S&P cuts Solectron ratings, rates new revolver at BB+, ACES BB-

Standard & Poor's lowered its corporate credit, senior unsecured note and senior unsecured bank loan ratings on Solectron Corp. to BB+ from BBB-, and assigned a BB+ rating to the proposed $500 million senior credit facilities and a BB- rating to the proposed $1 billion of convertible ACES. The outlook is negative.

The ratings downgrade is based on deteriorating operating performance and weaker credit measures, compounded by high debt levels. Dependence on weak communications end markets, which comprise more than half of sales, and operating metrics that are sub-par compared with other top-tier electronic manufacturing services providers contributed to the downgrade. Sales for the first half of fiscal 2002 are expected to fall by nearly 45%, to about $6 billion, from just over $11 billion in the first half of fiscal 2001.

The proposed financing, along with existing cash balances, alleviates concerns associated with the potential exercise of the near-term put provisions on its existing convertible issues, S&P said. Still, the major rating concern continues to be Solectron's sub-par operating performance under difficult industry conditions, which S&P expects to persist until at least mid-2002.

Ratings continue to reflect Solectron's top-tier position in the EMS industry, well-established customer relationships with leading original equipment manufacturers and favorable long-term trends towards outsourcing for larger EMS providers, S&P said. These factors are offset by the likelihood that Solectron's industry leadership position will be challenged by other top-tier EMS providers, its more leveraged financial profile and exposure to the communications market, S&P added.

Operating metrics have been affected by low capacity utilization and unusually high inventory levels, S&P said. Operating margins for the first half of fiscal 2002 are likely to be less than one-third of those in the like period of fiscal 2001 and profitability is likely to remain depressed over the intermediate term. However, operating performance should benefit from restructuring to reduce headcount and manufacturing capacity by more than one-third, producing cumulative annualized cost savings exceeding $750 million.

Credit measures are likely to benefit modestly from the financing activity, S&P added. Pro forma for the issue, the financial profile remains leveraged, with debt to EBITDA for the 12 months ended Nov. 30 of more than 4 times. Still, S&P noted cash flow generation is solid, as the liquidation of working capital and reduced fixed capital needs resulted in more than $1.2 billion of free operating cash flow over the three quarters ended Nov. 30. Pro forma for the issue, the company's cash balance will exceed $3.5 billion. Solid cash flow is expected to moderate the credit impact of weaker operating measures.

Moody's cuts Solectron existing converts to Ba1, assigns Ba2 to new converts

Moody's Investors Service lowered the long-term senior unsecured credit ratings of Solectron Corp. one notch to Ba1, including the company's existing convertibles, and assigned a Ba2 rating to Solectron's proposed new mandatory convertibles, with a negative ratings outlook. The downgrade and negative outlook, Moody's said, reflect the company's weak operating performance in terms of sales and margin deterioration as well as an ongoing erosion of returns on capital and assets in excess of what has been typical among its electronic manufacturing services peers. As a result of continuing weakness in Solectron's customers' end markets, and potential disruption as it integrates the recent C-MAC Industries Inc. acquisition while executing restructuring plans of its own, Moody's expects that operating performance will remain weak over the intermediate term while its cash flow leverage remains elevated.

The rating agency said that Solectron remains one of the leading providers of electronic manufacturing services to a global customer base spanning the networking, telecommunications equipment, mobile communications, PC, server, and an array of industrial sectors. However, as the majority of its end markets experienced a sudden, severe, and ongoing contraction in demand generally beginning around the third quarter of calendar 2000, Solectron exhibited a precipitous decline in its operating performance, with quarterly revenues declining from $5.7 billion in November 2000 to $3.6 billion in August 2001, while operating earnings have swung from $276 million to a loss of $313 million ($106 million loss excluding restructuring charges) over the same period. Revenues for the quarter ending November 2001 were $3.2 billion, leading to a net loss of $53 million. Management projects revenues next quarter of between $2.7 billion and $3.2 billion, leading to breakeven or loss results before incorporating restructuring or one-time charges, which would represent the fourth consecutive quarter of losses. Moody's said that while peer EMS companies have experienced similar pressures, Solectron's decline has been more notable even though it doesn't have a disproportionate exposure to harder hit end markets such as telecommunications and networking. The negative outlook derives largely from concerns about the company's execution and uncertainties regarding the recovery of business activity.

