S&P keeps Comcast on negative watch

Standard & Poor's said the BBB corporate credit rating on Comcast Corp. remains on negative watch, stemming from the merger agreement with AT&T Broadband.

The combined company, to be called AT&T Comcast Corp., will be the largest cable operator in the U.S. with about 22 million subscribers in 41 states.

The aggregate value of the transaction at the time of the announcement was about $72 billion, including the assumption of $20 billion of AT&T debt and liabilities and $5 billion of convertible preferred securities held by Microsoft Corp.

As part of the transaction, Microsoft has agreed to convert the QWIPS into shares of the new company.

In addition to the cable subscribers, the combined company will include AT&T's 25.5% interest in Time Warner Entertainment and several Comcast entertainment properties, including interests in QVC, E! Entertainment and the Golf Channel.

If the corporate credit rating on Comcast is lowered, S&P does not expect the rating to fall below investment grade based on its current assessment of industry fundaments.

Management's ability to improve the financial parameters of the combined company and to reduce debt in an appropriate time frame is key to maintaining the rating.

S&P says Navistar strike does not impact ratings

Standard & Poor's said the ratings on Navistar International Corp. (BB+/negative) are currently unaffected by the strike at its Chatham, Ontario assembly plant.

Navistar has the operating flexibility to accommodate a labor strike by shifting production to its Escobedo, Mexico facility, which can produce heavy-duty trucks.

Navistar has indicated that it is considering closing the Chatham plant if it is unable to reach a satisfactory agreement with the Canadian Auto Workers Union.

Should the strike continue for a significant period, causing overall production levels to be affected, S&P would reassess the impact.

Moody's rates L-3 notes at Ba3, raises outlook

Moody's assigned a Ba3 rating to L-3 Communications Corp. Inc.'s proposed $750 million senior subordinated notes and confirmed all existing ratings, including the $420 million of 4% senior subordinated convertible notes due 2011 and $300 million of 5.25% senior subordinated convertible notes due 2009 at Ba3.

Moody's also changed its rating outlook to positive from stable.

Proceeds of the new notes will be used to repay L-3's $500 million senior subordinated bridge loan and to fund the recently announced tender of the $225 million 10.375% senior subordinated notes.

Concurrently with the debt offering, L-3 plans to sell 14 million shares of common equity with a greenshoe for another 2.1 million shares, raising about $900 million. Proceeds from the stock offering will be used to repay the revolver, which stood at $351 million as of May 31, and for general corporate purposes.

Ratings recognize that pro forma for the transactions, L-3's capital base will be substantially strengthened with its equity increasing to about $2.1 billion from $1.3 billion and debt-to-capital decreasing to below 45%.

The proposed debt and equity issuance follows a spike in leverage in the first quarter of 2002, with debt-to-cap of 63% at March 31, that resulted from the $1.15 billion largely debt-financed acquisition of Raytheon Co.'s aircraft integration systems unit.

The equity sale is in consistent with the company's stated intent at the time of the acquisition and with management's demonstrated strategy of reducing leverage when it approaches the 60% level.

The ratings also reflect the favorable industry environment with a growing defense budget and the increasing proportion allocated to defense electronics, L-3's primary focus.

The ratings recognize L-3's track record of both organic and acquisition driven revenue growth, improved margins and profitability and successful integration of the businesses acquired since the original buyout from Lockheed Martin in 1997.

The ratings benefit from the company's broad business mix with limited reliance on any single platform, program or product, its established technology and proprietary products base with substantial sole-source position.

The company has a balanced mix of cost-reimbursement and fixed price contracts and Moody's noted that as is typical of the industry, L-3 uses percentage-of-completion method of accounting in the recognition of sales and income. Funded backlog as of the end of the first quarter 2002 stood at $2.6 billion.

However, the ratings also continue to reflect the company's leverage and negative tangible net worth after the equity offering and the potential for acquisition driven increases in leverage backed by significant revolving credit availability.

Moody's believes that the substantial increase in equity base positions the company for further major acquistions and increases the likelihood of same.

Further, incorporated in the ratings are acquisition integration challenges, most notably those related to the $1.15 billion AIS purchase. AIS, now known as L-3 Integrated Systems, will increase the company's revenue by about a third in 2002 and is almost equal in combined purchase price of all of L-3's material acquisitions since 1998 - 15 for a total of $1.3 billion.

The positive outlook reflects Moody's expectations for continued strong financial performance, helped by favorable industry environment, with acquisition adjusted revenue growth in the upper single digits and stable operating margins.

A ratings improvement would require a performance track record confirming the successful integration of the AIS acquisition. Further rating improvement might be limited by any near-term additional debt-financed major acquisition.

