Fitch cuts Solectron senior unsecured debt ratings to BBB- from BBB

Fitch on Monday lowered the rating for Solectron Corp.'s senior unsecured debt to BBB- from BBB, affecting chiefly the company's three issues of zero-coupon senior unsecured convertibles. The rating outlook remains negative. The downgrade reflects the prolonged significant reduction in demand from Solectron's existing customers, which continues to weaken credit protection measures, and limited visibility in the marketplace. The rating considers Solectron's leading position in the important but currently pressured electronic manufacturing services industry, its timely actions to resize its cost structure to keep up with current realities in its revenue prospects and its solid cash position.

The deep downturn in the market for the electronic end-products that Solectron builds for its OEM customers has significantly delayed expected improvement in credit protection measures, particularly the company's high leverage, Fitch said. Solectron has communicated to investors a continuing series of reduced expectations and of restructuring actions to resize the company appropriately. The company has stated it expects revenues of $2.8 billion to $3.2 billion in the first quarter of fiscal 2002 ending this month, a sequential decline of 11% to 22% and a year-over-year decline of 44% to 51%. Most recently, Solectron has stated that it now expects full fiscal 2002 sales to be below $16 billion, a more than 14% annual decline, Fitch noted.

Despite the downturn, the company has continued to make modest acquisitions under very favorable terms to strengthen its portfolio of capabilities for the eventual industry recovery, Fitch added, which has caused credit protection measures to continue to erode. 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 rating may be further impacted, Fitch said.

Moody's confirms WellPoint Health ratings on CareFirst merger

Moody's Investors Service on Monday confirmed the debt ratings (Baa1 senior long-term, Prime-2 short-term) of WellPoint Health Networks following the announcement that it plans to merge with CareFirst BlueCross BlueShield in a combined stock and cash transaction totalling about $1.3 billion. Similar to WellPoint's recently announced RightChoice merger, Moody's believes that this transaction will continue to improve the company's geographic diversity by establishing a strong market presence in the Mid-Atlantic region, including District of Columbia, Maryland and Delaware. Moody's noted that while this transaction as contemplated is expected to add about $450 million in debt, due to the timing of the transaction, anticipated to close by mid-2003, overall debt to capital levels should be within WellPoint's targeted mid-20% range at closing.

Going forward, Moody's said it expects management to continue to exhibit discipline in its pursuit of appropriately-valued assets and be prudent in its financing of acquisitions including the use of stock to finance any large transactions. In general, Moody's remains concerned regarding rising medical cost trends and the potential for a less favorable premium environment due to a slowing economy - which may accelerate following the events of Sept.11. In addition, Moody's said, the managed care sector continues to face competitive pressures as well as regulatory scrutiny - although we believe the status and timing of any pending healthcare legislation, such as the Patient Bill of Rights, may be less certain.

S&P puts Royal Caribbean-related deals on watch, positive

Standard & Poor's on Monday placed its BB+ ratings on class A-1 of two synthetic transactions linked to Royal Caribbean Cruises Ltd. on watch with positive implications. The two deals are swap-independent synthetic transactions that are weak-linked to the underlying collateral, Royal Caribbean Cruises Ltd. debt. The watch placements reflect the credit quality of the underlying securities issued by Royal Caribbean Cruises Ltd. The watch placements are a result the Nov. 20 announcement that Royal Caribbean Cruises has agreed to a merger of equals with P&O Princess Cruises PLC. The CreditWatch placement reflects the possibility that Royal Caribbean Cruises Ltd. could benefit from the combined entity's comparatively stronger debt protection measurements

Fitch expects to affirm BBB rating for Security Capital on Storage USA acquisition

Fitch said Monday it expects to affirm its BBB rating for the $700 million of senior unsecured notes of Security Capital Group Inc. on the closing of its proposed all-cash acquisition of the remaining 57% equity interest in Storage USA. However, Fitch revised its rating outlook from stable to negative. Financing for the acquisition will consist primarily of cash on hand derived from recent asset sales. The offer is currently under review by SUS, and if accepted, would be followed by a 45-day period during which SUS may solicit competing bids. Fitch's expected affirmation, which remains subject to review of SCG's interim investment activities and operating results, would coincide with the anticipated March 2002 closing for the acquisition.

Fitch said the expected rating recognizes that the use of recent divestiture proceeds to reduce debt and to build a cash balance has positioned Security Capital's balance sheet to absorb the proposed acquisition with little or no incremental debt. In addition to the previously mentioned asset sales, Fitch said Security Capital may sell its remaining interest in CarrAmerica at some point in the future. Credit positives associated with the proposed acquisition include an increase in the amount and visibility of cash flow, a significant increase in retained cash flow, and greater control over operating and investment strategies for the portfolio. These positives are balanced by the reduction in cash flow/earnings diversification associated with divestiture activities. Recognizing only Security Capital's senior unsecured notes and $221 million of convertible subordinated debentures, which are unrated by Fitch, debt leverage was a moderate 18% of tangible assets as of Sept. 30.

Fitch said the negative outlook acknowledges uncertainties regarding funding strategies and access to capital going forward. Privatization would eliminate the opportunity to finance asset growth independently in the public markets, and their capital requirements could exceed cash flow from operations and capital recycling activities, Fitch added.

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