Moody's confirms Harvest, outlook stable

Moody's Investors Service confirmed Harvest Natural Resources, Inc. including its 9.375% senior unsecured notes due 2007 at Caa2 and changed the outlook to stable from developing.

Moody's said the stable outlook reflects the return to a more normal situation in Venezuela following a two month workers strike and the subsequent restarting of Harvest's oil production in Venezuela after having it completely shut down during the strike.

Moody's said it believes that fundamentally Harvest's operations and liquidity are in line with higher ratings. However, due to the ongoing political uncertainty in Venezuela and the fact that all of Harvest's cash flows are generated from Petroleos de Venezuela Harvest's ratings and outlook are aligned with Moody's ratings of both PDVSA and Venezuela.

Currently, PDVSA's and Venezuela's foreign currency country ceilings and local currency ratings are Caa1 with stable outlooks.

Harvest's outlook and possibly the ratings could also be pressured by the potential renegotiation of Harvest's contract with PDVSA which could result in unfavorable changes in the economic terms of the original contract as the Venezuelan national oil company looks to recoup lost revenues from private producers due to the strike; additional production problems which would result in significant incremental investments by Harvest or further loss of production; and delays in the start-up of new natural gas production which is scheduled to commence in the fourth quarter of 2003. This new production should partially offset the steep natural decline of the company's oil production, which declines at about 20-25% per year.

Harvest's ratings are constrained by its concentration of cash flows, which come entirely from PDVSA; the company's exposure to political risk in Venezuela and Russia; current production is still below pre strike levels; high full cycle costs compared to realized prices which limits Harvest's ability to internally fund reserve replacement; and a significant amount of proved undeveloped (PUD) reserves relative to total reserves that will require significant future spending to convert to producing reserves, Moody's said.

The ratings are supported by significant cash balances; successful reduction of leverage; Harvest's expectation of new natural gas production to commence in the fourth quarter; lower interest expense which offsets some of the higher components of unit costs; and operating control in Venezuela.

Moody's cuts some United ETCs, EETCs

Moody's Investors Service downgraded the ratings of certain of United Airlines, Inc.'s equipment trust certificates and enhanced equipment trust certificates.

All the equipment trust certificates previously at Caa1 or Caa2 were cut to Ca. For the enhanced equipment trust certificates, series 1997-1 class A was cut to Caa1 from Baa3 and class B to Ca from Ba2, series 2000-1 class A was cut to Ba3 from Baa3 and class B to Ca from B3, series 2000-2 class A was cut to Ba3 from Baa3, class B to Caa1 from Ba3 and class C to Ca from B3, series 2001-1 class A was cut to Ba3 from Baa3, class B to B3 from Ba1, class C to Ca from B3 and class D to C from Caa3, Jets Equipment Trusts series 1994 class A was cut to Caa3 from Caa1, class B to Ca from Caa2 and certificates to C from Caa3, series 1995-A class A was cut to Caa3 from Ba2, class B to Ca from Caa1, class C to C from Caa2 and certificates to C from Caa3 and series 1995-B class A to was cut to Caa3 from Ba3, class B to Ca from Caa1, class C to C from Caa2 and certificates to C from Caa3.

Moody's said the downgrades were prompted by uncertainties surrounding the availability of sufficient cash flow in each transaction to allow the original terms of the debt to be met and the increased potential for principal loss to debt holders as a result of prolonged negotiations regarding the disposition of the aircraft combined with continued declines in the value of the underlying aircraft collateral.

United filed for Chapter 11 bankruptcy protection in late 2002. Since then the company and its creditors have been negotiating the terms under which United will continue to use the aircraft or the return of the aircraft to debt holders, Moody's noted. According to court documents, during this period some payments have been made to debt holders, which is assisting EETC transactions in continuing interest payments and avoiding default.

In Moody's opinion, while the continuation of some cash flow is a positive development, the limited amounts paid and the prolonged period of uncertainty surrounding the eventual disposition of the aircraft has lead to an increased risk profile. Recovery of transactions in default (ETC's) is compromised by declining collateral values. Those transactions not in default (EETCs) face both decline in collateral coverage and the increased probability of a degradation in cash flow sufficient to call into question the longer term ability of these transactions to perform according to original terms even for the most senior debt holders.

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