Moody's downgrade follows profit warning and accounting concernswrites Jane O'Sullivan

Credit rating agency, Moody's Investors Service, has downgraded Elan's debt to just above junk bond status. The move, which affects around $2.6 billion worth of the company's debt, follows Elan's recent profit warning and concern about its accounting policies.

Further downgrades, which would give Elan's debt junk bond status, remain a possibility as Moody's is keeping the ratings on review. This would greatly increase the company's cost of funding as investors demanded a higher return for the greater level of risk the bonds would entail.

The agency attributed the downgrade to its expectation that Elan's near-term cashflow relative to debt would be affected by lower earnings and higher capital expenditure. "In addition, we believe the recent SEC investigation into the company's accounting may limit Elan's ability to access new funds to support business development," the debt agency said.

It has assigned a Baa3 rating to Elan's senior guaranteed debt, down from its previous rating of Baa2 and just a notch above the Ba1 rating assigned to junk bonds. These are regarded by the agency as having higher speculative qualities than other grades of debt.

Shares in Elan were little changed yesterday. In New York, they were up 0.2 per cent at $14.49 by the close of business here while they lost 30 cents on the Irish market to close at €16.50.

"It's not a surprise," said Mr Robert Perryman, analyst with Merrion Stockbrokers. "But the downgrade is another piece of negative sentiment the company didn't need, especially as the review is open."

Moody's expected Elan's 2002 cashflow to be affected by higher research and development spending to support clinical trials and larger sales, general expenses and administration costs. It is also continuing to review Elan's balance sheet including the composition of intangible assets, the treatment of equity in joint ventures and the company's portfolio of marketable securities.

On the positive side, Moody's referred to Elan's recent realignment of its sales and marketing structure, favourable prescription trends on certain key products and the anticipated near-term launch of Frova, for migraines.

Meanwhile, Mr Daniel Tully, a director of Elan and chairman emeritus of US stockbrokers Merrill Lynch, bought 10,000 shares in the company on February 5th.

The shares, bought at a price of $12.80 per share, take his total holding to 60,548 shares or 0.017 per cent of the total.