Standard & Poor’s Studies Lowering Newhall Land Rating

Newhall Land & Farming Co.’s offer to buy back 10% of its equity units has prompted Standard & Poor’s Corp. to reconsider its opinion of the Valencia company’s debt.

Last week, Newhall, a real estate and agricultural concern, launched an offer to buy back up to 2 million of its units for between $100 million and $112 million. The offer was part of Newhall’s settlement of a lawsuit brought last year by dissident unit holders, in which Newhall agreed to buy back at least $40 million of its units.

Newhall’s units, which are similar to shares of stock, trade on the New York Stock Exchange.

After the offer was announced, S&P;, a credit-rating service in New York, said it placed Newhall’s $50 million of convertible subordinated debentures on its “CreditWatch� list. That means S&P; is thinking about cutting its rating of the debt, which is currently BB+

S&P;’s ratings, which range from D (for near-default speculative issues) to AAA (for top investment-grade debt) help investors determine a borrower’s credit worthiness. If a company’s rating is lowered, investors might force the company to pay a higher interest rate to borrow money in the future.

S&P; had expected Newhall to repurchase from $40 million to $80 million worth of its units. But Newhall said it would actually buy up to $112 million worth, using $54 million of available cash and a new bank line of credit.

“This partly debt-financed buyback could shrink cash flow protection dramatically,� S&P; said, referring to Newhall’s ability to consistently generate enough cash from its business to service all of its bills.

But S&P; also said protection “could be restored� if Newhall management “takes steps to quickly reduce debt� and if some of the bond holders convert their debt into more units.

Robert Wilke, Newhall’s chief financial officer, said Newhall expects many of the bond holders to convert their holdings into units to take advantage of its offering. That would substantially cut the amount of bonds still outstanding and reduce Newhall’s overall long-term debt, which now totals about $75 million, he said.