Moody's puts Solectron on review for downgrade

Moody's Investors Service placed under review for possible downgrade the ratings of Solectron Corp., including Ba1 for $1.43 billion (current accreted value) of 0% convertible notes due 2020, Ba1 for $1.52 billion (current accreted value) 0% convertible notes due 2020 and Ba2 for $1.05 billion of 7.25% subordinated convertible ACES due 2006.

Solectron's fiscal second quarter operating loss and company guidance for a loss in fiscal third quarter prompted the review, Moody's said, as well as a much slower ramp than previously anticipated of revenues derived from incremental customer platforms.

The review will take into account the latest phase of the company's restructuring effort to reduce costs as well as ongoing erosion of returns on capital and assets in excess of what has been typical among its electronic manufacturing services peers.

Moody's also said it will focus on Solectron's increasing debt leverage, the struggling performance of its leading customers and continuing weakness in end markets, including telecom, where its exposure actually increased to 57% in second quarter from 54% in first quarter.

Solectron is in full compliance with the financial covenants under its recently arranged senior credit facilities, including minimum consolidated tangible net worth and cash interest coverage tests and a 50% maximum consolidated debt to capitalization ratio, Moody's noted. There is no debt leverage ceiling.

Fitch cuts Solectron convertible notes to BB

Fitch Ratings lowered Solectron Corp.'s ratings as follows: senior bank credit facility from BBB- to BB, senior unsecured debt from BBB- to BB, including the 0% convertible notes due 2020 and 0% convertible notes due 2020, and the 7.25% convertible ACES due 2006 from BB+ to B+. The outlook remains negative.

The downgrades reflect the prolonged, significant reduction in demand from Solectron's customers, which continues to weaken operational performance and credit protection measures.

In addition, with the delay in new business as customers defer ramping new projects in the face of continuing weak end-markets, Fitch believes any sustainable recovery will not materialize in 2002.

The ratings also consider Solectron's top-tier position in the electronic manufacturing services industry, diversity of end-markets and geographies, recent improvements in its capital structure, solid cash position and recent working capital improvements albeit in an industry downturn.

The negative outlook indicates that if adverse market conditions persist, outsourcing contracts do not materialize from new customers, the company makes significant cash acquisitions, or if it is unsuccessful in execution of planned cost reductions the ratings may continue to be negatively impacted.

Fitch believes revenues will to be challenged for the remainder of the year. Solectron has taken $765 million in restructuring charges over the past five quarters including $175 million in latest quarter. Despite weak operating performance, the company generated $971 million of cash, including $787 million from a reduction in inventory.

EBITDA in the quarter was about $72 million and, applying a portion of equity credit for new $1.1 billion convertible ACES, Fitch calculates gross debt to trailing-12-month EBITDA in excess of 9 times.

However the company currently has in excess of $3 billion of cash on its balance sheet, and Fitch expects that a portion of this cash will be used to satisfy any put obligations associated with its 0% convertible notes .

S&P downgrades Calpine

Standard & Poor's downgraded Calpine Corp. including cuttings its senior unsecured debt to B+ from BB+ and its convertible preferred stock to B from B+. The outlook is stable.

S&P said the action follows Calpine's decision to secure $2 billion ahead of its unsecured bondholders.

The rating agency noted that to shore up its liquidity position, Calpine has added about $1.5 billion of debt beyond its forecast in October 2001, bringing adjusted minimum and average funds from operations to interest coverage ratios to about 1.9 times and 2.4 times, respectively, from 2002-2005.

This deviates substantially from the previous forecast ratios of 2.3 times and 2.8 times, respectively, S&P said.

"While the $2 billion in secured debt may improve Calpine's short-term liquidity position, the additional debt will increase interest expense, refinancing risk, and interest-rate risk," S&P commented.

The amount of secured debt also caused S&P to increase the notching of the unsecured debt.

S&P ups Reebok outlook to positive

Standard & Poor's revised its outlook on athletic footwear maker Reebok International Ltd. to positive from stable and affirmed its ratings, including the BBB- for the 4.25% convertible notes due 2021.

The ratings reflect Reebok's well recognized brand name, improved product portfolio, strong cash flow and solid liquidity. These factors are somewhat offset by the high degree of fashion risk in the athletic footwear market and significant competition in Reebok's core segments.

Reebok remains a solid cash generator, primarily because of its low capital spending requirements and increased focus on working capital management. S&P expects that ongoing annual free cash flow will be used for business investments rather than for share repurchases.

With over $400 million in cash as of Dec. 31 and a $300 million revolving credit facility, the company has ample financial flexibility. Credit ratios have improved steadily since 1999, with lease-adjusted EBITDA coverage of gross interest expense of 6.0 times (x) and adjusted total debt to EBITDA at about 1.8x for 2001.

S&P expects Reebok's financial profile to continue to improve due to strength in its key U.S. footwear market coupled with increasing sales of apparel under the NFL and NBA brands.

Reebok competes in a very competitive and fashion-oriented segment, which increases its business risk. However, if the company can achieve and maintain EBITDA coverage of interest above 7 times, S&P said the ratings could be raised.

S&P rates Storebrand exchangeables BBB

Standard & Poor's assigned a BBB rating to Storebrand ASA's offering of €160 million 2.25% exchangeable bonds due 2006.

© 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.