Markets & Finance

Halliburton Debt Rating Lowered


On Dec. 18, 2002, Standard & Poor's lowered its corporate credit rating on oilfield services and engineering and construction services provider Halliburton (HAL) to 'BBB' from 'A-'. The company's ratings remain on CreditWatch with negative implications.

Dallas, Tex.-based Halliburton has about $1.5 billion of outstanding debt.

The rating action reflects the larger-than-expected agreement in principle reached between Halliburton and asbestos-related claimants. Furthermore, the revised ratings presume that the company will be insulated from all present and future asbestos-related liabilities and incorporate expectations that satisfactory financing arrangements will be made. Ratings could be lowered further, if the presently contemplated terms are materially modified, or if financing terms vary materially from current expectations. On Dec. 18, Halliburton announced that it had reached an agreement in principle to settle present and future asbestos-related claims against the company.

A broad outline of key settlement terms includes:

Halliburton's DII Industries and Kellogg Brown & Root subsidiaries are to file for protection under Chapter 11 of the U.S. Bankruptcy code. The company intends to execute a "pre-packaged" bankruptcy filing whereby the negotiation, plan and disclosure statement, and solicitation of acceptances are completed before the bankruptcy filing.

A section 524(g) trust will be established to settle all present and future asbestos-related claims against Halliburton and its subsidiaries.

Halliburton will contribute $2.775 billion in cash, 59.5 million shares of its common stock, and notes with a net present value of less than $100 million to the trust. Standard & Poor's expects that a significant amount of the cash portion will be funded by the issuance of long-term debt.

Halliburton will retain its rights to the first $2.3 billion of insurance proceeds and any amounts in excess of $3 billion.

Halliburton will retain 100% ownership in all its subsidiaries. Standard & Poor's expects that Halliburton and its subsidiaries would continue to operate as a going concern.

It is Standard & Poor's understanding that Halliburton will support all outstanding Halliburton and subsidiary-level financial obligations and all scheduled principal and interests payments will be met.

The settlement is subject to the approval of Halliburton's board of directors and of the U.S. Bankruptcy Court. Further, the plan is contingent on Halliburton obtaining adequate financial arrangements. Halliburton is not expected to fund the trust until a final and nonappealable injunction is granted.

The current CreditWatch listing reflects the uncertainty surrounding:

A definitive agreement with plaintiffs;

A final and nonappealable court approval of the trust;

A permanent discharge of all present and future asbestos-related claims;

Adequate financial arrangements, structured in a manner consistent with Halliburton's investment-grade ratings, including maintaining liquidity throughout the settlement process and thereafter; and

The determination of the magnitude and timing of any insurance recovery.

Halliburton's ratings were placed on CreditWatch on Mar. 20, 2002, following the release of the company's plan to separate its energy services and engineering and construction businesses into distinct legal entities. The CreditWatch listing at that time reflected concerns that certain outstanding debt issues could become disadvantaged in a reorganization and that the restructuring was a precursor to an asbestos-related legal strategy.

The ratings on Halliburton reflect its leading position in the international oilfield services segment of the petroleum industry and its global engineering and construction operations. The ratings incorporate Standard & Poor's expectations that the company will be able to successfully discharge all present and future asbestos-related liabilities on the execution of a final settlement agreement. Standard & Poor's expects that Halliburton will maintain adequate liquidity throughout all phases of the settlement process. Halliburton is expected to be able to reach agreements with rights to potential draws on its liquidity, or otherwise compensate for such contingent calls on its resources. Standard & Poor's is in the process of evaluating the implications of Halliburton's $1.4 billion of outstanding letters of credit (LCs); at the present time it is Standard & Poor's understanding that outstanding LCs will not contribute to a material deterioration in Halliburton's liquidity. So-called ratings triggers (described in more detail below) could also provide a drain on liquidity.

To proceed with the 524(g) settlement, Standard & Poor's notes that Halliburton must arrange for agreements with counterparties of its $1.4 billion of outstanding letters of credit and other bank agreements.

Halliburton currently holds roughly $600 million of cash and liquid investments. The company has full access to its undrawn $350 million revolving credit facility. Halliburton also has an accounts receivable securitization program, where receivables can be sold though a special legal vehicle. The company is also in the process of completing roughly $500 million in asset sales for 2002/early 2003.

If Standard & Poor's or Moody's Investor Services lower Halliburton's rating to below 'BBB' or 'Baa2', Halliburton could be required to provide cash collateralization for up to $151 million under a bank agreement covering a letter of credit line. In addition, Halliburton is required to make a roughly $50 million payment to its deferred compensation plan participants within 45 days if Standard & Poor's lowers its ratings below 'BBB'. Also, if Halliburton's ratings are lowered below 'BBB-' or 'Baa3', the company would be in technical breach of a bank agreement covering a $176 million (Sept. 30, 2002) letter of credit, entitling the bank to set-off rights. From Standard & Poor's CreditWire


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