Moody's cuts Qwest Communications, Qwest Capital

Moody's Investors Service downgraded Qwest Communications International and Qwest Capital Funding but left Qwest Corp.'s ratings unchanged. All ratings remain on review for downgrade.

Ratings lowered include the senior unsecured debt of Qwest Communications International, Qwest Capital Funding and LCI International Inc., cut to Caa1 from B2. Unchanged is the senior unsecured debt of Qwest Corp., Pacific Northwest Bell Telephone Co., Northwestern Bell Telephone Co. and Mountain States Telephone and Telegraph Co. at Ba3.

Moody's said the action follows the company's announcement that it has amended its $3.4 billion bank facility and obtained a new $750 million senior secured facility.

Moody's said it recognizes that the amendment and new facility, taken together with the recently announced sale of QwestDex in two parts for a total of $7.05 billion, help address the acuity of the liquidity problem.

However Moody's said it lowered Qwest Communications and Qwest Capital because their debt is subordinate to the two bank loans and because it is concerned Qwest may still face difficulty generating sufficient cash flow to service the debt load that remains at Qwest Communications and Qwest Capital in 2004 and beyond even after the debt paydown from the QwestDex proceeds.

Qwest Corp. and its subsidiaries remain on review pending a full assessment of the structural and financial implications of the new bank transactions, among other factors, Moody's added.

Moody's said it is critical that the QwestDex sale proceed on course, and if it does, Qwest would have over $4 billion of cash (net of mandatory bank debt repayments from the Dex sale) and available bank facilities (assuming compliance with the new covenants) to deal with capital needs to cover operating shortfalls and maturing long-term debt.

Those proceeds should be sufficient to cover maturities through at least 2003 and possibly 2004, provided the company remains free cash flow positive and there are no material constraints on upstreaming funds to Qwest Communications and Qwest Capital, Moody's said.

However there are still concerns because of the company's need to restate prior earnings reports.

There is also an upcoming $20 billion-$30 billion charge for the impairment of goodwill plus possible additional charges relating to network assets which could wipe out "a very sizable portion, if not all", of the company's $34 billion of book equity, Moody's said.

Recent financial disclosures also indicate that Qwest's operations include minimum purchase commitments in excess of $2 billion over the next several years that Moody's said it believes will make continued cost-cutting initiatives challenging.

Moody's cuts NRG

Moody's Investors Service downgraded NRG Energy, Inc., affecting $9.5 billion of debt, and kept the ratings on review for possible downgrade. Ratings lowered include NRG's senior unsecured debt to Caa1 from B1, NRG Energy passthrough trust 2000-1 remarketable or redeemable securities to Caa1 from B1, NRG Northeast Generating LLC senior secured debt to B3 from Baa3, NRG South Central Generating LLC senior secured debt to B3 from Baa2 and LSP Energy LP senior secured debt to B1 from Baa3.

Moody's said it cut NRG because of the company's weak cash flow relative to a high debt burden, a very weak liquidity position, urgent need for timely execution of asset sales in a weak market, and dependence upon obtaining on-going waivers from its banks to avoid collateral calls.

While NRG was successful in obtaining a bank waiver through Sept. 13 and may prove to be successful in obtaining subsequent waivers from the banks, the success of NRG's strategy ultimately rests on its ability to successfully execute a substantial amount of asset sales over the next few months, Moody's said.

While NRG is actively working toward this goal, the amount of completed and announced asset sales to date have been modest relative to the amount of capital that needed to satisfy the collateral calls, ease liquidity pressures, and reduce debt, the rating agency added.

Xcel Energy, NRG's parent, has the ability to provide up to $400 million of additional capital into NRG, but Moody's said it believes that such funding is dependent, in large part, upon the progress NRG makes in selling assets, as well as the consent of NRG's bank lenders.

Moody's cuts Dynegy

Moody's Investors Service downgraded Dynegy Inc. and its subsidiaries, affecting $5.0 billion of debt. Ratings lowered include Dynegy Holdings Inc.'s senior unsecured debt to B3 from B1 and Illinois Power's senior secured debt to B1 from Ba2 and senior unsecured debt to B2 from Ba3. The outlook is negative.

