Moody's downgrades Celestica

Moody's Investors Service said it downgraded Celestica Inc.'s corporate family and probability-of-default ratings to B1 from Ba3, $500 million 7 7/8% senior subordinated notes due 2011 and $250 million 7½% senior subordinated notes due 2013 to B3 (LGD5, 85%) from B2 (LGD5, 87%) and speculative grade liquidity rating to SGL-2 from SGL-1.

This concludes the review for downgrade begun on Feb. 1, and the outlook is negative.

The agency said the downgrade reflects the continued excess capacity in the electronic manufacturing services sector; Celestica's sub-par asset utilization and ongoing business restructurings, which have totaled roughly $345 million since January 2005; expectations of continued pressure in the telecom space as original equipment manufacturers consolidation, combined with heightened competition from Asian outsourcers, have negatively impacted volumes; the potential for prolonged restructurings, which inevitably would serve as a major distraction for management; an increase in leverage to 5x EBITDA from 3.1x in 2005 as a result of weak EBIT levels over the last two quarters; and negative free cash flow generation in recent quarters due in part to increasing working capital, which has reduced Celestica's cash balance to a level that does not provide as much financial flexibility.

The ratings also reflects Celestica's position as a tier 1 electronic manufacturing services provider, efforts to diversify its concentrated client base, improving inventory and accounts receivable turnover and the sequential improvement in gross margin, Moody's added.

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