Moody's rates new Newfield notes at Ba3

Moody's rated Newfield Exploration's proposed $225 million of senior subordinated notes at Ba3 and confirmed the exiting ratings, including the $144 million of 6.5% convertible trust preferreds at Ba3.

The ratings are pro forma for Newfield's pending purchase of EEX Corp. for $650 million, including 7.1 million of Newfield shares in exchange for EEX common and preferred shares plus the assumption of roughly $400 million of debt.

Pro forma year-end 2001 proven reserves approximate 209.4 mmboe and proven developed reserves are about 190 mmboe.

The outlook is stable.

Newfield's three pro forma operating subsidiaries do not guarantee the proposed parent senior subordinated notes, existing senior notes, or the parent's current and pro forma $425 million senior unsecured bank borrowing base facility.

Thus, parent debt is structurally subordinated to $226 million of pro forma subsidiary liabilities of $101 million of secured EEX debt and $125 million of other liabilities.

Newfield states that roughly 65% of pro forma production and 53% of reserves are at the parent, assisting the subordinated notes to be rated one notch under the senior implied rating, instead of two, and the senior notes to be rated at the senior implied level.

If reinvestment patterns or acquisitions shift the resource balance to non-guarantor subsidiaries, each note rating would likely be reduced by one notch.

The ratings are supported by a history of sound funding and business strategies, a stated intention to quickly begin reducing effective debt, larger reserve scale and diversification, a long established core position in the shallow water Gulf of Mexico with deeper horizon potential, attractive operating margins and the ability so far, through effective hedging, to internally fund its high reserve replacement costs during weaker market prices.

Ratings are restrained by: rising combined unit costs relative to unhedged mean prices; fairly high pro-forma leverage on proven developed reserves, especially including the trust preferreds and in light of the short reserve life, reduced liquidity after acquisitions, flat second quarter 2002 production versus the year before, potentially higher front-end costs, risks and lead times and ratings flexibility needed for additional strategic moves.

The stable rating outlook could weaken if Newfield incurs rising debt, or encounters quarterly production disappointments, sustained realized prices below its total unit cost structure, or other challenges in replacing or growing volume at competitive costs relative to price realizations.

The outlook would benefit from debt reduction relative to reserve volumes, sustained production gains, and reserve volume gains at reduced reserve replacement costs.

Note proceeds and bank borrowings will refinance roughly $240 million of EEX bank debt, repay EEX's $64 million forward natural gas sale obligation and fund substantial transaction costs.

Pro forma for EEX, Newfield expects to have a $735 million unsecured bank borrowing base, under which it will continue to have a committed $425 million borrowing base facility.

Newfield appears to have $90 million to $100 million of pro forma undrawn committed bank and money market line availability after the banks' formula deductions of other debt, including one-third of the subordinated notes, from the $735 million borrowing base.

The borrowing base is now $525 million and, before EEX, $156 million was available for borrowing on June 30.

S&P revises Newfield outlook to negative

Standard & Poor's affirmed the rating on Newfield Exploration Co., including the B+ convertible preferred, and assigned a BB- rating to its new notes but revised the outlook to negative from stable.

Newfield is a small independent exploration and production company with $980 million of debt and preferred stock outstanding pro forma for the acquisition of EEX Corp.

The outlook revision reflects Newfield's decision to change the sources of funding for its $643 million acquisition of EEX Corp. in a manner that has worsened its credit quality.

In the new financing package, Newfield will fund about two-thirds of the purchase price with debt, including the new subordinated notes, versus about one-third in the prior package.

As such, Newfield's credit statistics will worsen, with pro forma total debt to projected 2002 EBITDA dropping from about 1.2 to 1.7 and pro forma total debt per mcfe of proved reserves rising to $0.48 to $0.65.

In addition, Newfield's liquidity, defined as cash plus available borrowing capacity, at June 30 pro forma for the transaction, will drop to about $94 million, although Newfield anticipates generating roughly $40 million in free cash flow in the second half of 2002 that can be applied toward the reduction of bank debt.

In S&P's view, Newfield's leverage and liquidity have stretched the limits of BB+ and further increases in leverage likely will trigger a ratings downgrade.

The ratings reflect the cyclicality, volatility and capital intensity of the extremely competitive upstream oil and gas industry, an aggressive growth strategy and the financial and operational challenges posed by a short reserve life.

Mitigating these challenges are management's moderate financial policies, long track record of capably managing its business and operating risks and high operating leverage to North American natural gas prices, which have favorable intermediate-term fundamentals.

