Moody's assigns Baa1 rating to GTech new convertible

Moody's Investors Service on Monday assigned a prospective first time rating of Baa1 to GTech's proposed $150 million senior convertible guaranteed debentures. The ratings reflect GTech's recurring revenue stream from its on-line lottery contracts with about 81 jurisdictions worldwide, its leading market share, and its conservative financial policies. The rating outlook is stable, Moody's said, reflecting the general stability of lottery sales, as well as the expectation that the company will maintain its conservative financial policies and focus on its core competencies.

GTech designs, installs, operates and maintains on-line lottery systems pursuant to long-term (5-7 years) contracts with multi-year extension options. The ratings reflect the company's 100% contract retention rate for its large contracts, its 95% win rate on new contracts and its 90% renewal rate. GTech does have significant concentration in its top 10 contracts that represent about 65% of EBITDA. This risk is mitigated to some degree by the recent renewal of several of its largest contracts. The ratings also reflect important barriers to entry, including the large installed base of point-of-sale terminals, and the high capital investment that would be necessary to replicate the company's systems and software relative to the payback period, particularly given the long-term and staggered nature of the lottery contract terms. Moody's said it believes it would be difficult for a new entrant to gain critical mass quickly. However, emerging Internet technology could replace point-of-sale terminals, and thereby disrupt this competitive advantage longer-term. This is a risk that Moody's said it will monitor carefully. GTech plans to continue its investment in research and development, and enter into alliances and or joint ventures in order to maintain and improve its technological capabilities, and to take advantage of any emerging technology. Generally, the company's competitors are smaller and have less financial flexibility. One of its main competitors, AWI, is a subsidiary of Anchor Gaming that is likely to merge with IGT that could increase competition.

The ratings consider the mature and relatively slow growth of lottery sales domestically, Moody's said, and the higher growth prospects in international jurisdictions, which are at an earlier stage of development. Additionally, economic weakness in the U.S. may lead to new jurisdictions introducing lotteries to offset declining tax revenues and/or lead them to consider new lottery games to spur growth in sales.

The company's new management team has completed its review of the company's assets and business strategy and will focus on profitable growth opportunities within its core competencies, Moody's said. The company's financial policy is conservative with debt-to-EBITDA of about 1.1 times and EBIT-to-interest in excess of 6 times. GTech can generate about $75 million to $100 million in free cash flow after capital expenditures which increases event risk associated with share repurchases and/or acquisitions, Moody's said. The rating reflects Moody's expectation that the company will manage the use of its free cash in a manner that maintains or improves its current debt protection measures going forward.

Moody's assigns Baa1 rating to RGA new convertible trust preferred

Moody's Investors Service on Monday assigned an A3 senior debt rating to Reinsurance Group of America, Inc.'s $200 million 10-year senior debt issue and a Baa1 preferred stock rating to the $225 million Trust Preferred Income Equity Redeemable Security Units (PIERS) issued via RGA Capital Trust I. The outlook for the RGA, Inc. ratings is stable, Moody's said, while the rating agency changed the outlook on RGA Reinsurance Co.'s A1 insurance financial strength rating to positive from stable.

The rating agency said that the RGA group ratings are based on the company's solid position in the U.S. mortality reinsurance market, good performance in the company's core domestic operations, and adequate capitalization. According to Moody's, the rating also benefits from implicit support from the company's 58% owner Metlife Inc. The rating agency said, however, that these strengths are somewhat offset by the potential volatility in reinsurance results (relative to individual life earnings for direct writers), as well as the potential volatility from non-traditional forms of reinsurance.

Moody's added that the change in outlook of RGA Re's A1 insurance financial strength rating to positive from stable reflects the strategic importance of these operations to MetLife Inc. The change in outlook also incorporates the rating agency's expectation that the rating differential between the insurance financial strength ratings of operating insurance companies and the debt ratings of holding companies will be widened to better reflect the considerable differences in expected losses of obligations of the two different types of entities.

