S&P rates new TXU issue at BBB

Standard & Poor's assigned a BBB rating to the $440 million of senior unsecured notes associated with TXU Corp.'s issuance of convertible FELINE PRIDES. The outlook is stable.

Clearly, the ability of TXU to access the equity markets at a reasonably strong price will continue to be an important factor in executing its strategy of acquiring additional retail customers while at the same time reducing overall debt by about $6 billion over the next few years, S&P said.

It is a good sign that market demand allowed TXU to increase the total number of shares and Feline Prides sold to $1 billion from $750 million, S&P added.

TXU Corp. has $18 billion of outstanding debt.

The outlook will remain stable as long as TXU's management continues to reduce debt and improve other measures of debtholder protection.

The plan, outlined more than a year ago, envisions TXU having a financial profile appropriate for the current ratings in the next few years.

Fitch affirms PerkinElmer ratings

Fitch Ratings affirmed PerkinElmer's existing bank and senior unsecured debt rating at BBB+, including the 0% convertible notes due 2020, and commercial paper debt rating at F2. The outlook remains negative.

However, Fitch said it anticipates a decline in PerkinElmer credit ratings unless asset sales occur near term with proceeds applied to debt reduction, while tempering acquisition expenditures.

PerkinElmer announced, during the first quarter conference call April 25, reduced earnings guidance for 2002 and the placement of two low-performing business units, telecom equipment and entertainment lighting, under strategic review with plans to divest or dispose of these businesses by the end of 2002.

The news followed the reduction in earnings guidance by the company on March 1.

The decision to review the businesses, which together represent about 5% of current total revenues, resulted from continued slowdown in end-market demand with a low expectation of a turnaround in the near to intermediate term. Restructuring charges of $10.7 million and optoelectronics inventory write-downs of $23.5 million taken in first quarter includes costs stemming from the strategic action.

Fitch's concern centers around the generation and use of cash flows given the loss in overall revenues from the divested businesses and the uncertainty in revenue generation from the remaining business units.

The company had cash and cash equivalents of around $170 million at the end of first quarter, with additional sources of cash in foreign monies and proceeds from asset sales.

Leverage, determined by debt-to-EBITDA, has increased over anticipated levels, however improvement in credit metrics is anticipated in the near term, as proceeds from asset sales are expected to be used for debt reduction.

The ratings account for weakness in the lighting and telecom industries, as well as cautiousness in capital spending from the pharmaceutical end-market, representing 28% of PerkinElmer's global customer base.

Also, the ratings reflect a strong reputation and market leading positions in instrumentation, in addition to the benefit of aggressive efforts to increase operating margins through working capital improvements, headcount reductions, facility rationalization and Asian manufacturing and raw materials sourcing.

The negative outlook reflects near-term risks that the company may experience further erosion in demand from end-markets, which may place downward pressure on current credit protection measures.

S&P rates new Agere convertible at B

Standard & Poor's assigned a B rating to the planned $220 million offering of convertible subordinated notes due 2009 and 2014 by Agere Systems Inc.

Also, S&P affirmed its BB- corporate credit rating for Agere and revised the outlook to negative.

Ratings reflect a good technology position in the highly stressed communications semiconductor and optoelectonic components industries, a strengthening position as a supplier to the computing and networking industries and expected sufficient liquidity to execute its business plans, as well as its independence from former parent Lucent Technologies Inc. on June 1.

These are offset by ongoing challenges faced by telecommunications equipment manufacturers and the company's continued depressed profitability.

The outlook revision was based on likelihood that the company will not achieve meaningful positive EBITDA during the current fiscal year, ending in September, and that profitability will remain below prior expectations over the intermediate term.

Agere reported a 2.6% sequential increase in revenues in the March 2002 quarter from the December 2001 period, to $551 million, while EBITDA improved to negative $108 million, from negative $136 million.

Although further improvements are expected, because of an improved position in the computing and networking sectors and a cost-reduction program, S&P believes EBITDA is likely still to be subpar for the rating over the next few quarters.

Meaningful recovery in the competitive local exchange carrier, long-distance optical-fiber network provider and the networking segments of the communications equipment industry is now not expected until late 2003 or early 2004, according to industry observers and equipment manufacturers.

With dramatic changes in its end markets, the company now derives well over 50% of revenues from the computing and networking semiconductor markets. While those markets are not robust, they remain stronger than the highly stressed optical components sector.

Agere's profitability has begun to recover from its low point in the September 2001 quarter, because of the changing sales mix and its earlier cost-reduction actions.

Further gains are expected as the company's storage business continues to strengthen, targeted wireless local-area-network market expands and additional cost reductions from already-announced programs continue to be implemented.

Due to depressed sales and a commitment to retain high R&D levels - 33% of sales in the March quarter - to support new product initiatives, the company is unlikely to report significant levels of operating income in fiscal 2002.

Agere has divested non-core assets and taken other actions to improve liquidity, however.

The company had cash balances of $1.6 billion at March 31, well in excess of its debt of $1.1 billion at that date. Agere is also expected to retain sufficient cash and borrowing capacity to implement its near- to intermediate-term business plans.