While there appears to be some sporadic indications of pockets of stabilization in North America (55% of last quarter's revenues), with some excess inventory burn off, business activity is still at low levels and with little visibility. In Europe and Asia, similar overall weak conditions persist with the usual lag to the North American market, which, we believe will serve to limit potential operating improvement over the next year. As a result of weak volume, low capacity utilization estimated at about 45-50%, unabsorbed overhead costs, and demand uncertainty, there is the possibility of further restructuring charges in order to reduce costs as the company continues to reassess business conditions. Although Moody's believes a recovery will develop, the timing and pace of a cyclical upturn continue to remain very uncertain, with the possibility that management and consensus estimates of a second half of 2002 recovery could once again fail to materialize, prolonging Solectron's weak operating performance and thereby limiting its ability to improve debt protection measures.

Regarding liquidity and financial flexibility, the planned offering of $1 billion of mandatory convertible ACES, with a 25% over-allotment provision, will add to the company's existing cash balances of $2.9 billion, thereby bolstering the resources available to cash settle the pending puts of zero-coupon convertibles in January 2002, for about $560 million, and in May 2003, for about $2.5 billion. Moody's noted that the company also has a potential put of $1.7 billion of zero-coupon convertibles in May 2004, the financing of which will need to be addressed over time.

The rating agency went on to say that Solectron's financial leverage has become quite elevated and is notably higher than its peers on a number of measurements. As measured by debt-to-EBITDA, for example, Moody's estimates that Solectron measures nearly 6 times on a latest 12 month basis ending November 2001. Given the operating challenges and business conditions, Moody's believes that Solectron's financial leverage will remain elevated throughout 2002. To the extent that progress in reducing cash flow leverage is not evident, the ratings could come under pressure.

Fitch rates Solectron's new convertible at BB+, revolver at BBB-

Fitch on Tuesday assigned a BBB- rating to Solectron Corp.'s proposed $500 million senior bank credit facility and a BB+ rating to the company's proposed $1 billion issuance of mandatory convertibles ACES. The senior unsecured rating, which was downgraded to BBB- from BBB on Nov. 26 was affirmed. The rating outlook remains negative, Fitch said.

The majority of the company's existing debt consists of liquid yield option zero-coupon senior unsecured convertible notes from three issues between January 1999 and November 2000, totaling $4.8 billion as of Aug. 31. Fitch expects that the proposed issuance of ACES will be used to repurchase the remaining portion of the first issue, due 2019, of which $831 million was outstanding at the end of August, reduction of other current debt obligations and general corporate purposes.

Fitch said the ratings balance the effect of the proposed changes in the company's capital structure on liquidity, financial flexibility, and credit protection measures, which result partially from the portion of equity credit assigned to the ACES, against the prolonged significant reduction in demand from Solectron's customers and the company's declining operating performance. The current ratings also consider Solectron's leading position in the electronic manufacturing services industry, actions to resize its cost structure against revenue prospects, solid cash position, the diversity of end-markets and geographies, and significant liquidity. The company continues to focus on managing working capital in a difficult environment and has generated positive cash flow from operations in recent quarters. It is anticipated that capital spending will remain at significantly lower levels due to reduced capacity utilization as a result of the industry downturn.

The negative rating outlook signifies that if adverse market conditions persist, if outsourcing contracts do not materialize from new customers, if the company makes significant cash acquisitions, or if it is unsuccessful in execution of planned cost reductions, facilities rationalizations, and restructuring actions, the ratings may be further impacted, Fitch said.

The deep downturn in the market for the electronic end-products has significantly delayed expected improvement in credit protection measures, particularly the company's high leverage. Solectron has communicated to investors a continuing series of reduced expectations and of restructuring actions to resize the company appropriately. Despite this downturn, the company has continued to make acquisitions to strengthen its capabilities for the eventual industry recovery. As a result of all these factors, credit protection measures have continued to erode, more as a result of cash flow pressures than increase in total debt.

