NEW YORK — As quickly as Gap announced it would be selling $1 billion in convertible notes, Moody’s Investors Services and Standard & Poor’s said Wednesday they were junk.

Moody’s Wednesday assigned the new senior unsecured convertible notes a Ba3 rating, three notches below investment grade. S&P rated them BB+, the highest classification of non-investment grade obligations. Gap reported its intention to offer the notes Tuesday when it released its fourth-quarter and yearly results.

Moody’s said the rating outlook is changed to stable from negative, reflecting the anticipation that comparable-store sales, profit margins and cash flow generation will not deteriorate further. Similarly, S&P noted Gap “has a significant opportunity to improve operating performance later in 2002, with margin improvement possibly driven by lower markdowns or increased sales.”

Gap said it ended the year with more than $800 million in cash and a total debt of about $2 billion, below the previous guidance of $2.2 billion. In addition, capital expenditures are expected to be about $400 million in 2002 versus $1 billion for 2001 and $1.8 billion in 2000 and below initial guidance of $600 million to $650 million for the current year. Expansion of square footage will be limited to about 3 percent this year, compared to 30 percent in 2000.

Based on strong demand, Gap’s notes are now expected to carry a 5.75 to 6 percent coupon and be convertible into Gap shares at a 25 to 30 percent premium over the shares’ price on the New York Stock Exchange at the time of sale. A 6 to 6.5 percent coupon and 22 to 25 percent premium had been expected.

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