Moody's Downgrades Motorola Debt Ratings
Moody's Investors Service has downgraded Motorola's senior unsecured debt rating to Baa2 from Baa1, concluding a review for downgrade initiated on January 24, 2008. The company's rating for commercial paper was not part of the review and was affirmed at Prime-2. The rating outlook is negative.
Moody's says that the downgrade was driven by the continued deterioration in the handset business and the resulting effects on the company's cash generating capabilities and cash balances. The company has loosely sketched a plan to fix the mobile phone business but details of the plan are limited.
According to Senior Analyst Matthew Jones, "effecting a turnaround in the near term will remain a challenge for the company in light of their difficulties in developing a broad portfolio of phones including 3G and low-end offerings as well as ongoing changes in Motorola's senior management ranks. Of particular concern are the market share inroads achieved by competitors, most notably Samsung." The Baa2 rating is predicated on the handset business achieving break-even profitability over the next twelve months. The negative outlook reflects the uncertainty in the company's ability to turn the handset division around and potential for further deterioration in cash balances. The Company's pending split up plan may also impact the ratings but given the lack of details, the impact on the ratings cannot be ascertained at this time.
The Baa2 rating continues to be supported by the company's broad geographic and product diversification, leading position across numerous communications equipment businesses as well as its conservative capital structure, and in particular its large cash balances. At the same time, the rating considers the company's concentration in the volatile handset business (as exemplified by recent dramatic deterioration in that business), current depressed operating margins and cash generating capabilities and ongoing challenges in the network equipment business. The company's large cash balances continue to be a key driver for both long- and short-term ratings as they provide a crucial cushion that allows the company time to weather downturns in any of its divisions. Cash balances declined measurably in the most recent quarter, however, and if this trend continues, it could result in further downward pressure on the ratings.
Cash and short to medium term investments declined approximately $885 million in the quarter ended March 29, 2008 to $7.7 billion (including Sigma fund assets recently classified as long term assets). While the cash and investments level is down, it continues to well exceed the outstanding debt level of $6 billion (which includes Moody's standard adjustments for pensions and operating leases).
Motorola is planning to separate the company into two separate public companies, one housing the handset business ("Mobile Devices") and one housing the remaining network equipment, government & enterprise communications and broadband businesses ("Broadband & Mobility Solutions"). Motorola will attempt to effect the separation through a tax free distribution with the timing of the separation expected sometime in 2009. No details have been provided by the company in terms of final legal and capital structure, nor which company will be the "surviving" entity. While the pending separation of the handset business may greatly improve the cash flow of the remaining company, there has been insufficient detail on the split-up to determine what the ultimate rating will be.
Moody's concluded by warning that the ratings could face downward pressure if the handset business or Motorola's overall performance continues to deteriorate. The ratings could also be negatively impacted if cash and investments levels drop below debt levels whether from share buybacks, acquisitions or the funding of operating shortfalls. The ratings could stabilize if the company shows a measurable and sustainable improvement in the handset business.
Posted to the site on 14th May 2008
