S&P cuts TECO notes to junk

Standard & Poor's downgraded TECO Energy Inc. including cutting its corporate credit to BBB- from BBB and senior unsecured debt to BB+ from BBB- and Tampa Electric's senior secured debt and senior unsecured debt to BBB- from BBB. The outlook remains negative.

S&P said the downgrade TECO reflects continued exposure to power plant projects that are being severely impacted by a weak power price environment, ongoing asset sale execution risk, and the paramount importance of continuing to execute planned strategic initiatives to arrest the company's weakening credit quality.

The company's attempt to refocus its business strategy to rationalize its merchant power exposure and focus primarily on its utility (about 70% of cash flow) and coal (about 20% of cash flow) businesses are the primary drivers behind the company's maintaining its investment-grade corporate credit rating, S&P said. The power projects continue to be subject to weak power price levels and may be subject to large write-downs in the future.

The current ratings are supported by the expected dramatic reduction in the company's business risk profile, which going forward will be supported by a lower-risk consolidated business mix that is expected to produce a steady cash flow stream, primarily generated by integrated utility operations, S&P said.

S&P noted that TECO's liquidity is expected to improve over the coming months due to the expiration of letters of credit posted to complete the Union and Gila power plants, potential asset sale proceeds, and minimal debt maturities over the next few years. The company has a $350 million term loan due November 2003 for which it has obtained a replacement credit facility for the full amount (the facility will upsize in October to $350 million from $150 million currently), which could effectively extend the maturity to October 2004.

The negative outlook reflects the substantial execution risk TECO faces as it attempts to rationalize its merchant plant exposure and complete potential asset sales, such as TECO Transport, the Hardee power station, Guatemalan assets, and other assets, S&P said.

Moody's rates Fairchild loan Ba3

Moody's Investors Service assigned a Ba3 rating to Fairchild's guaranteed secured $175 million revolving credit facility and $300 million term loan and confirmed its existing ratings including its $300 million 10.375% guaranteed senior subordinated global notes due 2007 and $350 million 10.5% guaranteed senior subordinated global notes global notes due 2009 at B2 and its speculative grade liquidity at SGL-1. The outlook is stable.

Moody's said the rating reflects Fairchild's strong and stable cash flow, which results from the diversity of its end markets and the long life cycles of many of its products, as well as its excellent liquidity and its demonstrated ability to manage its costs. The rating action also incorporates the continuing pressure on the company's gross margins, which has led to recent losses, and its relatively high leverage.

The stable rating outlook reflects Moody's expectation that Fairchild will maintain its gross profit margin at roughly current levels for the remainder of 2003, and that margins will improve modestly in 2004. It also reflects Moody's belief that the company will continue to fund capex out of operating cash flow. In addition, the outlook incorporates the rating agency's expectation that Fairchild will continue to make relatively small, strategic acquisitions and fund them internally.

In Moody's view, particularly given the sector in which it operates, Fairchild exhibits very stable and strong cash flow. Its ratio of free cash flow/total debt has been approximately 10% for the last two years, a figure that Moody's expects it will maintain through 2003 and improve moderately in the following year.

Fairchild exhibits fairly high leverage, Moody's said. Although total debt/EBITDA was a relatively moderate 3.3 times for the year ending Dec. 31, 2002, EBIT/interest expense for 2002 was only 1.0x. The latter figure should remain about the same or improve slightly during 2003 as the lower interest expense that will result from the refinancing of the company's subordinated debt offsets the expected slightly lower margins.

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