Moody's confirms Swiss Re senior unsecured debt at Aaa, cuts sub debt to Aa2 from Aa1

Moody's Investors Service confirmed the insurance financial strength ratings and senior unsecured debt ratings of Swiss Reinsurance Co. at Aaa. The company's subordinated debt rating and the rating of debt guaranteed on a subordinated basis by Swiss Re was lowered to Aa2 from Aa1. The outlook for all of the ratings is stable.

Following the events of Sept. 11, Moody's cited a number of concerns related to the size of Swiss Re's losses and its impact on the company's cash flow, earnings and balance sheet. In addition, Moody's noted concern over prospects for sustained profitability in the company's important non-life businesses, issues of the company's year-end renewal process with a focus on risk concentrations and a review of management's plans for financial leverage, including contingent liabilities, in the context of the losses due to the events of Sept. 11. In considering the company's prospects in its non-life business sector, Moody's believes that Swiss Re's earnings will recover quickly despite suffering the largest loss in the company's long history.

Regarding the downgrade of Swiss Re's subordinated debt rating, Moody's said it estimates the volatility of non-life reinsurance, as evidenced by the Sept. 11 losses for example, indicate that differences in the distribution of loss severity can be meaningful across different classes of creditors. Since Swiss Re's senior debt outstanding is relatively small in relation to policyholder obligations, Moody's believes the two-notch spread between subordinated and senior debt more accurately reflects the different expected loss content of those classes of creditors.

Looking ahead, Moody's said several factors could influence the rating over time, including a rise in core financial leverage that outstrips the relatively high levels of interest coverage that are expected at the Aaa and high Aa levels, unexpectedly weak performance in the non-life sector, or signs that the company's measures to mitigate the inevitable return of the 'cycle' were ineffective, or changing dynamics in the life reinsurance sector which now accounts for a meaningful portion of the company's revenues and earnings.

The rating agency noted a number of strengths factored into the stable outlook for the ratings, including the company's leading market position in two global industries (life and non-life reinsurance) as well as its standing as a leader in the convergence between capital markets and risk management sectors. The diversification from these businesses was a favorable rating consideration, Moody's said.

S&P keeps Conexant on review, negative

Standard & Poor's said its B+ corporate credit and B- subordinated debt ratings for Conexant Systems Inc. remain on watch with negative implications following the company's announcement that it plans to split itself into three companies over time and that it expects to bolster its balance sheet by $300 million within the next six months.

Newport Beach, Calif.-based Conexant plans to merge its wireless business with unrated Alpha Industries Inc. The merged company, which includes Conexant's gallium-arsenide wafer-processing plant, will provide radio-frequency solutions for mobile communications applications. The transaction is expected to be completed in the second calendar quarter of 2002. Conexant expects subsequently to separate its Internet infrastructure business, known as Mindspeed Technologies, into an independent company when business and market conditions permit. Conexant will then focus exclusively on broadband access applications. As part of the Alpha agreement, Conexant will sell its Mexicali, Mexico, assembly and test facility to New Alpha for $150 million. Separately, Conexant expects to receive a $150 million refund of a manufacturing-services deposit from a wafer foundry in about six months.

Moody's rates EchoStar unit's new senior unsecured notes at B1

Moody's Investors Service assigned a B1 rating to the proposed new $700 million of senior unsecured notes due 2009 of EchoStar DBS Corp., an indirect unit of EchoStar Communications Corp. Moody's also confirmed the existing ratings for EchoStar and its subsidiaries, including intermediate holding company EchoStar Broadband Corp., including the Caa1 ratings for the company's 4.875% convertibles due 2007 and the 5.75% convertibles due 2008. The outlook is still developing, Moody's said.

