Moody's cuts Nortel

Moody's Investors Service downgraded Nortel Networks Corp. and its subsidiaries three notches, affecting $5.0 billion of debt. The outlook is negative. Ratings lowered include Nortel's senior secured debt, cut to B3 from Ba3, preferred stock, cut to Caa3 from B3, and $136.9 million lease pass-through trust certificates series 2001-1 to B3 from Ba3.

Moody's said the downgrade reflects the severity of the decline in Nortel's revenue base, the magnitude of its current and prospective cash burn rate including the cost of restructuring and lack of clarity regarding the nature and timing of a rebound in revenue.

Also incorporated in the downgrade is the diminished financial flexibility as the company expects to allow its $1.5 billion in credit facilities to lapse in December.

However Moody's said its rating also takes into account Nortel's substantial $4.6 billion cash position, which includes $420 million in restricted cash; the progress Nortel has made in reducing its costs; its broad product offering including enterprise networks and modest near-term debt maturities.

The negative outlook reflects the company's continuing cash burn as well as the potential for future asset impairment charges, Moody's added.

The company's sizable cash position should support its cash consumption for the next 12 months. However, further downgrades could occur if cash erodes to $1 billion.

Cash burn including the cost of restructuring has been significant, Moody's noted. Net cash used in operations in for the first nine months of 2002 was about $1.3 billion, when adjusted for the positive impact of approximately $700 million in tax recoveries.

The sale of $1.5 billion in equity in June 2002 allowed the company to increase its unrestricted cash to $4.2 billion by the end of September 2002. However, the repayment of $300 million of debt in early October, the continued cash costs of restructuring and operating cash burn will result in a significant decline in cash by the end of the year, Moody's said.

S&P puts Neff on watch

Standard & Poor's put Neff Corp. on CreditWatch with negative implications. Ratings affected include Neff's $200 million revolving credit facility due 2005 at B and $100 million senior subordinated notes due 2008 and $100 million 10.25% senior subordinated notes due 2008 at CCC.

S&P said the action follows Neff's announcement that it was not in compliance with the leverage covenant on its credit agreement because of weakness in the company's financial performance in the third quarter.

Operating income in the third quarter of 2002 fell by 27% from the year-earlier level because of weaker equipment-rental revenues, S&P noted.

The company has virtually no cash on hand. While Neff is about to begin negotiating with its lenders to obtain covenant relief, banks have not yet approved any amendment and may not do so before an interest payment of about $8 million is due on Neff's subordinated notes on Dec. 1, 2002, S&P said.

S&P cuts Broadwing preferreds to D

Standard & Poor's downgraded Broadwing Communications Inc.'s 12.5% junior exchangeable preferred stock to D from B.

S&P said the action follows Broadwing Communications' statement that it intends to defer cash dividends on this issue.

Broadwing Inc. and Broadwing Communications' corporate credit ratings remain at BB and are still on CreditWatch with negative implications.

Moody's puts Tuesday Morning on upgrade review

Moody's Investors Service put Tuesday Morning Corp. on review for possible upgrade including its $69 million 11% senior subordinated notes due 2007 at B2.

Moody's said the review is in response to improved interest coverage and leverage, the company's ability to maintain working capital improvements and a history of growth using internally generated cash flow.

Through more efficient inventory management, Tuesday Morning has reduced working capital needs and improved inventory turnover and gross margins, Moody's noted. Successful working capital management and sustained profitability has allowed the company to generate sufficient cash flow to reduce leverage while financing store growth.

Moody's cuts AES Tiete

Moody's Investors Service downgraded AES Tiete Holdings, Ltd. to B2 from Ba2, affecting $200 million of debt. The outlook is negative.

Moody's said the downgrade is in response to a substantial deterioration in the credit quality of the cash flow that Tiete receives from its largest offtaker Eletropaulo; the need for regulatory waivers to allow collections from power sales to be sent to the issuer if Tiete does not have positive net income, and the increased likelihood of such a situation due to difficulties in the regional power market; Moody's belief that Tiete would have very limited options if its offtakers failed to honor their power purchase obligations, due the disruption in the functioning of the Brazilian wholesale market; concerns that inflation could erode the value of Tiete's power sales agreements in the near term because the company will not receive its annual inflation adjustment until August; and potential weaknesses in the protection provided by the issuer's OPIC devaluation insurance if Tiete's operating results are negatively effected by devaluation.

