Moody's rates new Airborne convertible Ba3

Moody's assigned a Ba3 rating to Airborne Inc.'s proposed $100 million of guaranteed convertible senior notes due 2007, and cut Airborne Express Inc.'s senior notes to Ba1 from Baa3. The outlook is stable.

The convertible rating reflects the support provided by guarantees of the company's operating subsidiaries and subordination to the currently undrawn $275 million bank line of credit, $200 million accounts receivable securitization and $200 million of existing notes.

The downgrade reflects an increase in financial risk profile created by higher levels of debt and reduced cash flow. Acknowledged in the ratings is the company's progress in strengthening cash flow through cost controls and reduced capital spending but, in Moody's view, a recovery of revenue growth and underlying earnings are critical to the company's full recovery.

This is anticipated to be a relatively slow process with debt coverage ratios remaining weak for the intermediate term, the rating agency said. The stable outlook anticipates a slow but steady positive revenue impact on Airborne from an economic recovery, the benefits of its pricing and product initiatives, and the ability of the company to manage its costs.

The company's liquidity is adequate for the intermediate term. The convertible issue will provide cash to repay a $100 million note due Dec. 15, 2002, and cash flow should be sufficient to finance capital expenditures at the planned reduced levels. The company has not drawn its $275 million bank line of credit although about $100 million is used for letters of credit and surety bonds. Airborne reported over $200 million in cash and equivalents at year end 2001.

Moody's anticipates stronger results than those seen in 2001 with strength increasing toward the fourth quarter. Should the first half of the year generate weaker than expected performance, additional stress on cash flow could develop, which could affect the rating.

S&P rates Airborne convertible BBB-

Standard & Poor's assigned a BBB- rating to Airborne Inc.'s proposed $100 million convertible senior unsecured notes due 2007, reflecting the company's position as the third-largest integrated package express carrier in the U.S. and a more variable cost structure than competitors, offset by recent losses in core operations due to reduced volumes, which have weakened the company's financial profile.

In response to recent challenges, Airborne has launched a ground-delivery operation, invested more in technology and focused its sales force on the expanded product line. These moves, meant to promote domestic volume growth and provide a more-diversified product line, are fully underway and appear to be contributing to stabilized results.

Airborne is expected to keep operations at least near profitability during 2002. Although financial flexibility has been reduced compared to previous years, the company has taken measures to maintain liquidity at acceptable levels. Slower-than-anticipated progress in the turnaround could further erode the company's financial position and result in a downgrade.

Airborne reported operating losses for the first two quarters of 2001 and modest profits for the second half of 2001, partially helped by compensation under Sept.11-related legislation. Combined with weak results and elevated capital spending in 2000, Airborne's business and financial profiles have been weakened compared with recent years, but is still adequate with lease-adjusted funds from operations to debt around 34% in 2001 and EBITDA coverage of interest around 5 times.

Moody's rates new Avaya senior notes Ba2

Moody's assigned a Ba2 rating to Avaya Inc.'s new $300 million in senior secured notes, reflecting the secured nature of the notes, which makes them superior to existing senior unsecured debt, currently rated Ba3. The outlook is negative.

The notes are secured by a lien on, among other things, the company's receivables, inventory, equipment, stock in domestic subsidiaries and domestic intellectual properties, which is subordinate to the claim on the same asset base held by the company's bank lenders.

The security interest will remain in place until either the unsecured debt is rated Baa2 by Moody's and the corporate credit rating from S&P is BBB, in each case without a negative outlook, or the company has $400 million in unsecured debt or availability under its credit agreements.

The bank facilities provide for a release of the collateral if the company achieves those ratings. As a result of the proposed issue, the available aggregate bank facilities will decline to about $950 million from $1.25 billion. The bank agreements have a maximum debt to EBITDA coverage test and minimum EBITDA generation requirements.

While Avaya is currently in compliance with the covenants, operating performance will have to improve significantly later in the year to remain in compliance.

Earlier this week, Moody's lowered Avaya's senior unsecured debt to Ba3 from Baa3, reflecting deterioration in operating outlook for end markets, cash costs of the next phase of restructuring and uncertain timing of a rebound in its business.

S&P affirms Duke Realty convertible at BBB

Standard & Poor's affirmed the BBB+ corporate credit rating for Duke Realty Corp., and the BBB rating on $609 million convertible preferred. The outlook remains stable.

The ratings acknowledge a strong market position, stable operating performance and sound financial risk profile. These strengths are somewhat tempered by recent occupancy declines, a sizable level of development to come on line in the coming year and the trust's growing use of joint-venture financing.

Given expectations for a continued challenging operating environment this year, any material deterioration in consolidated fixed-charge coverage would likely prompt an outlook revision.

Moody's cuts Telewest senior bonds to Caa3

Moody's downgraded the debt ratings of Telewest plc and its units, including senior unsecured bonds to Caa3 from B2. The outlook for all ratings is negative.

The downgrade reflects heightened concerns regarding Telewest's ability to grow into its highly leveraged capital structure given the company's slowing overall revenue declining growth trends, continued high levels of cash burn and a challenging operating environment.

It also reflects Telewest's significantly weakened access to capital over the past year, which has diminished its financial flexibility and likely reduced its ability to strengthen its balance sheet through the issuance of subordinated capital.

Absent a meaningful injection of incremental equity it now appears increasingly likely, in Moody's opinion, that a restructuring of the company's balance sheet may be required.

While Moody's continues to recognize Telewest's solid growth prospects, particularly for broadband Internet services, the absolute magnitude of the company's future growth requirements is of significant concern.

The Caa3 rating of Telewest's holding company notes reflect subordination to obligations at both the operating and intermediate holding company levels. Moody's noted that the considerable decline in European cable asset valuations over the past year has likely reduced the asset protection that would be afforded to bondholders in a downside scenario.

S&P rates new St. Paul senior notes at A-

Standard & Poor's assigned an A- rating to St. Paul Cos. Inc.'s $500 million senior notes due 2007. The outlook is negative because of the risk of significant restructuring and the need to improve capital adequacy.

The rating reflects St. Paul's current financial leverage and management's intended use of proceeds - to refinance short-term debt. Debt leverage is in line with the rating, while preferred leverage is at the high end of the range.

S&P expects significant improvement in St. Paul's pretax earnings and combined ratio through yearend 2002. Capital adequacy is expected to return to extremely strong levels through improved earnings from restructuring, and St. Paul is expected to exhibit continued strong financial flexibility.

S&P upgrades DaVita

Standard & Poor's upgraded DaVita Inc. and changed the company's outlook to stable from positive.

Ratings affected include DaVita's $225 million 9.25% senior subordinated notes due 2011, $125 million 5.625% convertible subordinated notes due 2006 and $345 million 7% convertible subordinated notes due 2009, all raised to B from B-, and its $175 million senior secured revolving credit facility due 2006, $75 million senior secured term A loan due 2006 and $175 million senior secured term B loan due 2007, all raised to BB from BB-.

S&P rates new Navistar exchangeables BB-

Standard & Poor's assigned a BB- rating to Navistar Financial Corp.'s planned issue of $200 million subordinated exchangeable notes due 2009.

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