Moody's cuts Williams rating to just above 'junk'

NEW YORK, June 7 (Reuters) -

Moody's Investors Service cut the credit ratings of troubled pipeline and energy trading company Williams Cos. to one notch above "junk" status on Friday, saying Williams isn't generating enough cash, given its heavy debt load and the business risks it faces.

The downgrade came as the Tulsa, Oklahoma-based company reels from a potential credit crunch and probes by federal regulators into the energy trading business, including "wash" trades designed to artificially boost trading volume and revenue.

Moody's cut Williams' senior unsecured debt one notch to "Baa3," its lowest investment grade, from "Baa2." Moody's rating outlook is negative, and the action affects $13 billion of debt.

"The downgrades reflect weak cash flow generation relative to (Williams') debt and business risks and low asset returns," Moody's said in a statement.

The downgrade could make it costly for Williams to refinance a $2.2 billion 364-day credit line that matures July 24.

Moody's move follows similar action by Standard & Poor's which cut Williams' credit rating to "BBB", two notches above junk status on May 28.

Williams shares closed Friday on the New York Stock Exchange at $8.70, down 23 cents. They have fallen 66 percent this year.

Moody's announcement came during the last few minutes of trading.

William Maze, an analyst with Banc of America Securities, said investors will probably be relieved that Moody's did not immediately relegate Williams' debt to junk status.

"The move by Moody's was expected, but there was a fear that the rating could be moved to non-investment grade, so there is probably some relief out there," he said.

"They are definitely in a situation that they need to work their way out of...But this is an asset rich company, and we believe they have some options," he said.

Williams said it was disappointed but not surprised by the Moody's downgrade and that steps it is taking to strengthen its finances should help resolve "lingering credit-quality issues".

S&P and Moody's downgraded their ratings for Williams despite the company's recent announcement of plans to reduce its debt by $3 billion through asset sales and issuing common stock.

Williams has already raised more than $1.7 billion through asset sales and raised $2.6 billion of long-term capital, using the proceeds to pay down debt and boost liquidity as part of its efforts to retain investment-grade credit ratings.

But Moody's said this had resulted in only a minimal reduction in the company's net debt because Williams had assumed over $2 billion in debt from its bankrupt former telecom subsidiary Williams Communications Group .

One reason for Williams' weak cash generation is its large energy marketing and trading business which requires lots of working capital, Moody's said.

Moody's said it will take "further rating action" if Williams is unable to implement its plans in a timely manner.