Fitch cuts GM

Fitch Ratings downgraded the senior unsecured debt of General Motors Corp. and its financial services subsidiary General Motors Acceptance Corp. and related entities to BBB+ from A-. Fitch confirmed the commercial paper ratings at F2. The outlook remains negative.

The downgrade is the result of an increasingly more negative incentives environment, weaker than expected share performance in the key U.S. light vehicles market (down to 27.3% calendar year to date), ongoing concerns about healthcare/pension costs, and longer term concerns about GM's competitive position especially in the key U.S. market and especially in light of the upcoming United Auto Workers negotiations, Fitch said.

Positives include GM's strong liquidity position, the extended nature of its debt maturity schedule, strong product introductions such as the Hummer H2, better product mix in North America, stronger pension asset performance, and the strong performance at GMAC and in the Asia Pacific region.

One of Fitch's foremost concerns is that the current pricing environment may have permanently lowered the profitability profile of those companies that have most strongly participated. In the case of GM, Fitch is concerned that GM may be unable to restore the margins that have been lost over the last two years. This is especially true in the car portfolio which has been a laggard for several years.

Although good new products can be helpful in increasing profitability, it is not clear to what degree, as the industry has shortened its product cycle substantially over the last five years, Fitch said. Innovative and well positioned products like the H2 and the XLR have demonstrated that it is possible to hold relatively stable in this very negative pricing environment. However, these are relatively niche products that do not represent substantial volumes.

Finally, although Fitch recognizes the benefits of a consistent marketing message it feels that at this point GM is leaving money on the table in that its consistent message is hurting the overall profitability of the company.

Despite many of these negative headwinds, GM has made positive progress on many fronts. Liquidity remains strong with $20.6 billion in cash and net liquidity of $5.6 billion (as of the end of Q1, 2003 and including short-term VEBA), Fitch said.

Moody's lowers Genesco outlook

Moody's Investors Service lowered its outlook on Genesco Inc. to stable from positive and confirmed its ratings including its $103 million convertible subordinated debentures due 2005 at B2.

Moody's said the action takes into account declining performance metrics, which Moody's believes are due largely to cyclical factors, as well as Genesco's prudent financial and operating strategies, which have helped to generate positive cash flow and maintain acceptable debt protection measures for its rating category during a weak retail environment.

Moody's will not rate Genesco's new convertibles.

Genesco will use cash balances along with proceeds from the new $75 million issue to redeem the existing $103 million of debentures. While ongoing interest payments will be reduced, Moody's does not expect overall effective leverage to be significantly impacted because of the effect of lease payments on the company's coverage and leverage measures. Moody's believes that Genesco's cash balances and working capital facility, which has historically been used primarily for seasonal purposes, provides sufficient liquidity to support normal operations.

Fitch raises Chubb outlook, rates convertible A+

Fitch Ratings assigned an A+ rating to The Chubb Corp.'s offering of $400 million 3 year senior mandatory convertible notes and raised its outlook on Chubb to stable from negative.

The change in outlook reflects the benefits of this recent capital raising activity, which reduces parent company financial leverage, increases the level of cash and investments at the holding company and boosts surplus at the insurance subsidiary level to support premium growth, Fitch said.

The ratings continue to reflect Chubb's market position as a leading property/casualty insurer in several commercial and personal lines business segments, history of favorable underwriting performance, strong capital position at both the insurance subsidiary and parent holding company levels, conservative investment portfolio, and experienced management team.

Earnings have been significantly below historical levels for Chubb in the last two years due to losses from the events of Sept. 11 and surety losses related to the Enron bankruptcy in 2001 and a $700 million increase in reserves for asbestos and environmental exposures in 2002, Fitch said. Chubb reported consolidated GAAP net income of $222.9 million in 2002, compared with $111.0 million for the full year 2001. Chubb's GAAP combined ratio improved to 106.7% in 2002 from 113.4% in 2001. Net written premium increased by 30% in 2002 to $9.0 billion.

Earnings are expected to improve significantly in 2003 due to continued strong improvements in insurance market pricing across all segments, Fitch added. Net written premium grew by over 22% in the first quarter of 2003 and net income increased by 13.3% relative to the same period in 2002 to $224.6 million. The combined ratio for the period ending March 31, 2003 was 95.3%, which includes 4.1 points for catastrophe losses.

S&P lowers Micron outlook

Standard & Poor's lowered its outlook on Micron Technology Inc. to negative from stable and confirmed its subordinated debt at B-.

