Water Resources, Fitch added. This contract, entered into at the height of the energy crisis to supply up to 1,900 megawatts of power to the state, continues to be mired in litigation and regulatory dispute.

S&P puts i2 on watch

Standard & Poor's put i2 Technologies Inc. on CreditWatch with negative implications including its $350 million 5.25% convertible subordinated notes due 2006 at CCC+.

S&P said the watch placement is in response to i2's decision to re-audit its financial statements for 2000 and 2001. The re-audit follows allegations regarding i2's revenue recognition with respect to certain customer contracts.

The CreditWatch listing reflects uncertainties as to the size and nature of possible adjustments and the potential for additional disclosures following the audit, S&P said.

S&P puts ACE on watch

Standard & Poor's put ACE Ltd. (A-) on CreditWatch with negative implications.

S&P said the action is in response to ACE's announcement that it will strengthen its asbestos reserves by $2.18 billion (gross) ($516 million net; $354 million after taxes) and the pervasive impact it will have on the ACE organization as a whole.

The reserve strengthening uses ACE's remaining $533 million of adverse development reinsurance protection from National Indemnity Co. and leaves the group exposed to potential prospective additional adverse developments on the asbestos exposures incurred with its acquisition of Cigna Corp.'s property/casualty operations on July 2, 1999, S&P said.

Although uncertainty with the adequacy of these reserves has historically been factored into the financial strength rating on the group, the magnitude of such a reserve strengthening was not, S&P said.

ACE has additional adverse development reinsurance protection for asbestos reserves incurred with its 1996 acquisition of the Westchester Specialty Group. These specific reserves, which have $600 million of remaining reinsurance protection (also with National Indemnity Co.), were included in this recent reserve analysis and are presumed to be adequate. In aggregate, gross asbestos exposures and latent liabilities accounted for 29.7% of ACE's capital base as of Sept. 30, 2002.

S&P said the watch placement also indicates its concerns about the group's capital adequacy, accumulated credit risk to reinsurance recoverables, and the managed run-off of historical liabilities associated with old Cigna books of business and other discontinued business lines, which have been an inherent drag on ACE's earnings and cash flows since they were acquired in 1999.

Although management of these areas has progressed well, and bad debt reserves were increased as part of the current charge, S&P said it remains concerned with the rapid growth of reinsurance credit exposure on ACE's balance sheet and the prior-year loss-estimate uncertainties that remain within certain business segments.

Moody's puts ACE on review

Moody's Investors Service put ACE Ltd. on review for possible downgrade including its senior unsecured debt at A2, subordinated debt at A3 and preferred stock at Baa1 along with its subsidiaries ACE INA Holdings, Inc. (senior unsecured debt at A2, subordinated debt at A3) and Capital Re LLC (monthly income preferred securities at A2).

Moody's said the review follows ACE's announcement that it will incur a net after-tax charge to earnings of $354 million in the fourth quarter of 2002 in connection with the addition of approximately $2.2 billion to its gross reserves for asbestos and environmental-related liabilities. The company's announcement follows the completion of an internal review of the company's asbestos and environmental reserves, as well as a regular biennial reserve review by an internationally-known actuarial consulting firm required by the Pennsylvania Insurance Department as part of the acquisition of Cigna's property and casualty operations in 1999.

The review was prompted primarily by the combination of the magnitude of the reserve charge - on both a gross and net basis, and the prospective increase in ACE's debt tangible leverage profile as a result of its proposed recapitalization through the issuance of debt or trust-preferred securities, the latter of which Moody's considers to be essentially debt-like.

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