The issuer's six-month debt service reserve account contains sufficient cash to cover its $19.5 million December interest and principal payment, Moody's noted. The debt service reserve is intended in part to make payments while OPIC processes any claims under its insurance policies. Withdrawals from the debt service reserve for reasons other than OPIC claims would reduce the on-going protection provided by the reserve unless withdrawn amounts are replenished from operating cash flow.

S&P rates Rexnord loan B+, notes B-

Standard & Poor's assigned a B+ rating to Rexnord Corp.'s planned $75 million revolving credit facility and $360 million term B loan and a B- ratings to its planned $225 million subordinated notes due 2012. The outlook is positive.

S&P said its assessment of Rexnord reflect the company's its leading positions within niche industrial markets, its very aggressive financial profile and policy, and fair financial flexibility.

Markets served are characterized as modest in size, somewhat consolidated, and requiring a moderate amount of fixed capital and R&D investments. Although key end markets, including energy, aerospace, forest products, and construction equipment, are highly cyclical, most products are consumables with relatively short life cycles, which help to temper earnings variability, S&P noted.

Barriers to entry - engineering capabilities, distribution channels, broad product lines, and large installed bases - are meaningful. However, certain product lines, such as roller chain and couplings, are considered engineered commodities that are affected by heavy pricing pressures, S&P added.

As a result of weak demand in many industrial markets, Rexnord has taken several restructuring charges during the past three years, mainly for plant closures, headcount reductions, and asset write-downs, S&P said. Although major restructuring activities are complete, the company continues to improve its cost structure through implementation of its Rexnord Business System. Over time, this should reduce delivery times and manufacturing inefficiencies, and improve working capital management. However, there are some operational risks in the near term because the company moves towards lean manufacturing from batch processing.

Pro forma for the leveraged buyout by The Carlisle Group, total debt (including the present value of operating leases) to EBITDA was very aggressive, at 4.8 times at Sept. 30, 2002, S&P said. Between 2000 and 2002, revenues and EBIT declined by 15%, and 42%, respectively, mainly reflecting industry conditions and unabsorbed overhead. Still, operating margins, at approximately 19%, are solid and should strengthen over time from cost initiatives and as market condition strengthen.

In the intermediate term, should operating margins remain flat or even modestly decline further, working-capital initiatives and moderate capital spending requirements should enable the firm to generate some free cash flow, S&P added. In the intermediate term, free cash flow is expected to be used for modest but increasing scheduled debt amortization requirements. EBITDA to interest coverage is expected to average in the 2.5x-3.0x range, while total debt to EBITDA is expected to strengthen to the 4.0x-4.5x range.

Fitch rates Owens-Illinois notes BB

Fitch Ratings assigned a BB rating to Owens-Illinois' proposed $300 million senior secured notes. The outlook remains negative.

Credit risks incorporated in the rating and the outlook concern Owens-Illinois' asbestos exposure, high leverage position and refinancing requirements, Fitch said.

The bankruptcy of several companies with asbestos exposure has heightened interest in the company's asbestos exposure, and some uncertainty will likely remain over the near term.

However, Owens-Illinois showed reduced payments through the first nine months of 2002, and despite a $475 million addition to reserves in the first quarter, trend lines are positive, Fitch said.

Owens-Illinois exposure is differentiated from other asbestos exposed firms by a number of factors including Owens-Illinois' exit in 1958 from asbestos-related manufacturing (earlier than most other exposed companies), the aging of potential claimants, and agreements in place with numerous plaintiff law firms as to the handling of claims, Fitch added.

Owens-Illinois has retained high leverage as a result of a number of meaningful acquisitions as well as high levels of asbestos payments. Owens-Illinois has demonstrated continued access to the capital markets, although heavy refinancing requirements, unsteady capital markets and exposure to asbestos uncertainties indicate that refinancing risk, although reduced, could remain.

Moody's puts Britax on review

Moody's Investors Service put of Britax Group plc on review for possible downgrade including its £175 million senior secured credit facilities at Ba3 and €145 million senior unsecured notes due 2011 at B2.

