Moody's lowers Filtronic outlook

Moody's Investors Service lowered its outlook on Filtronic plc to negative from stable and confirmed its ratings including its $90 million senior unsecured notes due 2005 at B1.

Moody's said the revised outlook reflects the continued weak market conditions in the wireless infrastructure market; the uncertainty of the timing of break-even for the compound semiconductor business, which continues to be a significant cash drain on the company; and the refinancing risk associated with the forthcoming repayment of the senior unsecured notes and consequent medium-term liquidity concerns.

Positively, Moody's noted the progress the company has made to date in reducing absolute levels of debt and maintaining positive free cash flow despite falling profitability.

Moody's said the ratings were confirmed because it expects Filtronic's operating performance will remain reasonably stable over the next year and that the company will be able to refinance the notes within the next 12 months.

Moody's believes that the weak industry trends evidenced in the wireless infrastructure market will continue in the short- to medium-term as mobile operators defer the roll out of 3G services and that consequently pricing pressure evidenced over the last year for 2G and 2.5G services will persist, further reducing profitability and cash flow in this division, which is the mainstay of the group, representing the majority of revenues and cash flows in the financial year ended May 2003, Moody's said.

S&P confirms Rayonier

Standard & Poor's confirmed Rayonier Inc.'s ratings including its senior unsecured bank loan and senior unsecured debt at BBB- and Rayonier Timberlands Operating Co. LP's senior unsecured bank loan and senior unsecured debt at BBB-. The outlook is stable.

The confirmation follows Rayonier's announcement that it plans to convert to a real estate investment trust effective Jan. 1, 2004.

S&P said it believes this restructuring should not have a material effect on the company's financial profile despite higher cash distributions to shareholders.

In connection with the conversion, Rayonier will be required to pay a special dividend to shareholders equal to its undistributed earnings and profits totaling $225 million in cash and stock, with the cash portion expected to be no more than 20% to 30%. Rayonier has sufficient cash on hand to make this payment, and S&P said its ratings confirmation is based on expectations that the cash amount will be in this range.

Although Rayonier's federal tax payments should be lower as a REIT, its expected annual dividend of $110 million is substantially higher than the current $45 million payout. However, because Rayonier has reduced its debt by $500 million since 1999 to $690 million (including capitalized operating leases), S&P said it was already expecting the company to use its free cash flow to acquire timberlands, repurchase shares, or modestly increase its dividend, rather than to further reduce debt. Also, Rayonier has established the dividend amount at a level that should be sustainable even during cyclical downturns.

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