Moody's said the action is because of concerns about the adequacy of cashflow that the restructured company will be able to generate relative to its high financial leverage and continuing concerns related to the company's ability to refinance debt obligations coming due in 2003.

Dynegy Holdings' senior unsecured ratings continue to be notched down from the senior implied rating due to increased amounts of secured debt and the expectation that future renewals of existing bank debt will likely be done on a secured basis, effectively subordinating the senior unsecured bonds.

The negative outlook reflects execution risk associated with company's restructuring plan, including the ultimate structure and viability of its marketing and trading business, a continuing lack of investor and counterparty confidence that has limited access to public debt markets and negatively impacted the company's marketing and trading business, uncertainty surrounding the FERC and SEC investigations and uncertainty relating to ongoing re-audits and reviews of the company's financial statements from 1999 through June 30, 2002, Moody's said. Dynegy has been unable to provide the required CEO or CFO representations in line with SEC requirements.

Excluding Illinois Power, which has exhibited a relatively stable cash flow profile, cashflow from Dynegy's remaining businesses after considering working capital changes, is insufficient to cover debt maturities for 2002 and 2003, leaving the company highly dependent upon asset sale proceeds and refinancing of the $1.6 billion of Dynegy Holdings and Illinois Power bank debt and $1.5 billion of ChevronTexaco preferred securities in order to meet all obligations and reinvest in the business, Moody's said.

Due to the insufficient level of operating cashflow, proceeds from additional asset sales are not expected to lead to material debt reduction, therefore, debt protection measures are likely to remain very weak, Moody's said.

Moody's cuts GT Group Telecom

Moody's Investors Service downgraded GT Group Telecom Inc. including lowering its US$855 million face value senior discount notes due 2010 to C from Ca and GT Group Telecom Services Corp.'s C$100 million guaranteed senior secured term loan due 2007 and C$120 million guaranteed senior secured revolving credit facility due 2006 to Ca from Caa2. The outlook is negative.

Noting GT recently filed for creditor protection, Moody's said the company's high level of negative cash flow compared to limited cash resources, the current difficult state of the telecom market, foreign ownership restrictions in Canada, and the recent pricing decision from the Canadian regulator indicate that there will be significant impairment to the discount notes and a lesser but still significant impairment to the secured bank loans.

Moody's raises United Biscuits outlook

Moody's Investors Service raised its outlook on United Biscuits Finance plc and Regentrealm Ltd. to stable from positive affecting £800 million of debt including United Biscuits senior subordinated notes at B2 and Regentrealm's £625 million senior secured credit facility.

Moody's said it revised United Biscuits' outlook because new management has been improving the operating performance of the company in line with its plans and has started to reduce the high financial leverage of the group.

Since March 2001, United Biscuits has been using its strong competitive positions in particular in the U.K. to moderately grow its revenues and at the same time reduce its supply chain costs, Moody's said. United Biscuits is focusing on strengthening its priority brands, which in general hold leading positions in their markets.

Moody's initial rating in March 2001 reflected its view that United Biscuits' objective to raise EBITDA by 15% in the first two years was very ambitious and that the deleveraging could take time.

But Moody's said it recognizes that United Biscuits made significant progress broadly in line with management's targets.

A rating upgrade in the next 18 months appears possible, if United Biscuits' current brand and product strategy continues to prove successful and if the smooth repayment of the financial debt is pursued in line with the recent trends, Moody's said. The rating agency added that it expects that the EBITDA interest coverage will exceed 3 times and that the gross cash-flow to total debt coverage will consistently exceed 13% (11% on an adjusted basis) in 2003. Such levels would pave the way for an upgrade provided the market conditions remain satisfactory and management's plans continue to focus on organic growth and cost base improvements.

Fitch takes Orbital Sciences off watch

Fitch Ratings removed Orbital Sciences' from Rating Watch Negative and confirmed its senior secured credit facility at B+ and convertible subordinated notes at B-. Fitch also assigned a B rating to Orbital Sciences' second priority secured notes. The outlook is stable.

