Moody's cuts Adelphia, still on review

Moody's Investors Service downgraded Adelphia Communications Corp. and its subsidiaries and left the ratings under review for possible further downgrade. Downgraded ratings include Adelphia's senior secured bank debt, cut to Ba3 from Ba2, senior unsecured notes and senior subordinated notes of FrontierVision to B3 from B2, convertible subordinated notes to Caa1 from B3, convertible and exchangeable preferred stock to Caa2 from Caa1, senior unsecured issuer rating to B3 from B2 and senior implied rating to B1 from Ba3.

The downgrade reflects the company's over-leveraged balance sheet, loss of investor confidence, ensuing liquidity crunch and the lack of a near-term contingency plan, Moody's said.

"Importantly, the one notch downgrade reflects our belief that the company's many immediate obstacles, including the imminent requirement to file its financial statements in order to cure its current bank loan agreement defaults, the need to gain renewed access to undrawn bank lines in order to avert a liquidity crisis, and the need to satisfy both the NASDAQ and the SEC and maintain its common stock listing in order to preclude the put of convertible securities back to the company, will all be satisfactorily addressed in very short order," the release said. However, if the company problems are not fixed, ratings could be downgraded even further.

If the company files its 10-K, engages in an asset monetization program, improves and extends its liquidity and the Nasdaq and SEC reviews close, the Moody's review will probably end and the ratings will be confirmed, the release said.

Fitch rates H-P notes at A

Fitch Ratings initiated coverage of Hewlett-Packard Co. and assigned an A rating to its senior unsecured debt and an F1 rating to its commercial paper program. The outlook is negative.

Fitch said the ratings reflect HP's strong balance sheet and liquidity, recurring revenue base, solid industry positions, especially in enterprise systems, storage, and printing, the breadth of its product line, the stability of certain cash flows via its services offerings, ample financial flexibility, and the wide geographic revenue base.

On the other hand, it faces the competitive nature of the computer industry, the significant integration risks of the merger with Compaq, the necessity for constant new product introductions, and the need to improve profitability in the PC segment, Fitch added.

With more than $75 billion in revenues, HP will be the second largest IT company, although nearly a quarter of revenues will be derived from the currently unprofitable PC segment.

The negative outlook reflects the execution risk of the largest merger in the technology industry's history, entailing significant changes to the organizational structure and headcount reductions, and there is clearly event risk integrating two very large, multinational organizations with approximately 150,000 employees in 160 countries, Fitch said. HP has stated that at least 10% of the workforce will be reduced. As these cost cuts occur, there is still risk of human capital defections. Overlapping product lines, which Fitch expects to result in revenue losses of more than 5% for 2002 and 2003, as well as customer disruptions, are also near-term concerns.

In addition, the outlook reflects the continued difficult environment of the company's end markets, which provides uncertainty to the timing of HP's return to historical profitability levels. Additionally, if HP's credit protection measures do not show improvement over the first 9-12 months of integration, the ratings may be negatively impacted, Fitch added.

S&P cuts Wind River outlook

Standard & Poor's lowered its outlook on Wind River Systems Inc. to negative from stable. Ratings affected include Wind River's subordinated debt at B-.

S&P said the action follows Wind River's company's announcement that it expects sales in the April 2002 quarter will fall short of expectations.

S&P said it believes deteriorating customer spending on software development projects, particularly among the company's communications customers, is likely to pressure profitability and cash flow over the near term.

R&D spending by Wind River's top customers has declined 25%-40% over the past year and continues to slow, limiting the company's revenue visibility. The company expects to report sales in the April 2002 quarter of about $65 million, down from $110 million in the year-earlier period. Cost savings expected from the company's planned level of expense reductions would take time to realize and may not be sufficient to compensate revenue shortfalls, S&P added.

Moody's puts Cypress on review

Moody's Investors Service put Cypress Semiconductor Corp. on review for possible downgrade, including its $199 million 3¾% convertible subordinated notes due 2005 and its $283 million 4% convertible subordinated notes due 2005 at Ba3.

Moody's said the review is in response to continued weakness in Cypress Semiconductor's networking, storage and wireless end markets, notwithstanding its expectations for revenue growth in the second quarter of fiscal 2002; continuing losses from operations in the first quarter, after losses were recorded in the second through fourth quarters of fiscal 2001; and the erosion of the company's balance sheet since the beginning of fiscal 2001, particularly the deterioration in the cash and investments, and retained earnings accounts.

Viewing the balance sheet on a consolidated tangible net worth basis, as of March 31, 2002 debt had increased to 60% of total capitalization from 34% at the end of fiscal 2000, Moody's said.

Cash, short-term and long-term investments were $354 million, including $77 million of restricted investments, as compared to $1.16 billion at the end of fiscal 2000.

S&P rates FEI convertibles B-

Standard & Poor's assigned a B- rating to FEI Co.'s $175 million convertible subordinated note due 2008. The outlook is stable.

S&P said the rating reflects the high degree of volatility and technology risk in FEI's end markets, particularly semiconductors, combined with the company's small operating scale and reliance on a narrow technology and product spectrum.

Offsetting the negatives are FEI's position as a niche provider of high-end metrology equipment and the company's adequate profitability, cash flow generation and balance sheet liquidity, S&P said.

Moody's cuts Hexcel

Moody's Investors Service downgraded Hexcel Corp. including lowering its $340 million 9¾% senior subordinated notes due 2009 to Caa2 from Caa1, its $47 million 7% convertible subordinated notes due 2003 and $26 million 7% convertible subordinated debentures due 2011 to Caa3 from Caa2 and its $339 million senior secured credit facilities to B3 from B2. The outlook remains negative.

Moody's said it lowered Hexcel because of an increase in its financial risk profile created by the high level of debt and the expected continued weakness in the company's commercial aerospace and electronic markets, as reflected in the nearly 20% decline in first quarter 2002 revenues.

Based on its order book and the latest OEM production forecasts, the company now expects its commercial aerospace revenues to drop 25-30% in 2002 versus 2001, a decline larger than management's initial evaluation of the impact of the Sept. 11 attacks which indicated a revenue drop of about 20%, Moody's noted.

Further, Hexcel's electronics segment has felt the effects of the severe industry downturn, and the attendant inventory correction throughout the supply chain, since the end of the first quarter of 2001, Moody's said.

However the rating agency also said it recognizes Hexcel's "significant and early effort to adjust its cost structure to the dramatically lower business levels."

Moody's said it believes that the company's near-term liquidity position is adequate. Access to its revolving credit has been improved due to a first quarter amendment revising financial covenants consistent with the company's anticipated financial performance through the year 2002. Credit availability, though, was reduced with the revolver commitment cut to $220 million from $235 million, with a further reduction to $212 million on or before September 30, 2002. As of March 31, 2002, the company had undrawn revolver and overdraft availability under its senior credit agreement of about $65 million.

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