S&P cuts Solectron

Standard & Poor's downgraded Solectron Corp. including cutting its $500 million 9.625% senior notes due 2009, $150 million 7.375% senior notes due 2006, $4.025 billion senior LYONs due 2020 and $2.9 billion LYONs due 2020 to B+ from BB-, $200 million 364-day senior secured revolving credit facility, $250 million senior secured revolving credit facility to BB- from BB and $1 billion Adjustable Conversion-Rate Equity Security Units (ACES) to B- from B. The ratings were removed from CreditWatch negative. The outlook is stable.

S&P said the downgrade reflects sub-par operating profitability relative to Solectron's peers in the highly competitive electronics manufacturing services (EMS) industry, despite several restructuring efforts.

The company's 2003 restructuring effort focuses on reducing high-cost manufacturing locations in North America and Europe and includes a 20% reduction in manufacturing facilities and a 16% headcount reduction, S&P noted. Solectron is also in the process of divesting several non-core businesses, from which the company expects to generate proceeds for debt repayment.

Although balance sheet improvements are expected from debt repayments and divestiture proceeds and Solectron has made modest progress restructuring its operations and rationalizing selling expenditures, the company's operating margins before depreciation and amortization are expected to be lower than previous expectations over the intermediate-term, S&P said. This is primarily because of inefficient asset utilization and a shift in product mix toward lower-margin products.

Solectron's ratings reflect its weak operating performance and a leveraged financial profile. These are only partially offset by the company's top-tier position in the EMS industry, well-established customer relationships, and adequate financial flexibility from cash balances.

Operating margins before depreciation and amortization were about 2% in fiscal 2003, ended August, compared to the 4%-8% range for other top-tier EMS companies, and net debt to EBITDA was more than 6x. EBITDA coverage of cash interest charges was about 2x, and free cash flow was $239 million in fiscal 2003, S&P said.

S&P cuts Kansas City Southern

Standard & Poor's downgraded Kansas City Southern and Kansas City Southern Railway Co. including cutting its senior unsecured debt to B+ from BB- and preferred stock to B- from B. The senior secured debt was confirmed at BB+. The ratings were removed from CreditWatch negative. The outlook is negative.

S&P said the downgrades reflect the company's weaker-than-expected operating performance over the past year and S&P's concern that uncertainties and potential funding requirements related to its investment in TFM SA de CV will prevent the company from materially improving its financial profile over the near term and could, under certain circumstances, lead to a deterioration in financial strength.

S&P said it confirmed the senior secured debt because it believes that there is a very strong likelihood of recovery of principal for bank lenders in the event of a default or bankruptcy, given the significant amount of collateral the company has and the relatively small proportion of secured debt in the capital structure.

Operating results have been depressed by the weak economy and increased cost pressures (especially fuel) over the past year, S&P noted. Results in 2002 were also adversely affected by complications arising from the implementation of a new transportation computer system in the second half of the year. Although this system is now helping the company manage its rail operations more efficiently (as is reflected in improving service metrics), the company's operating ratio (operating expenses, including depreciation, as a percentage of revenues) remains significantly weaker (higher) than average among Class 1 railroads. During the second quarter of 2003 it was 90.3% versus an average low- to mid-80% level for the other large U.S. railroads.

In April 2003, Kansas City Southern announced a series of agreements with TMM under which Kansas City Southern would gain control of TFM and the Texas Mexican Railway Co., S&P said. To date, the transaction has been approved by the board of directors at both Kansas City Southern and TMM, by the bank group, and by Mexico's Competition Commission. In addition, it has passed antitrust review in the U.S. However, TMM's shareholders voted against the transaction in August, despite the fact that the controlling shareholder is also the chairman and chief executive of TMM. The two companies are now in a dispute over whether TMM shareholder approval is required for the transaction to go forward and whether the merger agreement remains in effect. The two companies are expected to begin arbitration proceedings regarding the matter shortly as part of the dispute resolution process.

S&P rates United Rentals notes B+

Standard & Poor's assigned a B+ rating to United Rentals (North America) Inc.'s new $125 million 1 7/8% senior subordinated convertible notes due 2023 and $450 million senior subordinated notes due 2013 and confirmed the company's existing ratings including its senior secured debt at BB, senior unsecured debt at BB-, subordinated debt at B+ and preferred stock at B. The outlook is stable.

S&P said the refinancing will extend the maturity and repay lease obligations that were due in 2006, while modestly lowering interest expense.

United Rentals' ratings reflect its position as the largest provider of equipment rentals in the U.S., good geographic, product and customer diversity, offset by exposure to cyclical construction end-markets and a moderately aggressive financial policy, S&P said.

Spending in its key end-market - nonresidential construction - continues to be weak, down about 7% through 2003, while highway spending also remains weak, S&P said. Near-term prospects are dependent on a rebound in weak end-markets and a reduction in fleet overcapacity. Some positive signs of improvement in market conditions include an increase in United Rentals' rental rates of about 2%-3% during the second and third quarters of 2003. In addition, excluding United Rentals' traffic-related business, its same-store sales increased about 3%-4% during the second and third quarters of 2003.

Despite the near-term challenges as a result of the decline in construction spending, longer-term prospects for United Rentals include increased penetration on large construction projects, increased emphasis on high-reach equipment, good prospects for required infrastructure spending, continued marketing efforts to increase national accounts and increased merchandise sales at United Rentals' branches.

United Rentals is expected to spend about $330 million in gross rental capital expenditures in 2003, down from about $490 million in 2002. Offsetting equipment sales of $120 million should put free cash flow at about $260 million in 2003, which S&P expects to be used primarily to reduce debt in 2003. Debt leverage increased to about 4x EBITDA, and funds from operations to total debt is less than 20%. Incorporated into the rating is the expectation that debt leverage will trend downward toward 3x EBITDA, and funds from operations to total debt, adjusted for operating leases, will range from 20% to 25% over the intermediate term.

S&P raises ABB outlook

Standard & Poor's raised its outlook on ABB Ltd. to positive from negative and confirmed its ratings including its senior unsecured debt at BB-.

S&P said the action follows the group's announcement that it has obtained underwriting commitments for an equity rights issue of $2.5 billion from a number of banks.

In addition to the equity rights issue, which is expected to be finalized by mid-December 2003, ABB announced it has secured commitments from a syndicate of banks to provide a new $1 billion revolving standby credit facility with a tenor of three years. The new facility will become available to ABB upon completion of the rights issue and will replace the existing short-term $1.5 billion revolving credit facility.

The new facility will be provided on an unsecured basis if ABB manages to receive combined minimum gross proceeds of $3 billion from the equity rights issue, a complementary long-term bond issue, and/or asset disposals. To that end, ABB said it will also seek to issue a new bond of up to €650 million over the next few weeks.

The proposed financing and recapitalization measures will solve ABB's liquidity problems as they will cover several years of debt maturities, S&P said. In addition, the large rights issue will reduce the group's high financial leverage. Nevertheless, the group's cash flow protection measures still require significant improvements and further deleveraging is needed before a ratings upgrade will be considered.

The positive outlook reflects the expectation that management has initiated the right steps to adequately strengthen the group's cash flow generation, S&P noted.

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