Moody’s downgrades Covanta rating

New York, January 23, 2002 — Moody’s Investors Service downgraded Covanta Energy Corporation’s senior unsecured rating to B3 from Ba3 and subordinated rating to Caa1 from B1. The investors service is concerned about the uncertainty of Covanta’s plans for its ongoing financial operations and what it calls limited options.

Covanta announced on December 21 that it was retaining Salomon Smith Barney to help it with certain strategic options, although the company isn’t saying much about what directions it may soon take.

Also downgraded to (P)Caa2 from (P)B2 is the rating on the shelf registration for the issuance of preferred stock. The ratings remain under review for possible further downgrade pending the company’s immediate actions to obtain sufficient liquidity to maintain ongoing operations and to announce and execute a credible plan to insure its long-term financial viability.

Although the company appears to be exploring various alternatives, there has been very limited information forthcoming, little clarity on what these alternatives might be, or on how the company intends to operate in the coming months and going forward, Moody’s said.

Moody’s believes that Covanta has very little financial flexibility and that there are limited strategic alternatives available to it considering continued uncertain market conditions in the energy industry.

In addition, Moody’s is growing increasingly concerned with the company’s tight liquidity and its lack of access to the capital markets. These problems have been exacerbated by its inability to sell its remaining entertainment and aviation services assets, continued delays in the collection of outstanding California utility receivables, and its inability to meet cash usage covenants under its bank revolving credit agreement.

The banks have agreed to waive these covenants through January 31, 2002 but have declined to provide much needed additional liquidity to the company. If the banks do not agree to continue to waive these covenants beyond the end of January, the resulting default would eliminate a critical source of letter of credit capacity for the company which will be very difficult to replace.

Covanta also has significant convertible debenture maturities in mid-2002 ($85 million in June and $64 million in October) and will likely have difficulty refinancing these issues in the capital markets.

Covanta Energy, headquartered in Fairfield, NJ, is primarily an energy company focusing on independent power, waste-to-energy, and water and wastewater businesses.

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