S&P cuts Pinnacle Holdings to D

Standard & Poor's lowered the senior unsecured debt rating on wireless tower operator Pinnacle Holdings Inc. to D from C due to the company's Chapter 11 bankruptcy filing.

The senior secured bank loan rating on subsidiary Pinnacle Towers Inc. was also lowered to D from CC.

The corporate credit rating on Pinnacle Holdings was lowered to D on March 21, following the company's missed March 15 interest payment on its 5.5% convertible subordinated notes due 2007.

Moody's puts Verizon on review for downgrade

Moody's placed the long-term debt ratings of Verizon Comunications and all subsidiaries, including Verizon Wireless, under review for possible downgrade.

The review was prompted by concerns about expanding competition and technology substitution and the sustainability of cash flow growth, net of substantial capital expenditures, debt service and dividends relative to the company's large debt load.

Moody's said the review will focus on the ability of Verizon's wireline operations to offset increasing competitive challenges from IXCs, wireless providers, technology substitution, cable companies and CLECs and the ability of Verizon Wireless to sustain margins and grow cash flows in the face of an extremely competitive landscape for providing national wireless voice and data services.

In addition, the review will also focus on financial concerns.

Those include the company's continuing efforts to improve its liquidity profile and the potential impact on Verizon's balance sheet and financial flexibility from further funding of Genuity and/or its recapture, the exercise by Vodafone of its $20 billion put to either Verizon or Verizon Wireless and a ruling requiring Verizon Wireless to purchase and pay the $8.8 billion that it bid in the Nextwave re-auction.

Moody's will also assess the ability of the company to offset the potential impact of these events on debt and make significant progress in the stated objective of reducing total debt and the short-term debt component.

Moody's confirms Wendy's ratings

Moody's confirmed Wendy's Baa1 senior unsecured long-term and the convertible preferreds at Baa2 following the company's announcement that it is acquiring Fresh Enterprises Inc., the owner and operator of the Baja Fresh Mexican Grill restaurant chain, for $275 million plus the assumption of a small amount of debt.

The confirmation reflects the strategic benefits of increased diversification, Baja's track record of successful growth, the solid position of Wendy's existing brands in their core markets and the expectation that debt protection measures will not be materially impacted by the transaction.

The rating outlook is stable reflecting the company's acceptable performance through the current economic down cycle and the strong execution of its operating plan at the unit level.

S&P ups Wendy's outlook to stable

Standard & Poor's revised its outlook on Wendy's International Inc. to stable from negative based on strengthening of the company's balance sheet due to the conversion of its $200 million convertible preferreds into common stock.

S&P also affirmed the BBB+ long-term and A-2 short-term corporate credit ratings on the company's $275 million acquisition of Fresh Enterprises Inc.

"The conversion of the [convertible] into equity restores Wendy's balance sheet to historical leverage levels," said S&P credit analyst Diane Shand.

Pro forma for the transaction, total debt to total capital declines to 37.7% from 47.8% at the end of 2001.

"The $275 million purchase price, which is expected to be funded with a combination of cash and debt, does not materially impact Wendy's overall financial condition," Shand said.

S&P said Wendy's operating margins are consistently above 20% and it generates return on permanent capital in the mid- to high-teens percentage area.

Credit protection measures are adequate for the rating category, with EBITDA coverage of interest more than 8.5 times and funds from operations to total debt of 36%. Pro forma for the convertible conversion and the proposed acquisition, total debt to total capital is expected to be in the low-40% area.

Liquidity is provided by a $200 million credit facility, a $300 million shelf and $132 million of cash on the balance sheet at March 31. This, together with the company's good cash flow generation, provides satisfactory financial flexibility.

The company had $606 million of funded debt outstanding as of March 31.

S&P raises some Hercules notes

Standard & Poor's upgraded the senior unsecured notes of Hercules Inc. and confirmed its other ratings and removed them from CreditWatch with positive implications. The outlook is positive. Ratings affected include Hercules' $400 million 11.125% senior notes due 2007, raised to BB- from B+, its $125 million 6.625% senior secured notes due 2003, $100 million 6.6% notes due 2027 and $200 million revolver due 2003, all confirmed at BB, and Hercules Trust I's $350 million 9.42% trust originated preferred securities and Hercules Trust II's $350 million preferred securities, confirmed at B.

S&P said the actions follow the completion of Hercules' sale of the Water Treatment business of its BetzDearborn Division to GE Specialty Materials for $1.8 billion in cash (after-tax proceeds $1.665

billion).

As anticipated, the proceeds have been used to substantially reduce debt, thereby improving the financial profile and eliminating concerns about near-term debt maturities and constrained liquidity due to financial covenant pressures, S&P said.

S&P said it believes the transaction will largely complete management's proactive strategic review of the business portfolio, thereby reducing the prospects for further M&A activity and uncertainty in the ratings.

The ratings on the senior unsecured notes have been raised to one notch below the corporate credit rating to reflect the note holders' improved recovery prospects in a default scenario following the reduction of a substantial portion of the secured bank debt, S&P said.

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