S&P said the outlook change reflects continued price pressures and weak demand levels, which have pressured the company's profitability and liquidity.

The company's ratings reflect the challenges of supplying technologically intensive products subject to severe price pressures, tempered by the company's conservative financial policies. Micron is the second-largest global supplier of dynamic random access memories, holding about a 20% share of the market.

Industrywide manufacturing capacity is ample, while bit growth in 2002 was about 45%, well below the historical 70%-100% range, S&P said. Total DRAM industry sales were about $10 billion in 2002, down somewhat from 2001, and well below the $29 billion level set in 2000. The decline reflected steep price cuts and soft personal computer sales, offsetting the upward trend of memory capacity in each computer. Growth has continued to be subpar, while price pressures have continued; average selling prices declined 15% sequentially in the May 2003 quarter. Micron's revenues of $733 million in the May 2003 quarter were about 32% of the cyclical quarterly peak of $2.3 billion set in August 2000.

Micron lagged Samsung in its transition to double data rate (DDR) memory from the formerly dominant synchronous DRAM (SDRAM) technology in 2002. That year, DDR products sold for around 2x the price of SDRAMs, while unit manufacturing costs were comparable, which cut into Micron's market share and significantly stressed its operating profitability and cash flows. The company has substantially closed the product gap in mid-2003, which has led to some recovery in market share and contributed to profitability, S&P said.

S&P raises Best Buy outlook to stable

Standard & Poor's revised its outlook on Best Buy Co. Inc. to stable from negative and confirmed its ratings including its senior unsecured debt at BBB- and senior subordinated debt at BB+.

S&P said the revised outlook reflects Best Buy's divestiture of its troubled Musicland business segment, no expected significant acquisition activity over the next 12 months and positive same-store sales trends despite the weakened U.S. economy.

The divestiture of Musicland, which represented about 7% of the company's total sales, will eliminate lease obligations and other liabilities related to that segment, allowing Best Buy to focus on its core business segments.

S&P said Best Buy's ratings reflect its leading position in the consumer electronics industry, stable operations despite the weakened U.S. economy, and favorable growth prospects for digital consumer electronics. However, the ratings also reflect risks posed by the cyclical nature of the consumer electronics industry, and competition from "category killer" retail formats in many product categories.

Lease-adjusted EBITDA coverage of interest was 5.2x in fiscal 2002 (ended March 1, 2003) down slightly from 5.3x in 2001, S&P said. Pro forma EBITDA coverage of interest for 2002, eliminating the Musicland operating leases, would have improved to about 5.8x.

Total debt to EBITDA improved to 2.3x in 2002 from 2.7x in 2000. Funds from operations to total debt was 30.7% in 2002. Best Buy has generated significant free cash flow in recent years but increased capital expenditures to fund store growth and new corporate office facilities in 2002 resulted in marginal free cash flow, S&P said. Lease-adjusted operating margins rose to about 8.6% in 2001 from about 7.0% in 2000 on initiatives to improve product mix and inventory management.

S&P lowers Motorola outlook

Standard & Poor's lowered its outlook on Motorola Inc. to negative from stable, confirmed its ratings including its senior unsecured debt at BBB, subordinated debt at BBB- and preferred stock at BB+ and assigned a BBB+ rating to its new bank loan.

The revised outlook reflects the slower pace of improvements in profitability than previously expected.

Despite a strengthened balance sheet and improvements in segment profitability to date, overall progress on profitability improvement during 2003 will fall significantly below prior expectations, S&P said. On June 9, Motorola announced that June quarterly revenues would be about $6.1 billion, or about $400 million lower than prior guidance, because of the effects of the SARS epidemic, and excess cell phone channel inventory in Asia. Net income for the quarter, excluding special items, is expected to be about breakeven, compared to earlier expectations that net income would be around $90 million.

The company believes that sales and earnings will be reduced for the balance of 2003, as these Asia-centered effects continue into the third and possibly the fourth quarter. The company's handset and semiconductor sectors are particularly affected; Motorola's other divisions, and its non-Asian phone business, continue to meet the company's expectations.

Notwithstanding cost-reduction actions, Motorola's overall profitability remains subpar for the rating level, as the company's operating margin for the four quarters ended March 2003 was 12%, and the return on capital has only recently reached the mid-single-digits percentage area, S&P said. Debt to EBITDA was 3x for the past four quarters, and the SARS and Asian phone issues will stress profitability for at least the June quarter.

© 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.