Fitch cuts AES

Fitch Ratings downgraded The AES Corp. and put it on Rating Watch Negative. Ratings lowered include AES' senior unsecured debt, revolving credit facility and ROARS, lowered to BB- from BB, its senior subordinated debt, lowered to B from B+, and convertible junior debentures and trust convertible preferred securities, lowered to B- from B.

Fitch also lowered IPALCO Enterprises and Indianapolis Power and Light because of the downgrade of the parent company and similarly put them on Rating Watch Negative. Indianapolis Power & Light Co.'s first mortgage bonds and secured pollution control revenue bonds were lowered to BBB- from BBB, its senior unsecured debt and preferred stock to BB+ from BBB- and commercial paper lowered to B from F2 and withdrawn. IPALCO's senior unsecured debt was lowered to BB+ from BBB- and its commercial paper lowered to B from F2 and withdrawn.

Cilcorp and Central Illinois Light Co. remained unchanged and on Rating Watch Evolving pending their announced sale to Ameren Corp. Cilcorp's senior unsecured debt is rated BBB- while Cilco's first mortgage bonds and secured pollution control revenue bonds are rated BBB, its senior unsecured debt and preferred stock is rated BBB- and its commercial paper F2.

Fitch said the watch placement reflects AES's constrained liquidity in the next six to nine months and AES's dependence on dividends from Latin American subsidiaries. The company has significant refinancing risk in this period and needs to secure financing or complete asset sales.

Fitch lowered AES because of "the increasingly challenging business environment" facing the company in Latin America as well as other countries such as the U.S. and the U.K., high consolidated leverage and high parent company leverage.

S&P lowers Xerox notes

Standard & Poor's removed Xerox Corp. from CreditWatch with negative implications, confirmed its corporate credit rating at BB-, downgraded its senior unsecured debt to B+ from BB-, confirmed its subordinated debt at B and preferred stock at B-, rated its $1.5 billion revolver due April 30, 2005, $1.5 billion term A loan due April 30, 2005 and $700 million term C loan due Sept. 15, 2002 at B+ and rated its $500 million term B loan due April 30, 2005 at BB-. The outlook is negative.

S&P said the action follows Xerox's completion of its $4.2 billion amended and restated credit agreement and the removal of a major refinancing uncertainty.

S&P said it lowered the senior unsecured debt rating because of the material amount of secured debt (including security granted under the new credit facility, and on- and off-balance sheet loans secured by finance receivables).

The negative outlook reflects Xerox's need to achieve material improvement in non-financing EBITDA in 2002 and non-financing cash flow over the intermediate term, S&P said.

S&P said the term B loan is rated higher because it has a first priority claim on security interests not to exceed: (a) 20% of consolidated net worth, minus (b) existing secured debt as defined in Xerox' public indentures (collectively, the lien basket). Consolidated net worth is equal to common equity plus preferred securities not treated as debt under GAAP.

S&P said the term B loan has likelihood of meaningful recovery of principal in the event of default or bankruptcy. Lenders could recover more than 50% of principal.

The other loans are rated the same as the senior unsecured debt because they have a second priority interest in the lien basket.

Covenants in the amended and restated credit agreement provide significantly more protection for the lenders, including collateral, than the previous agreement, S&P said. Covenants include limitations on: additional debt, liens, investments, acquisitions, and capital expenditures. In addition, Xerox must maintain minimum levels of consolidated EBITDA and net worth, and maximum levels of leverage. The collateral pool for the lenders' security interest includes: major owned U.S. real estate; 100% of the owned stock of direct material domestic subsidiaries; 65% of the owned stock of direct material foreign subsidiaries; all other Xerox Corp. U.S. personal property that may be perfected; and all domestic intellectual property.

Moody's rates Community Health loan Ba3

Moody's Investors Service assigned a Ba3 rating to CHS/Community Health Systems, Inc.'s proposed $1.25 billion senior secured credit facilities and confirmed its existing ratings including its $287.5 million 4.25% convertible subordinated notes due 2008 at B3. The outlook is stable.

Moody's said the ratings reflect Community Health's moderately high leverage, its strategy for growth through acquisitions, operating risks associated with purchasing under-performing facilities and the relative vulnerability of its intangible assets to a slowdown in revenue growth for the industry.

The ratings also recognize industry-wide challenges such as the potential for renewed reimbursement and pricing pressures in the near to intermediate term, the nursing shortage and the rising cost for medical supplies, labor and general and medical malpractice insurance, Moody's added.

The company's relatively aggressive operating strategy increases its vulnerability to industry pressures, Moody's noted.

Mitigating factors include the company's strong operating performance, the continued strengthening of its credit profile, the company's strong position within its markets, the geographic diversity of its assets and positive demographic trends for the industry, the rating agency said.

Although the company has materially strengthened its credit metrics in recent years, in a large part due to equity offerings, Moody's said it believes that future improvements will be more limited.

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