Moody's rates new Vornado notes Baa2

Moody's assigned a Baa2 rating to the proposed offering of senior unsecured notes by Vornado Realty LP, the operating partnership for Vornado Realty Trust. On issuance of the notes Moody's will upgrade the preferred stock of Vornado Realty Trust to Baa3 from Ba1. The outlook is stable.

According to Moody's, the reflects Vornado's well respected management team with a successful record of adding value and operating profitably while managing risk, a diversified portfolio of highly productive assets, substantial financial flexibility resulting from a sizeable and high quality pool of unencumbered assets, an undrawn $1billion bank credit facility and demonstrated ability to consistently access the capital markets.

Offsetting the positives are the company's opportunistic investment strategy, which is less predictable, an expectation that the company will continue to maintain high levels of secured debt even as it transitions its capital structure to include unsecured bonds, relatively high levels of variable rate debt and modest fixed charge coverages for its rating category.

Although secured debt comprises a substantial portion of the REIT's capital structure at 40% of total assets at cost, the size and quality of Vornado's proforma pool of unencumbered assets is strong. Proforma for the bond offering unencumbered assets at cost is 5.8X unsecured debt, with unencumbered interest coverage of 17.3 times.

Vornado targets variable rate debt exposure at about 25%, which is high for its rating category. However, the company has been able to maintain its targeted coverage ratios even during periods of high interest rates and other adverse conditions.

Moody's noted that the financial covenants for the proposed unsecured bond offering are expected to be different from standard REIT bond covenants, although not unique.

Covenant calculations are to be based on a prorata consolidation of all the firm's ownership interest, which is more appropriate for Vornado's investment strategy.

However, the covenants uses a cap rate valuation methodology versus a more conservative original cost basis for calculating total assets. Furthermore, the proposed bond covenants allow for higher levels of secured debt - 55% of total assets.

While Moody's will monitor compliance with these covenants, Vornado is anticipated to maintain a credit profile well above these covenant levels and consistent with its rating.

With a commitment to an opportunistic investment strategy, high levels of effective leverage including preferred stock and a capital structure still anticipated to be comprised of substantial amounts of secured debt, improvement in the rating would be difficult.

Downward rating pressure would result from a major leveraged acquisition, engagement in substantial additional development, or failure to improve its leverage ratios and fixed charge coverages as the capital structure transitions.

Fitch cuts TCI, MediaOne ratings

Fitch Ratings downgraded the TCI Communications Inc., MediaOne Group Inc., MediaOne Group Funding Inc. and MediaOne Group of Delaware Inc. debt obligations of AT&T Corp. in connection with the downgrade of AT&T on June 3.

Included were the TCI Communications 5% convertible trust preferred, cut to BBB- from 'BBB, and the MediaOne Group 6% convertible PIES, cut to BBB+ from A-.

All of the ratings remain on negative watch pending the close of the merger between AT&T Broadband and Comcast.

On March 4, Fitch assigned an indicative BBB rating to the senior unsecured debt obligations of AT&T Comcast.

Likewise, an indicative BBB senior unsecured rating was assigned to Comcast Cable Communications, AT&T Broadband and MediaOne Group.

Fitch sees Aquila plan improving credit profile

Fitch Ratings said recent actions announced by Aquila Inc. are likely to lower its business risk and improve its credit profile.

While some aspects of the plan, such as proceeds of planned asset dispositions, are subject to execution risk, other features, such as lowering wholesale trading exposures, expense reductions and dividend cuts are more readily achievable.

Fitch Ratings currently rates Aquila's senior unsecured obligations at BBB-, preferred stock at BB+ and commercial paper at F3.

The outlook remains stable.

Aquila intends to issue $400 million of common stock and $500 million of long-term debt to refinance $675 million of 2002 debt maturities and prefund $375 million of cash requirements related to the Cogentrix acquisition.

If these financings are completed, Aquila will boost liquidity and eliminate refinancing risk through 2004.

Currently, Aquila has a $650 million credit revolver in place and plans to add $200-$400 million of additional bilateral credit facilities before the end of the year.

The announced 42% reduction of the annual dividend rate will increase available after-tax cash flow by about $100 million.

Aquila plans to reduce more debt through $1 billion worth of asset sales, including its investments in New Zealand. However, the sales are subject to execution risk, as there are no signed sales agreements.

S&P rates new El Paso convert at BBB

Standard & Poor's assigned a BBB rating to natural gas pipeline giant El Paso Corp.'s (BBB+/stable/A-2) $500 million convertible offering.

Houston, Texas-based El Paso is North America's biggest natural gas pipeline operator and has about $17 billion in debt.

S&P's rating is based in part on El Paso's stated intention to strengthen its financial profile and credit protection measures.

