Moody's may downgrade H3C

Moody's Investors Service said ratings of H3C Holdings Ltd. could be affected negatively considering news that its parent company, 3Com Corp., signed a definitive merger agreement to be acquired by affiliates of Bain Capital Partners, LLC for about $2.2 billion in cash.

Huawei Technologies, currently one of H3C's major customers, also will acquire a minority interest in 3Com and become its commercial and strategic partner, Moody's said. This may partially alleviate concerns over competition from Huawei after the expiration of the non-compete clause at the end of 2008.

The credit agreement for the rated secured loans remains intact, which provides protection to creditors such as restrictive covenants on dividend payments, additional indebtedness and providing upstream guarantees to 3Com, Moody's said.

However, the ratings could be negatively affected if H3C's overall balance sheet be leveraged up following a debt refinancing exercise, or should the terms of the credit agreement are amended in a manner unfavorable to creditors, the agency said.

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