Newfield's financial position is somewhat aggressive following the EEX acquisition.

Pro forma for the transaction, Newfield's estimated debt plus preferred stock increased to $0.76 per mcfe versus about $0.57 prior to the transaction. In comparison, recent unit prices paid for Gulf of Mexico reserves have been at prices that are double Newfield's debt per mcfe.

While total debt to EBITDA averaged less than 1 times during 2001, this measure should deteriorate to about 1.7 times in 2002 based on S&P's pricing assumptions. Newfield's internal cash flow in 2002, which is helped by a strong hedging position for the remainder of the year, should be sufficient to fund planned capital expenditures.

However, in 2003, Newfield has far fewer hedges and consequently its cash flow protection measures are more susceptible to commodity price fluctuations. If prices were to fall to historic norms, Newfield likely would draw further on its bank credit facility to fund its capital expenditures.

Newfield's liquidity is expected to remain adequate given the company's limited funding needs for the remainder of 2002.

The negative outlook reflects the likelihood of a ratings downgrade should Newfield continue to increase debt leverage. Management has commented that leverage has peaked and that it will seek to reduce it over an unspecified period of time.

The outlook may be changed to stable if EEX is digested smoothly and Newfield fortifies its financial position.

S&P cuts Amkor convertibles to CCC+

Standard & Poor's lowered the ratings of Amkor Technology Inc., including the two convertible notes to CCC+ from B-.

The outlook is stable.

The downgrade reflects volatile conditions in the semiconductor market and a sustained deterioration in profitability and debt-protection measures, offset by Amkor's adequate near-term liquidity.

While Amkor has retained its leading market share among independent providers, the company is not expected to materially outperform the semiconductor packaging segment overall, which has suffered from a protracted period of overcapacity.

Amkor is the largest provider of outsourced packaging and testing services to semiconductor makers. It also markets digital signal processors made by Anam, a minority-owned semiconductor wafer manufacturer, for Texas Instruments Inc.

While S&P's view of the long-term outsourcing trend in semiconductor packaging remains positive, S&P believes that sequential improvements in demand are expected to be modest over the near term.

Amkor aggressively expanded in 1999 and 2000, increasing the company's debt leverage following the purchase of four packaging factories from 42%-owned Anam Semiconductor Inc. of Korea.

More recently, the company has made a number of joint venture and other investments to increase its packaging presence in Japan, Taiwan and China, all places where Amkor sees future growth opportunities.

As a result, the company's high cost structure, manufacturing intensity, and underutilized capacity are expected to delay attempts by Amkor to materially improve profitability and cash flow measures.

While profitability and cash flow has grown and stabilized over the past year from very low mid-2001 levels as factory utilization levels have risen and price declines have flattened, profitability and debt-protection measures remain weak.

Lease-adjusted debt is currently at about $1.9 billion as of June, exceeding sales over the past 12 months, and debt-to-EBITDA was over 20 times. The company has no maturities before 2005.

Expected 2002 capital expenditures of $100 million have been limited to maintenance levels plus spending based on contracted new business.

Amkor expects to become cash flow positive in the December 2002 quarter. Cash balances, at $162 million as of June 2002, combined with a $100 million unused revolving credit facility, provide adequate near-term liquidity.

In addition, Amkor has an agreement to sell 20 million shares of Anam to Dongbu Group, a Korean wafer manufacturer. The transaction will close in August and is expected to generate about $100 million for bank debt repayment.

Amkor's bank loan is rated one notch higher than its corporate credit rating. S&P is reasonably confident in the prospects for full recovery of principal for secured bank lenders over unsecured debt holders in the event of default or bankruptcy.

The bank loan package is contractually senior to all other debt issues and includes $98 million in secured term loans and a $100 million secured revolving line of credit.

The bank loans are secured by working capital, domestic fixed assets, the company's equity stake in Anam, its wholly owned domestic subsidiaries that indirectly own the company's international operating assets, and inter-company notes and guarantees from its subsidiaries.

Amkor's foundries and equipment represent the bulk of non-current assets and are specific to its industry.

In liquidation, they would likely sell at a substantial discount.

Furthermore, in a distress scenario, S&P assumes declining industry conditions, fully drawn bank lines, falling revenues and accounts receivables and depleted cash.

Still, based on a review of likely cash flow levels in a distressed scenario, the company's enterprise value is likely to cover the entire bank loan package.