Fitch said Orbital Sciences had been on watch because of liquidity pressure related to the maturity of $100 million of convertible subordinated notes in October 2002.

On Aug. 22, the company completed the sale of $135 million of second priority secured notes, saying it will use most of the proceeds to retire the convertible subordinated notes.

The second priority secured note transaction relieves Orbital Sciences' liquidity pressure, Fitch said, adding that this was the company's main risk.

The ratings reflect Orbital Sciences strong position in missile defense programs, improved satellite manufacturing performance, solid backlog, and significant debt reduction over the past 18 months, Fitch added.

Remaining concerns are negative near-term cash flow and the weak commercial space market, although Orbital Sciences has generated several new orders in this sector within the past year.

Fitch said it believes that Orbital Sciences has potentially valuable assets and technology, and credit quality will continue to improve if the company executes its business plan.

Fitch cuts Midland Cogeneration

Fitch Ratings downgraded Midland Cogeneration Venture LP's $567 million subordinate lease obligation bonds to BB from BB+ and kept them on Rating Watch Negative.

Fitch said the action follows its recent downgrade of the senior unsecured debt of Consumers Energy Co., Midland Cogeneration's principal offtaker, to BB from BB+; Consumers remains on Rating Watch Negative.

Absent counterparty credit concerns, Fitch said it views the credit quality of the MCV bonds to be of low investment grade quality.

S&P cuts Gemstar-TV Guide

Standard & Poor's downgraded Gemstar-TV Guide International Inc. and kept the company on CreditWatch with negative implications. Ratings affected include Gemstar's $300 million revolving credit facility due 2005 and $300 million 364-day revolving credit/term loan facility due 2005, both cut to BB from BB+.

S&P said it is concerned that recent legal setbacks may diminish the fee-generating potential of Gemstar's patent portfolio and undermine its leading position in the industry. In addition, the company's financial risk has risen with the delayed SEC filing and officer certification and the potential delisting by NASDAQ, which could limit access to the capital market.

The company generated positive cash flow of $128 million for the 12 months ended March 31, 2002, and had $413 million in cash on March 31, 2002, which provided the primary support for the ratings, S&P added.

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

Standard & Poor's assigned a B+ rating to Gray Television, Inc.'s proposed $75 million senior secured revolving credit facility due 2009 and $375 million term loan B due 2010 and a B- rating to its $100 million add-on to its 9.25% senior subordinated notes due 2011. The new ratings were put on CreditWatch with negative implications along with the existing ratings.

S&P originally put the ratings on CreditWatch on April 4, 2002 in response to concerns about the size of Gray's planned acquisition of Stations Holding Co. Inc., the parent company of Benedek Broadcasting Corp., and how the transaction will ultimately be financed.

The subordinated notes will be used to reduce Gray's bank debt until the company completes its $502.5 million acquisition of Benedek, S&P said. Gray expects to close the purchase on Oct. 1, 2002 and fund it with $275 million in common equity and proceeds from the new bank loan, which will also be used to repay the remaining old bank debt of about $100 million.

Gray is also acquiring the ABC-affiliate in Reno, Nev. for $41.5 million and this transaction should close in late 2002.

Ratings will remain on CreditWatch with negative implications until all financings are completed, S&P said.

The acquisitions will improve Gray's network-affiliation, geographic, and cash flow diversity, S&P commented. Gray's television operations will represent 80% of revenue and 90% of media cash flow on a pro forma basis and will increase its presence in the Southeast, Midwest, and Great Lakes regions. The transactions will maintain the high quality of the company's TV portfolio with the leading news and overall ratings in 80% of its markets, which generally results in a higher share of market revenues, national spot advertising, and political spending.

The planned use of equity to help fund these transactions should modestly improve the company's key credit measures, although its financial profile will remain aggressive and Gray is expected to remain acquisitive, S&P said. Pro forma leverage and EBITDA coverage of interest are expected to be about 6.8 times and 1.8x at closing compared with 7.2x and 1.5x on a historical basis.

These ratios should improve by year-end due to the strengthening of TV ad spending and an expected boost from political advertising in the second half of the year, S&P said.

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