The ratings reflect EchoStar's high financial leverage and low interest coverage, heavy capital expenditures for ongoing satellite construction and launch, as well as subscriber acquisition costs whether or not they are capitalized, the likelihood of an increasingly competitive operating environment as well as the corresponding implications for potentially higher subscriber churn levels, lingering uncertainties such as the questionable adequacy of the company's self insurance practices for its satellite fleet and near-term satellite capacity availability to ensure compliance with local signal must-carry requirements on Jan. 1 in the absence of an adverse impact on customer service and numerous new uncertainties related to the proposed merger agreement with Hughes/PanAmSat like the regulatory, execution and integration risks, among others.

The ratings are supported, Moody's said, by the company's large and growing size, with 6.4 million subscribers at the end of the third quarter; the implicit collateral coverage afforded by its existing deployed satellite fleet, ground network infrastructure, and orbital slot licenses, near-term stability as provided by the to-be-acquired PanAmSat business, good EBITDA growth already albeit largely driven by leased versus expensed subscriber equipment and the prospect of further operational improvements, including substantial cost savings and revenue enhancing opportunities resulting from the proposed merger with Hughes and its DirecTV assets in particular; and good access to the capital markets, as well as a still meaningful equity cushion - including existing common equity, new shares to be issued in connection with the pending transactions, and new convertible preferred capital to be raised early next year from Vivendi - that provides downside protection for the company's creditors. Additionally, Moody's noted that sufficient flexibility exists within the company's current ratings to support the new debt that is being raised herein as a means of partially supporting at least the PanAmSat acquisition, which is expected to be completed whether or not the larger Hughes merger is approved.

The developing outlook continues to principally incorporate all of the uncertainties related to the proposed Hughes/PanAmSat merger, and the financing transactions and their ultimate structure that will facilitate the same. Although the developing outlook still suggests the possibility that the ratings may be adjusted either upward or downward or confirmed at stable over the ensuing rating horizon, Moody's noted that there now appears to be less chance of a downward rating adjustment given the recently announced $1.5 billion equity contribution by Vivendi in support of the proposed financing package.

The company essentially faces binary risk related to the various anti-trust, regulatory and foreign approvals necessary for completion of the planned merger with Hughes, Moody's said. Additionally, there is some ambiguity and uncertainty related to the specific contractual rights and ultimate legal interpretation of the Hughes-NRTC contract, as partially evidenced by more than one count of pending litigation, and the specific level, materiality and impact of any requisite concessions that may have to be made to cure this and other potential anti-trust and/or regulatory concerns is not clear at the present time. Moreover, if approved, the combined company will face considerable execution and integration risks related to combining the two subscriber bases, conversion costs for migrating existing subscribers to a singular platform, and ultimately realizing what may amount to considerable operational synergies upon which the merits of the deal are largely predicated. And while the proposed merger would result in a material increase in cash flow generation, an equally meaningful amount of incremental debt on a relative basis is also likely to be assumed, the servicing and repayment of which is based on the attainment of both near-term and more distant future cost savings and cash flow increases. Notwithstanding the aforementioned uncertainties, Moody's believes that a combined DirecTV/EchoStar platform would ultimately be a much stronger competitor to the well-entrenched cable companies that currently control the vast majority of the pay television service distribution universe.

S&P rates new EchoStar notes B+, puts ratings on positive watch

Standard & Poor's rated the planned new senior notes notes of Echostar DBS Corp. B+.

The rating agency also changed the CreditWatch on EchoStar's other issues to positive from developing. Affected debt includes EchoStar Communications Corp.'s $1 billion of 4.875% convertible subordinated notes due 2007 and its $1 billion of 5.75% convertible subordinated notes due 2008, both rated B-; and Echostar DBS Corp.'s $375 million of 9.25% senior notes due 2006 and its $1.625 billion of 9.375% senior notes due 2009, both rated B+.

Fitch assigns AA+ senior debt rating to General Re

Fitch on Tuesday assigned a AA+ senior debt and long-term issuer rating and F1+ commercial paper and short-term issuer rating to General Re Corp. Fitch also affirmed the insurer financial strength rating of the operating subsidiary General Reinsurance Corp. at AAA. The rating outlook is stable, Fitch said.