In addition, Amkor is expected to remain within amended covenant requirements for minimum EBITDA and liquidity levels, and maximum capital expenditure levels.

Covenant amendments expire in December 2002, before which S&P expects Amkor to negotiate a new covenant package.

Expected modest sequential improvements in operating performance and cash balances provide ratings support.

Moody's cuts Telewest ratings

Moody's downgraded the debt ratings of Telewest plc, Telewest Finance (Jersey) Ltd. and Telewest Communications Networks Ltd. Senior unsecured bonds of Telewest Communications and Telewest Finance were cut from Caa3 to Ca.

The outlook is negative.

The downgrade reflects the increased certainty that Telewest will require some form of balance sheet restructuring and Moody's expected recovery prospects for Telewest's different classes of creditors.

On March 15, Moody's downgraded and changed the outlook to negative from stable, reflecting Moody's expectation that it was increasingly likely that the company would be unable to grow into its highly leveraged capital structure. The company has announced it is seeking bank waivers to allow it to explore potential debt restructuring alternatives.

Given Telewest's relatively limited growth trends in context of its leveraged balance sheet, it now appears almost certain that some form of balance sheet restructuring will be required.

The Ca rating of the holding company notes reflect the significant impairment likely to be realised by par bondholders given the very high debt leverage, ongoing funding requirements and a significant amount of subordination to obligations at both the operating and intermediate holding company levels.

The B3 rating of Telewest Communications Network's bank facility reflects its structural seniority and the benefits of strong covenant and collateral packages, as well as upstream subsidiary guarantees.

Fitch affirms WellPoint

Fitch Ratings affirmed the ratings of WellPoint Health Networks Inc., including the convertible notes at BBB+.

The outlook is stable.

The ratings of WellPoint's subsidiaries gain significant group support from their position within the overall organization. Fitch considers each of the rated operating companies to be an important part of WellPoint's overall long-term expansion strategy.

Ratings reflect superior competitive position in the individual and group health insurance market in California, Georgia and Missouri, strong and consistent consolidated operating performance, solid capital position and excellent cash flow.

The ratings also reflect the considerable challenges facing the health insurance industry, including the rapidly escalating cost of providing health care, as well as regulatory and legal challenges that may affect the extent to which industry participants can manage costs and price their products appropriately.

In addition, while the company's integration of Cerulean Companies Inc. acquired in March 2001 and RightCHOICE appears to be going well, some integration risks will remain, as would be the case with any company implementing a national expansion strategy.

WellPoint is currently one of the largest publicly traded health insurers in the U.S., with total June 30 medical membership of about 13 million and around 45 million specialty members. For the first half of 2002, WellPoint reported premium and management services revenue of $8.1 billion and net earnings of $311.8 million.

S&P revises Lucent outlook to negative

Standard & Poor's affirmed the ratings on Lucent Technologies Inc., including the CCC+ preferred rating, but revised the outlook on the company to negative from stable.

The ratings reflect challenging market conditions, as core customers continue to defer purchases of new communications equipment. The revised outlook reflects continued stresses in market conditions and increasing uncertainty as to Lucent's ability to return to profitability.

The company had $5.3 billion of combined debt and preferred stock outstanding at June 30.

Lucent's June quarter sales were $2.95 billion, 16% below the March quarter, although the company had anticipated only a 10%-15% decline in its mid-June guidance update. Revenues were $5.4 billion in the June 2001 quarter.

Industry conditions are not expected to improve materially over the next year, as carriers continue to defer capital expenditures in light of renewed economic concerns and lack of marketplace visibility.

Lucent's ability to meet prior revenue targets, given that challenging market conditions had become increasingly problematic, and the company is not providing guidance for the September 2002 quarter.

Cost-reduction actions that have already been announced were targeted to permit net income breakeven on quarterly revenues below $3.5 billion by the September 2003 quarter.

Some progress has been seen from these actions, as the company's pro forma losses from operational sources were trimmed from the March level. Additional cost-reduction programs, planned for the current quarter, are expected to further reduce the break-even level.

However, these new programs will also not likely become fully effective until the September 2003 period, when the company expects to achieve a 35% gross margin.

Financial flexibility remains sufficient for the company's intermediate term operational needs, with $5.4 billion cash at June 30 and full availability in its $1.5 billion revolving credit facility. The company continues to be in compliance with all revolver covenants.

If Lucent cannot achieve its targeted return to net profitability by the end of fiscal 2003, or if other financial measures erode materially, ratings could be lowered.

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