Moody's confirms Sanmina-SCI ratings, cuts SCI on merger

Moody's Investors Service on Monday confirmed the ratings of Sanmina-SCI Corp., formerly known as Sanmina Corp., and at the same time lowered the rating on the debt outstanding for SCI Systems Inc. that has been assumed and will be guaranteed by Sanmina-SCI Corp., following the merger that closed Dec. 6. Moody's confirmed the Ba2 rating on the Sanmina zero coupon convertible subordinated debentures due 2020 and Sanmina 4.25% convertible subordinated notes due 2004, and lowered the rating to Ba2 from Ba1 on the SCI Systems 3% convertible subordinated notes due 2007, which will be guaranteed by Sanmina-SCI. The ratings outlook is negative, Moody's said.

The ratings and outlook take into account the contraction in information technology and telecommunications capital investment which has adversely affected the dominant proportion of Sanmina-SCI's end use markets, Moody's said. Also, Moody's noted the precipitous sequential decline in the former Sanmina revenues from fiscal first quarter 2001 through fiscal fourth quarter 2001 and more dramatic decline in operating margins since fiscal second quarter 2001. Moody's said the prospective integration challenges as management assumes control of a fairly complex business more than double the size of the former Sanmina in last 12 months revenues was also a factor in the ratings. In Moody's opinion, the deterioration in the last 12 months performance of the former Sanmina, as well as that of the former SCI Systems, could have provided as compelling a rationale for the two companies to merge as the opportunities for horizontal and vertical integration that will ensue.

Moody' said it is concerned that a protracted period of IT and telecommunications spending restraint could continue to depress capacity utilization within the combined businesses. Visibility remains limited, and the popular consensus prognosticating a calendar second quarter 2002 or second half economic revival, having gained momentum in recent weeks, could be shattered once again, as has happened recurrently throughout 2001. If orders for new hardware continue to be deferred due to over-capacity and a dearth of compelling new enterprise software, and telecommunications service providers fail to coalesce their priorities from a panoply of capital expenditure alternatives, 2002 could pose another challenging year. Sanmina-SCI's strategy is to proceed beyond the independent restructuring activities undertaken by the respective companies in 2001, further consolidating plant sites and operations, and negotiate for product platforms positioned for divestiture in the latest phase of OEM outsourcing. Enhanced scale and a complement of assets necessary to provide customers with a more complete solution assure Sanmina-SCI of an opportunity to compete with any other EMS provider for OEM divestitures over the foreseeable future. Furthermore, some potential exists for additional PCB consumption among higher end assembly and systems integration programs tied to the former SCI Systems, although for the more commodity oriented products such as personal computers, peripherals, and set top boxes the company would continue to outsource lower layer count boards from the low cost Asian producers.

Fitch sees discount retailers shine in 2002

As 2001 comes to a close, the U.S. recession has left department stores the hardest hit while discounters continue to benefit from improvement in their apparel and home merchandise offerings, according to rating agency Fitch. "We expect discounters to continue to post solid results in 2002, with comparable-store sales remaining in the low- to mid- single digits," Fitch analyst Michelle Barishaw commented in a report. "The discounters will continue to capture market share from other retail segments, but most of the growth will be at Wal-Mart, Target and Costco."

Moody's cuts Global Crossing ratings

Moody's Investors Service on Monday lowered the ratings of Global Crossing, including the senior secured rating to Caa2 from B1, senior unsecured rating to Ca from B2 and preferred stock rating to C from Caa1. The outlook is negative. The rating, Moody's said, reflects heightened concern that Global Crossing's business plan may be increasingly pressured by protracted softness in global telecom spending and our view that liquidity may be insufficient to sustain a fully funded business model. Global Crossing has announced a number of cost-cutting measures, including a 3,200 workforce reduction, as well as the sale of its Global Marine and IPC business units. Recent discussions by its new management team concerning a possible merger with Asia Global Crossing have been terminated.