These important steps help to balance the growing contributions of the higher-risk, non-regulated business lines. However, a major deviation from this stated commitment to credit quality would likely pressure credit ratings.

Since late 2001, El Paso has initiated balance sheet enhancement and strategic repositioning plans in part to strengthen its credit quality.

El Paso's recognition that it needs to maintain lower debt balances, increase equity and simplify its capital structure are all appropriate measures in today's energy market environment, especially after the Enron Corp. bankruptcy.

El Paso completed a $860 million common stock offering in December and in May announced plans to issue an additional $1.5 billion of equity securities. The company also is reducing capital spending to $3 billion in 2002 from $4.6 billion in 2001, completed $1.75 billion of asset sales and another $1.5 billion are planned, and eliminated rating and stock price triggers on $3 billion of financings.

All of these actions are constructive and further signify the company's commitment to credit quality and its current ratings.

The ongoing examination by the FERC into El Paso's bidding practices and market power issues related to natural gas pipeline capacity in California is not expected to significantly affect credit quality, S&P said.

In October, a FERC administrative law judge found that there was no evidence that the company actually exercised market power in the California natural gas market, but the judge did rule that some affiliate transaction rule violations did occur, S&P noted.

El Paso is expected to strengthen its financial profile as it continues to integrate recent acquisitions and extract the benefits offered by having a visible market presence in each major segment of the energy value chain.

The firm is forecasting cash flow of $4 billion and free cash flow after maintenance capital spending and dividends of $1.5 billion for 2002. Consolidated cash flow from operations to average total debt and interest coverage of about 25% and 4 times, respectively, is in line with rating expectations. Reduced debt leverage, targeted at 50% by year-end 2002, and buoyant credit protection measures help mitigate the shift towards higher-risk activities.

Ratings on El Paso reflect steady cash flow characteristics of regulated pipeline units, ANR Pipeline Co., Colorado Interstate Gas Co., El Paso Natural Gas Co., Southern Natural Gas Co. and Tennessee Gas Pipeline Co., which currently account for about one-third of assets and EBIT.

This strength is countered by the growing importance of investments in a myriad of nonregulated businesses, including exploration and production, merchant energy marketing and trading, and chemical processing.

Importantly, management's commitment to maintain credit quality supports the ratings.

Fitch lowers XO bank loan

Fitch Ratings downgraded XO Communications' $1 billion senior secured credit facility to C from CC and assigned a negative outlook. The debt was previously on Rating Watch Evolving. The senior unsecured debt and convertible subordinated notes remain at D.

Fitch said the downgrade reflects the increased risk of default on the senior secured credit facility.

On June 17, XO filed for Chapter 11 bankruptcy protection, as the company failed to reach a restructuring agreement with potential investors, Fitch added.

Concurrent with the bankruptcy filing, XO filed a plan of reorganization that offers two different restructuring scenarios, one which would incorporate the plan previously announced by Forstmann Little and Telefonos de Mexico, and a stand-alone plan, which proposes the conversion of the $1 billion in loans under the credit facility into common equity and $500 pay-in-kind junior secured debt.

Bondholders rejected the plan and were in favor of a plan by Carl Ichan, who proposed putting up $550 million for a 55% stake.

XO is currently attempting to legally enforce the Forstmann deal, but Forstmann claims it can legally exit the deal based on a decline in the value of XO. Should the company be unsuccessful in its attempts to enforce the deal, it will be forced to pursue the stand-alone plan.

The negative outlook reflects the probability of a conversion of the bank debt to equity, which would result in default, Fitch said.

Fitch keeps CMS on negative watch

Fitch Ratings said CMS Energy and its subsidiaries, Consumers Energy and CMS Panhandle Eastern PipeLine Co., remain on Rating Watch Negative following the announcement that the company has reached an agreement with its lenders to extend a $450 million revolving credit facility through July 12.

CMS is now working on establishing a longer-term financing structure. CMS' financial statements for 2000 and 2001 are being restated following the revelation that revenues and expenses were overstated in those periods due to 'wash trades' in the energy marketing and trading business. The SEC investigation of the 'wash trades' combined with CMS' engagement of Ernst & Young to replace former audit firm Arthur Anderson will likely complicate the refinancing of the expiring bank facility and $100 million of maturities at Consumers in 2002, Fitch said.

While Consumers and Panhandle Eastern are financially sound, the companies' financial condition and credit ratings may be adversely affected by the financial stress of their parent, Fitch commented.

Fitch rates CMS Energy's senior unsecured debt at BB+ and its preferred stock at BB-, Consumers Energy's senior secured debt at BBB+, senior unsecured debt at BBB and preferred stock at BB+, Consumers Power Financing Trust I's trust referred securities at BB+ and CMS Panhandle Eastern Pipe Line's senior unsecured debt at BBB.

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