In addition to favorably reflecting General Re's position as a core member of the Berkshire Hathaway family of companies, the ratings reflect General Re's superior franchise, and excellent historic underwriting performance, Fitch said. The ratings also consider unfavorable underwriting performance relative to historical levels as well as a reduction in General Re's stand-alone capital position. Fitch said it believes that the recent underwriting deterioration is reflective of the very difficult, but improving, market conditions, which have caused a downtrend in accident year results, as well as a lower level of favorable reserve releases on prior years' business. Additionally, results for 2001 have been negatively impacted by losses resulting from the events of Sept. 11. Berkshire recorded a total pretax, net of reinsurance, loss of $2.275 billion in third quarter, $1.70 billion of which are directly attributed to General Re. Mitigating these concerns are General Re's solid capitalization as well as the substantial financial flexibility of parent Berkshire, Fitch said.

While Fitch said it considers the deterioration of capital a moderate concern, Berkshire's acquisition of General Re was designed to leverage Berkshire's $55 billion equity base in support of General Re's global reinsurance business, freeing General Re from the need to meet the predictable earnings needs of Wall Street and the capital constraints of rating agencies.

Moody's says Elektrim is in default on convertibles by missing put

Moody's Investors Service said Tuesday that the Polish telecom concern Elektrim S.A is in default per the rating agency's criteria, after the company failed to meet the put obligations under the terms and conditions of the 3.75% convertible notes due 2004 on Dec 17. The Caa1 rating for the Elektrim Finance BV €440 million 3.75% convertible notes due 2004, B3 senior implied rating and Caa1 unsecured issuer rating are unchanged, with a negative outlook, Moody's said.

As a result of Elektrim being unable to meet the expected scheduled payment under the 109.22 put option bondholders will likely be impaired, which is considered a default under Moody's ratings criteria. Although Moody's recognizes that the indenture provides for a grace period to rectify the situation to avoid legal proceedings, this does not negate the loss experienced by bondholders as a result of the failed scheduled payment. Moody's acknowledged that Elektrim management continue to seek refinancing solutions to remedy the situation, but said the default also recognizes the adverse change in the fundamental relationship between the bondholder and Elektrim.

In its ratings Moody's has taken into consideration the potential severity of loss faced by bondholders. In its assessment, Moody's continues to recognize that Elektrim's 49% stake in Elektrim Telekomunikacja has significant value based on market analyst assumptions relative to the size of the convertible bond and other unsecured obligations at the holding company. The value of ET, the amount of cash on-hand and expected proceeds from the sale of the Elektrim Kable assets relative to the size of the convertible provides Moody's with some comfort that sufficient divestment proceeds could be raised to meet the bond obligations. The negative outlook, however, takes into consideration that any proceeds from ET could be impaired in the event of a distressed sale. Moreover, the outlook takes into consideration the uncertain timing of any resolution and the increasing likelihood of legal proceedings being brought against the company.

Moody's assigns A3 senior unsecured rating to Prudential mandatory convertibles

Moody's Investors Service on Tuesday confirmed the credit ratings of Prudential Financial Inc. and its affiliates (issuer rating at A3 and the short-term debt rating of Prime-2), on the closing of Prudential's initial public offering and demutualization of its principal insurance subsidiary, The Prudential Insurance Co. of America. Moody's also assigned an A3 senior unsecured debt rating to Prudential Financial Capital Trust I's mandatory convertible preferreds.

Moody's said the ratings are based primarily on the organization's improving strategic profile, its good earnings capacity, its opportunities for growth in the international arena, its improved capitalization relative to balance sheet and operational risks, and its well known brand name. These strengths are offset primarily by the challenges of restoring market share in the company 's individual life insurance unit, building scale in its property/casualty and retail securities operations, reducing its relative high expense structure, and meeting the increasingly heightened competition among financial services companies.