Moody's said it began the review because of concerns about Britax's ability to grow operating cash flow in line with Moody's original expectations and the trend increase in debt leverage.

Moody's said it recognizes that Britax's ability to grow revenues from its three core divisions continues to face individual market pressures.

Although management continue to make strenuous efforts to lower costs and improve cash generation, further declines in revenues are likely to adversely impact absolute levels of cash flow relative to debt service obligations over the near term, Moody's added.

Moody's cuts Lucent

Moody's Investors Service downgraded Lucent Technologies Inc., affecting $7 billion of debt. Ratings lowered include Lucent's senior unsecured debt, cut to Caa1from B2, trust preferred stock, cut to Caa3 from Caa1, and preferred stock, cut to Ca from Caa2. The outlook is negative.

Moody's said the downgrade concludes a review begun on Sept. 13 and reflects the severity of the decline in Lucent's revenue base, the magnitude of its current and prospective cash burn rate, lack of clarity regarding the nature and timing of a rebound in revenue and the reduced liquidity sources following the cancellation of the $1.5 billion bank facility and $500 million accounts receivable securitization vehicle.

Moody's said it recognizes that despite these difficulties Lucent remains a leading vendor to the telecom sector with broad product offerings, a substantial $4.4 billion cash position and a materially reduced cost structure.

Moody's added that it expects telecom spending will eventually rebound as wireline traffic, particularly data, and wireless traffic continue to grow and the company's cash position provides significant support of the cash burn for at least the next 12 months.

However, Moody's believes most wireline and wireless telecom carriers will continue to cut back on capital expenditures in 2003 to absorb some of the excess capacity and to focus on their own cash flow.

The negative outlook reflects the potential for a further downgrade to the extent that continuing cash consumption erodes Lucent's formidable cash base to $1 billion, Moody's said.

Cash burn including the cost of restructuring has been significant. Net cash used in operations in 2002 was nearly $1.5 billion, when adjusted for the positive impact of a $700 million tax refund. In addition to the tax refund, Lucent's cash benefited from $2.5 billion in asset sales and a $1.75 billion preferred stock issue. As a result, Lucent had a cash balance of $4.4 billion at the end of September.

According to the company, the cash costs of the restructuring and operating losses could absorb $2 billion or more in the next 12 months, leaving the company with a minimum cash balance of $2 billion by September 2003. Given the lack of visibility across the industry, there can be no assurance that Lucent will be able to contain its cash burn to the announced level, Moody's said.

Furthermore, while working capital contraction has been a significant source of cash, Moody's believes that most of this benefit has already been received and that once carrier spending reverses, working capital will become a cash drain.

S&P takes R.H. Donnelley off watch

Standard & Poor's confirmed R.H. Donnelley Inc.'s ratings and removed it from CreditWatch with negative implications. The outlook is stable. Ratings affected include R.H. Donnelley's $100 million senior secured revolving credit facility due 2004, $100 million tranche C loan due 2006, $125 million tranche B loan due 2005 and $75 million tranche A loan due 2004, all at BB, and $150 million 9.125% senior subordinated notes due 2008 at B+.

S&P said its confirmation follows its evaluation of the planned $2.23 billion purchase of Sprint Publishing & Advertising, the directory publishing business of Sprint Corp. by R.H. Donnelley Corp., the holding company of R.H. Donnelley Inc. The transaction will transform Donnelley from a sales agent and pre-press yellow pages vendor to a yellow pages directory publisher.

The ratings reflect Donnelley's substantial pro forma debt levels, with debt to estimated 2002 EBITDA in the high 5 times area, and an expected meaningful debt amortization schedule following the acquisition, S&P said.

In addition, the company faces mature industry conditions and revenue concentrations in the Chicago metropolitan area, Las Vegas, and Florida, which are currently being affected by competition and soft economic environment.

Neither Donnelley nor Sprint Publishing have developed an online strategy, which could become a more significant factor in several years, S&P added.

However, these aspects are mitigated by the significantly better business profile resulting from the Sprint Publishing transaction, S&P added. Donnelley will be a much more geographically diversified company, with greater critical mass. The firm's pro forma estimated 2002 EBITDA base increases to about $400 million, from about $150 million. In addition, Donnelley's revenue and EBITDA streams are relatively stable throughout the advertising revenue cycle. Capital expenditures are modest, resulting in healthy and fairly predictable free operating cash flow generation.