Moody's ups General Semiconductor ratings, affirms Vishay

Moody's Investors Service on Monday confirmed the rating on Vishay Intertechnology Inc.'s zero-coupon convertibles due 2021 at Ba1, while raising to Ba3 from B2 the rating on the one piece of General Semiconductor Inc. debt, its 5.75% convertible subordinated notes due 2006, that will remain for General Semiconductor, which was acquired by Vishay on Nov. 2. The ratings outlook remains stable.

The General Semiconductor rating upgrade is based on Vishay Intertechnology's acquisition of the leading manufacturer of power rectifiers, transient voltage suppressers and diodes, which will contribute to a more comprehensive product line of active and passive discrete components. While General Semiconductor will remain a wholly-owned subsidiary of Vishay, Vishay has, to date, declined to declare any intention to assume or guarantee payment on the General Semiconductor convertible subordinated notes that would remain outstanding.

In the event that Vishay assumes such obligation in writing or extends its guarantee to the payment of the bonds, Moody's would view the remaining General Semiconductor convertibles as equivalent to, or on a parity with, the Vishay convertibles, and further upgrade the rating on the General Semiconductor convertible subordinated notes to Ba1. Although the General Semiconductor convertible subordinated notes will now be convertible into Vishay Intertechnology, Inc. stock at a price of $27.62 per share, in accordance with the change of control provision accompanying the General Semiconductor convertibles, noteholders will have up to 45 days to put the notes to General Semiconductor at a price of 100% plus accrued interest.

The ratings take into account Vishay's very low 0.8 times pro forma debt to cash flow ratio for the last 12 months ended June 30, including $140 million borrowed under its revolving credit facility to eliminate General Semiconductor's outstanding revolving bank debt and to finance the acquisition of Mallory; the modest leverage going forward, as evidenced by the 18.0% pro forma debt to capitalization ratio; and the broadened product diversification attained through the merger. However, it is evident that fiscal 2001 EBITDA will decline precipitously over FY2000, ratcheting up debt leverage calculations. The company's pro forma returns on assets and invested capital, based on EBITA for the LTM ended June 30, 2001, were 16.9% and 21.9%, respectively. Gross margins should benefit from a greater proportion of active electronics components in the product mix. Vishay enjoys ample liquidity with estimated pro forma cash of about $453 million as of June 30, supplemented by $660 million, which may be increased to $1 billion upon majority consent of the lenders, available under the company's unrated revolving credit facility. Potential flexibility is provided by the company's $1 billion shelf registration, filed in December 2000, which may be employed for senior debt and/or common stock issuance.

The stable outlook is based on our expectations that debt leverage will remain moderately low despite operating performance, which is expected to weaken, year-over-year, over the coming quarters. Vishay and General Semiconductor's ratings could be lowered if the downturn in high technology and telecommunications is more protracted than is currently perceived, and Vishay's revenues, operating income and cash position decline significantly from fiscal third quarter performance and quarter-end levels.

Moody's says U.S. life insurance exposure to Enron won't precipitate rating actions

The US life insurance industry's direct exposure to Enron Corp. was approximately $3.9 billion at year-end 2000, according to Moody's Investors Service. Though a substantial dollar amount, this amounts to less than 2% of the consolidated statutory capital base of Moody's rated US life insurance universe. Consequently, Moody's believes that this exposure will have limited credit implications for its rated US life insurance companies.

"While the exposure of certain insurers to Enron and its affiliates is indeed substantial, Moody's believes that their ratings remain appropriately positioned," said Arthur Fliegelman, a VP/senior credit officer with Moody's and a co-author of the Moody's report. "We do not expect to take any rating action driven primarily by Enron-related investment exposures at the present time."

According to Ellen Fagin, an associate analyst and co-author of the Moody's report, "leading the list of exposures were John Hancock ($360 million), Prudential ($311 million), AIG Life ($255 million excluding $79 million additional at American General), AEGON USA ($217 million), and New York Life ($197 million). Twenty-three life insurance groups had an exposure in excess of $50 million, with an additional 11 companies having an exposure of between $25 million and $50 million."

The highest exposures as a percentage of consolidated statutory capital were Amerus (10.0%), USAA Life (8.8%) and AIG Life (8.0%).

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