Moody's believes that going public offers Prudential several tangible benefits, including greater flexibility to grow or to raise capital through the issuance of equity securities. In addition, Moody's said it believes the discipline of operating as a public company is more likely to improve the consolidated financial performance of PFI, which has been modest relative to its assets under management. Despite these benefits, it will be management 's use of its new capital that will determine the competitiveness and success of the demutualization. As part of the plan of demutualization, Prudential has destacked its principal operating subsidiaries and organized them as subsidiaries of Prudential in order to enhance the financial flexibility, earnings and future cash flows of the consolidated enterprise. The destacking will be beneficial over the medium term if management is successful in fixing the operating challenges of Prudential Securities and Prudential Property and Casualty, Moody's said.

Regarding the A3 senior unsecured debt rating to the Prudential mandatory convertible preferreds, Moody's said it reflects the senior unsecured guarantee of Prudential. In general, Moody's believes that these instruments are predominantly equity like. However, to the extent the use of proceeds from such instruments are used to acquire Prudential's common stock in the open market, Moody's said the mandatory convertibles will not be considered to create new common equity in the aggregate.

Both The Prudential Insurance Co. of America and Prudential Funding have unsecured committed lines of credit of $4.0 billion, of which $1.5 billion expires in October 2002, $1.0 billion expires in May 2004 and $1.5 billion in October 2006. Upon demutualization, Prudential will have access of up to $2.5 billion of these facilities, consisting of $500 million, $1 billion and $1 billion made available under the lines of credit expiring in October 2002, May 2004 and October 2006.

S&P puts USA Networks on watch, negative

Standard & Poor's put USA Networks Inc.'s ratings, including its BBB corporate credit rating, on watch with negative implications, following the planned sale of the company's highly profitable entertainment business to Vivendi Universal SA. S&P's initial assessment of the extent of the ratings downside is one notch to a BBB- corporate credit rating subject to further analysis of management's business and financial strategies.

The effect of the transaction, in S&P's view, is to reduce USA Networks' asset and cash flow critical mass, taking away the highest margin, highest net cash generating businesses - the USA Network and Sci Fi cable channels. The assets being sold amount to 63% of USA Networks' projected 2001 EBITDA. The USA and Sci Fi cable networks are among the most seasoned of the company's businesses, which were expected to resume above average cash flow growth once an economic recovery takes hold. The remaining portfolio of businesses making up the new USA Interactive has some diversification, and the Ticketmaster and Home Shopping Network units have good market positions. The newer interactive businesses may have good long-term growth potential, but they involve risks and uncertainties to realizing that growth, and also have little or no track record of profitability. Some of the emerging businesses are still in investment mode with an uncertain time horizon for reaching profitability. Taken together, S&P regards these businesses as less leverageable than USA Networks when including the cable networks.

Cash and preferred stock received in the transaction further build USA Networks' already strong liquidity and financial capacity. However, S&P views this benefit as more than offset by a narrower, less cash generative business portfolio. S&P's expectation that any potential downgrade would be limited to one notch is based on its initial assessment of the new business profile, and preliminary assumptions that management will not alter its risk-averse financial policies. The ultimate rating conclusion will depend on the strategy management plans to pursue in building its interactive business and the resources involved.

Fitch raises TXU outlook to stable

Fitch raised its outlook on TXU Corp. to stable from negative. Ratings affected include the senior notes at BBB, preference stock at BBB- and commercial paper at F2. Fitch also said it expects debt of the successors to the TXU Electric Co to be rated: BBB+ for TXU U.S Holdings Co. $20 million of senior unsecured debt and $136 million of preferred stock; A- for the $3.3 billion of first mortgage bonds of TXU Electric Delivery Co. (implied senior unsecured BBB+); and BBB+ for the$3.5 billion senior unsecured bonds of TXU Energy Co. LLC.

Fitch said its assessment takes into account TXU's changing corporate structure and business profile. The rating agency said the company's business plan and reduced leverage are consistent with the rating level and stable outlook.

"TXU has made progress in reducing consolidated leverage and remains committed to reducing parent company debt," Fitch commented. "Reductions in consolidated leverage result primarily from asset sales over the last year. Pro forma debt to capitalization is about 57%, reflecting asset sales that will be competed in the first quarter of 2002, and giving appropriate equity credit for mandatorily convertible debt. While parent level debt remains high, management has taken steps to replace straight debt with mandatorily convertible securities."

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