Moody's puts GM on review

Moody's Investors Service put General Motors Corp. and General Motors Acceptance Corp. on review for possible downgrade. GM's long-term rating is A3 while GMAC's is A2.

Moody's said the review is prompted by the risk associated with GM's need to maintain highly successful cost cutting and new product initiatives in order to mitigate the cash flow pressure created by two longer-term, structural challenges that the company will face: negative price realization, and rising pension and OPEB funding requirements.

The ratings of GMAC and its subsidiaries are on review because of the substantial interrelationship and business ties between it and its parent company.

If a rating adjustment is needed, Moody's currently anticipates that it will be modest, and that the one-notch rating differential between GM and GMAC would likely be maintained.

The review is focusing on GM's ability to demonstrate that it will be able to: continue to reduce its variable cost position; maintain a broad-based and successful new product initiative in the US; and preserve adequate cash generation and liquidity, Moody's said. A high degree of success in these areas will be necessary to contend with ongoing pricing pressure and large pension and OPEB liabilities, and to maintain the current rating level.

As a result of past efforts to reduce material, assembly, and launch costs, GM is the most efficient operator among the Big-3, and it has considerably narrowed the productivity gap that had existed between its North American manufacturing and assembly operations and those of Japanese transplant facilities, Moody's added.

These operating efficiencies and a low variable cost position have enabled GM to maintain a relatively high degree of profitability, compared with the other Big-3 manufacturers. However, the increasingly competitive pricing environment and burdensome legacy cost structure will require the company to accelerate its cost cutting plans.

GM's ability to generate cash flow from operations has been strong through 2002. However, the pricing pressure it faces in North America will dampen the level of cash that can be generated from earnings, Moody's said. For instance, during 2002, increases in various operating liabilities and accrued expenses contributed a significant $5.2 billion to cash from operations. As earnings decline, this type of working capital contribution could become an even larger portion of the company's total cash generation.

S&P lowers PMI outlook

Standard & Poor's lowered its outlook on PMI Group, Inc. to negative from stable including its $360 million 2.5% convertible debentures due 2021 and $100 million 6.75% notes due 2006 at A+.

S&P said the action follows its lowering of its residential subprime and residential special servicer rankings on Fairbanks Capital Corp. to below average from strong on April 30.

Fairbanks is a 57%-owned, uncontrolled, unconsolidated subsidiary of PMI.

The serious difficulties Fairbanks has encountered in servicing one of the largest portfolios of subprime mortgage loans and the possibility, though remote, that there might be material legal actions arising from these difficulties could affect PMI, S&P said.

Fairbanks operates independently of PMI - both operationally and financially - but PMI'a majority ownership, minority board representation, and size could still expose it and its operating carriers to litigation.

S&P raises Genzyme outlook

Standard & Poor's raised its outlook on Genzyme Corp. to positive from stable including its subordinated debt at BB+.

S&P said the action reflects Genzyme's continued strong financial performance, moderate financial policies, and the promise of increased diversification in its product portfolio, factors offset somewhat by the company's still-heavy reliance on its flagship product Cerezyme.

Though Cerezyme's market is considered mature and future sales growth will be minimal, Genzyme has several new products that will provide growth in the intermediate term. The drug Renagel treats hyperphosphatemia (an excess of phosphorus in the blood) in patients suffering from end-stage renal disease. Renagel generated more than $150 million in sales in 2002, and it is selling at a rate in excess of $200 million for 2003.

In addition, two other Genzyme drugs have recently been approved by the FDA. Fabrazyme is a treatment for Fabry's disease. It is already on the market in Europe. Aldurazyme is a treatment for MPS I, which can cause organ dysfunction. Both drugs have received U.S. orphan drug status, which provides the company with seven years of market exclusivity.

Nevertheless, in the intermediate term Genzyme will remain highly reliant on Cerezyme, S&P noted. The product has lost its orphan-drug status, so while its method-of-manufacturing patents is in effect until 2010, a competitor can now potentially enter this lucrative and unprotected market.

Genzyme has been acquisitive but has used a mix of equity and debt to fund its acquisitions. Total debt to capital stands at only 27% and funds from operations to total debt is a healthy 31%. EBITDA interest coverage is a robust 7x, S&P said.

Moody's cuts Storebrand

Moody's Investors Service downgraded Storebrand including cutting Storebrand Livforsikring's subordinated debt rating to Baa2 from Baa1 and Storebrand ASA's senior debt to Baa3 from Baa1 and subordinated and junior subordinated debt to Ba1 from Baa2 and Baa3 respectively. The ratings remain on review for possible further downgrade.

Moody's said the life company needs to demonstrate its ability to return to sustained profitability.

Moody's added that it review will also focus on capital, gearing and liquidity at the holding company.

The rating actions reflects the deterioration of credit strength of Storebrand Livsforsikring, the principal operating company of the group, after 2 years of losses that have negatively impacted its capital position. The market value adjustment reserve has been reduced to zero from NOK 844 million at the end of 2001 and the additional statutory allocation reserve reduced by NOK1.2 billion to about NOK 3 billion at the end of 2002.

Because of the level of the guaranteed interest rate in the products offered by the life insurance company, its earnings are highly dependant on the return obtained from its investment portfolio. Despite a significant reduction in the equities portion of the portfolio the equity-backing ratio remains high at year end at 173% based on solvency margin capital and 351% based on pure equity. With a debt to equity ratio of 40% and a gearing ratio of 28% based on the solvency margin capital, Moody's still views the leverage of Storebrand Livforsikring as relatively high.

S&P rates Comverse convertibles BB-

Standard & Poor's assigned a BB- rating to Comverse Technology Inc.'s new $350 million zero-yield putable securities due 2023 and confirmed its existing ratings including its senior unsecured debt at BB-. The outlook is negative.

S&p said the rating reflects a relatively weak business profile, which is narrowly dependent on capital expenditures by telecommunication carriers, partially offset by a strong financial profile that includes a significant net cash position.

Comverse has been adversely affected by cutbacks in spending on enhanced services, such as voicemail, its largest product offering at about 57% of total revenues. The cutbacks have come from telecommunications carriers, especially wireless operators, which account for more than half of Comverse' revenues.

Revenues were $176 million in the most recently reported quarter, ended Jan. 31, 2003, down from a high of $365 million in the quarter ended April 2001. Profitability has likewise deteriorated, with EBITDA falling to a loss of approximately $11 million in the January 2003 quarter from quarterly levels of $90 million and higher throughout 2001, S&P said.

The rating is supported by Comverse's financial profile, which included a cash balance of $1.8 billion and a net cash position of nearly $1.4 billion as of Jan. 31, 2003, S&P said. Pro forma cash balances following the sale of the new securities will be approximately $2.2 billion. The cash position affords Comverse the capacity to absorb EBITDA losses while maintaining significant overall financial flexibility.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.