Moody's adjusts Adelphia's ratings

Moody's Investors Service adjusted its rating on Adelphia Communications Corp. and its subsidiaries, lowering some and confirming others. The actions conclude Moody's review.

"Rating differentials generally reflect our expected relative recovery values for individual instruments under an imminent bankruptcy filing as anticipated," Moody's said. The rating outlook remains negative.

Affected Adelphia Communications ratings include: senior unsecured notes and debentures lowered to Caa2 from Caa1, convertible subordinated notes lowered to Ca from Caa2, convertible and exchangeable preferred stock lowered to C from Ca, senior unsecured issuer rating lowered to Caa3 from Caa1 and senior implied rating lowered to Caa2 from B2.

As for the company's subsidiaries: FrontierVision Holdings senior unsecured discount notes were confirmed at Caa1. FrontierVision Operating Partners senior subordinated notes were confirmed at Caa1 and senior secured bank debt was lowered to B2 from B1. Olympus Communications senior unsecured notes were confirmed at Caa1. Olympus Cable Holdings senior secured bank debt was lowered to B2 from B1. Century Communications senior unsecured notes and discount notes were lowered to Ca from Caa1. Century Cable Holdings senior secured bank debt was lowered to Caa1 from B1. Century-TCI senior secured bank debt was lowered to B3 from B1. Parnassos senior secured bank debt was lowered to B3 from B1. And, UCA et al senior secured bank debt was lowered to Caa1 from B1.

The rating actions reflect "our estimated relative expected loss severity for the company's many different instruments from the top to the bottom of its capital structure. Under the now much more certain bankruptcy scenario as currently anticipated, and on a potentially imminent basis, expected credit losses in general will likely be greater than previously anticipated," Moody's said.

According to Moody's, creditors of Olympus Cable Holdings and FrontierVision Operating Partners are in the best relative recovery position. Creditors of Olympus and FrontierVision's holding companies are also fairly well protected, Moody's said. Century Cable Holdings and UCA bank debt have a perceived risk of absorbing some losses. Parnassos bank debt is expected to fare better than Century and UCA, however, it is still seen as carrying some risk, Moody's said.

Senior unsecured noteholders of Adelphia are better positioned than senior unsecured creditors of Century. "We believe that Adelphia noteholders can reasonably be expected to realize still good recovery value approximating as much as 75%-80% or more, while Century bondholders could suffer loss severity of as much as 50% or more," Moody's said. "Convertible subordinated noteholders and preferred stock holders are not expected to fair nearly as well and may in fact recover very little, if anything, relative to the face value of their claims. The common equity of the company will almost certainly be wiped out in its entirety."

The negative outlook reflects the absence of audited financial statements and disclosure of true financial conditions.

S&P rates new FPL issue at A-

Standard & Poor's assigned an A- rating to FPL Group Capital Inc.'s $400 million debentures series B related to a mandatory convertible preferred equity unit, which are issued by utility holding company FPL Group Inc.

The FPL Group Capital debt is pledged as collateral for the forward stock purchase contract. The underlying FPL Group Capital debt is guaranteed by FPL Group and ranks pari passu with the holding company's outstanding senior unsecured debt.

A significant percentage of the equity to be issued in 2006 will be incorporated in the assessment of FPL Group's credit rating.

Proceeds will be used to refinance short-term debt issued by FPL Group Capital to fund independent power projects. The rating is on CreditWatch with negative implications.

Juno Beach, Fla.-based FPL Group has about $6.8 billion in outstanding debt. Subsidiaries include Florida Power & Light Co. and FPL Group Capital.

The rating applies to the company's debt service obligation as well as the issuance of common shares. The rating does not pertain to the safety of principal. The units' value depends on the market value of the company's common shares and is not addressed by the credit rating.

Credit quality for FPL Group is characterized by the activities of its operating utility, Florida Power & Light and a growing portfolio of higher-risk, non-regulated investments, mainly in independent power projects.

Ratings for FPL Group and its affiliates incorporate increasing business risk for the consolidated enterprise attributable to the growing non-regulated independent power producer portfolio, an aggressive financing plan and declining credit-protection measures.

The rating was placed on watch with negative implications on April 18, following FPL news that it will buy an 88% interest in the 1,161 MW Seabrook nuclear power plant.

This is the first nuclear plant in FPL's portfolio of non-regulated generating assets.

The plant will not have any initial offtake contracts and will be managed as a merchant plant with a series of short-term contracts. FPL Group will thus be exposed to electricity price volatility, although as a low-cost base load plant, high levels of dispatch can be expected.

The increased risk is partly balanced by FPL's good track record operating two nuclear plants in Florida. The Seabrook facility also has a good operating profile.

S&P expects to review FPL's strategy and financial plans for its regulated and non-regulated segments with a focus on its rapidly growing and aggressive strategy in the competitive energy business, which could result in a ratings affirmation or downgrade.

Fitch rates new AEP issue at BBB+

Fitch Ratings assigned a rating of BBB+ to the notes embodied in American Electric Power Co. Inc.'s $300 million mandatory convertible preferred equity units.

Fitch only rates the debt issue and remains silent in regards to the common stock or equity unit.

The outlook is stable.

AEP is a holding company that derives its credit strength from the cash flow of its numerous subsidiaries, including 11 electric utility operating companies. The geographically diverse portfolio of regulated utilities provides a predictable revenue stream and unrestricted access to subsidiary dividends.

Primary areas of credit concern are relatively high leverage, continued exposure to evolving environmental regulations due to an extensive coal-fired generating fleet and continued contribution from energy marketing and trading and other higher risk businesses.

Maintenance of existing ratings depends on successful execution of management's plan to reduce leverage through asset sales and the $300 million mandatory convertible and an additional $700 million of common stock.