Donnelley will be substantially leveraged following the acquisition. Although the initial financial profile will not be indicative of the BB corporate credit rating, the company's strong free operating cash flows are expected to be used to lower its debt levels in the intermediate term, S&P said. Importantly, Donnelley has a track record of strengthening its capital structure through debt reduction.

Moody's cuts Satmex

Moody's Investors Service downgraded Satelites Mexicanos, SA de CV (Satmex), affecting $560 million of debt. Ratings lowered include Satmex's senior secured floating rate notes due 2004, cut to B3 from B1, senior secured revolving credit facility due 2002, cut to B3 from B1, and 10.125% senior unsecured notes due 2004, cut to Ca from B3. The outlook remains negative.

Moody's said it cut Satmex because it has diminished expectations that the company will be able to substantially replace cash flow lost during 2002 and the likelihood of a requisite restructuring of its obligations.

In addition Satmex's operating profile and credit metrics have also deteriorated fairly materially over recent periods, suggesting greater than anticipated loss severity for creditors under almost any restructuring scenario, Moody's said.

The weak fundamentals of the fixed satellite services industry, as compounded by continued economic uncertainty both domestically and in Mexico, have exacerbated the refinancing concerns in

2004, the rating agency said.

Unless Satmex is able to obtain the pending U.S. Export-Import Bank financing in the near term, Moody's anticipates a breach of the amended leverage covenant for the secured FRNs during 2003 could trigger a balance sheet restructuring.

S&P puts Cogentrix on watch

Standard & Poor's put Cogentrix Energy Inc. on CreditWatch with negative implications.Ratings affected include Cogentrix's $100 million 8.1% senior notes due 2004, $100 million 8.75% notes due 2008 and $255 million 8.75% senior notes due 2008 at BB+.

S&P said the action follows its downgrade of PG&E National Energy Group to B- from BB+.

The downgrade of PG&E National Energy has a significant effect on Cogentrix's offtaker credit profile, S&P said. There are two projects that will sell its generation capacity to PG&E National Energy; the 810 MW Southaven project in Mississippi and the 800 MW Caledonia project, also in Mississippi.

Both projects are currently under construction and have construction loans outstanding. Even though PG&E National Energy's downgrade has resulted in a default under the tolling agreements, no default occurs related to the downgrade under the construction loans for another six months (starting in September) while Cogentrix attempts to find a more creditworthy replacement offtaker.

In the event Cogentrix cannot identify a replacement offtaker and PG&E National Energy does not cure its default under the tolling agreement, the banks may withhold funding after the six months; but by then, the facilities would be near completion, S&P noted.

This negative development comes on top of the downgrade earlier this year of Dynegy, the offtaker for the Sterlington project. The Sterlington project has been receiving payments from Dynegy, but because of the rating downgrade, the dividends have been withheld at the project level.

On the other hand, the company has a diversified portfolio of projects and a high level of financial flexibility, S&P added.

Cogentrix generally generates positive free cash flow and has little need to access the capital market at the corporate level.

Moody's confirms Luscar

Moody's Investors Service confirmed Luscar Coal Ltd. including its US$275 million 9.75% guaranteed senior notes due 2011 at Ba3. The outlook remains stable.

Moody's said the confirmation follows the announcement that Sherritt Coal Partnership II had made an unsolicited offer to purchase all of the common shares of Fording Inc. for C$29 per share. The two general partners of SCP II are wholly-owned subsidiaries of Sherritt International Corp. and Ontario Teachers' Pension Plan Board (OTPPB), which together own all of the Luscar Coal Income Fund and its subsidiary, Luscar Coal Ltd, through Luscar Energy Partnership.

The rating confirmation anticipates that the proposed transaction, as it relates to Luscar, will close along the lines indicated by SCP II. SCP II has said that, if the Fording offer is successful, Luscar would purchase certain coal assets currently owned by Fording having an estimated fair market value of C$250 million.

Luscar has arranged bridge financing commitments for the financing of these assets.

Luscar has stated that it intends to finance the transaction in such a way as to maintain or improve the credit rating of the Luscar senior notes, Moody's added.

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