Proposed asset sales include AEP's interest in Seeboard Group, plc, a UK distribution company and CitiPower, an Australian distribution company. A successful sale would eliminate the consolidated debt and provide cash for further debt reduction.

In states where AEP's subsidiaries are allowed to offer customer choice, the businesses are functionally operating as separate units for generation and transmission. The Federal Energy Regulatory Commission deferred its decision on the legal separation of the AEP subsidiaries until roughly the third quarter of 2002.

Consolidated EBITDA and interest coverage ratios improved in the last 12 months ended March 31, due to lower interest expenses and the significant contribution to earnings from the operation of the Cook plants. For the period, consolidated EBIT/interest coverage and EBITDA/interest coverages were 2.26 times and 3.67 times, respectively.

Also during the period, consolidated adjusted EBIT/interest coverage and EBITDA/interest coverages were 2.11 times and 3.23 times respectively. Consolidated total debt-to-capital as of March 31 was relatively high at roughly 66% and debt-to-EBITDA for the 12-months ended March 2002 was 4.3 time.

Fitch expects lower leverage measures in 2002 as a result of the proposed equity issuances and plans to pay down debt with proceeds from asset sales.

Fitch rates new TXU issue at BBB

Fitch Ratings assigned a BBB rating to TXU Corp.'s $440 million Feline PRIDES, initially consisting of 8,800,000 Income PRIDES. The outlook is stable.

The return to investors will depend on the value of TXU's common stock at settlement date. The rating does not comment on the expected common equity value.

The ratings take into account TXU's holding company structure and reliance on upstream cash flows from subsidiaries that have individual debt to service parent debt. Additionally the rating reflects a high percentage of consolidated net income and cash flow coming from non-regulated activities.

TXU has made progress in reducing consolidated leverage and remains committed to reducing parent company debt.

Reductions in consolidated leverage result primarily from asset sales over the last year. Net debt to capitalization is about 63% and is projected to decline to about 56% by year-end, reflecting asset sales securitization and adjustments for hybrid equity.

While parent level debt remains high, management continues to take steps to refund straight debt and commercial paper with mandatory convertibles and common equity.

Other debt is earmarked for paydown from proceeds of asset sales and the expected securitization of Oncor Electric Delivery Co.'s regulatory assets - about $1.3 billion.

While it is likely that TXU will make additional investments or acquisitions, management has indicated an intention to fund them with 50% equity and 50% debt, thereby continuing to enhance the capital structure to a level comparable to that of similarly rated holding companies.

S&P rates Quest Diagnostics term loan at BBB-

Standard & Poor's assigned a BBB- rating to Quest Diagnostics Inc.'s proposed $275 million senior unsecured term loan and confirmed other ratings, including the 1.75% convertible notes due 2021 at BBB-.

The debt is being issued to partially finance the proposed $1.1 billion acquisition of Unilab Corp.

Unilab is the largest provider of diagnostic testing services in the state of California and has operating margins, before depreciation and amortization, of more than 20%, among the highest in the industry.

This acquisition will greatly expand Quest's presence in this market, as the company will acquire contracts with about 150 large buyers in the state.

The acquisition of Unilab follows Quest's February cash acquisition of American Medical Laboratories Inc., which was purchased for about $500 million. Both acquisitions expand Quest's operations with minimal overlap of facilities and contracts.

However, due to the timing of the two purchases, there are concerns regarding integration.

Beginning in 1999, with its $1.3 billion, largely debt-financed acquisition of the clinical laboratory business of SmithKline Beecham PLC, Quest has built a successful record of acquisitions and is the leading national provider of clinical laboratory services in terms of revenues.

Still, competition is strong and pricing will remain an ongoing issue, as third-party payors continue to focus on containing health care costs, especially in the California market, because of managed care's significant penetration and current soft economic conditions.

Nevertheless, the use of stock in the Unilab transaction, and process improvement initiatives combined with increased testing volume, are expected to contribute to bolster credit protection measures. Accordingly, funds from operations to lease-adjusted debt is expected to be at least 30%, with pretax coverage of interest at about 6 times.

S&P expects that increased testing volume and geographical reach will improve the company's economies of scale and business position. Quest's ability to self fund its growth and successfully integrate acquired operations could lead to a higher rating.

S&P cuts KPNQwest

Standard & Poor's downgraded KPNQwest NV.

Debt lowered includes KPNQwest's $450 million 8.125% notes due 2009, €340 million 7.125% notes due 2009, €500 million 8.875% notes due 2008 and €211 million 10% convertible bonds due 2012, all cut to D from C.

Moody's raises Hercules' outlook

Moody's Investors Service confirmed the debt ratings of Hercules Inc. after the company repaid $1.6 billion of debt from proceeds of the sale of its Betz-Dearborn unit. In addition, the ratings outlook was revised to stable from developing because of the expectation that further major restructurings are less likely and that remaining business lines will generate positive cash flow.

Confirmed ratings include Hercules' senior secured revolver and senior secured debt at Ba1, senior implied, issuer rating and senior unsecured notes at Ba2 and junior subordinated debentures at Ba3 and preferred stock at Ba3.

Currently, the company's capital structure includes a $200 million revolver and $225 million of senior secured notes. Bank loan collateral consists of a lien on the company's property and assets. Senior secured notes collateral consists of a lien on property and assets, excluding working capital items, investment property and general intangibles. Unsecured debt includes $400 million in senior notes and about $625 million of junior subordinated preferred securities.

Ratings reflect operating challenges, consolidation among the paper and pulp customer base and rising raw material costs in the Aqualon division. Offsetting these factors is the company's cost saving initiatives.

Despite the company's asbestos related lawsuits, "Moody's believes that Hercules exposure can be managed within the rating category," Moody's said.

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