Moody's raises Maxtor outlook, rates convertible B2

Moody's Investors Service raised its outlook on Maxtor Corp. to positive from negative, assigned a B2 to its new $200 million convertible senior notes due 2010 and confirmed its existing ratings including its $60 million 5¾% subordinated debentures due 2012 at Caa1.

Moody's said the convertibles are being issued in part to address Maxtor's pro rata principal payment under Quantum Corp.'s 7% subordinated convertible notes maturing in 2004.

The outlook revision takes into account Maxtor's restoration of positive last 12 months EBITDA with the aid of solid margins in its fourth quarter of fiscal 2002 and first quarter of fiscal 2003, and Moody's expectation of full-year operating profitability in 2003.

The ratings confirmation is based on the company's moderately high debt leverage, and unanticipated protracted integration of the disk drive platforms obtained in the 2001 acquisition of Quantum Corporation's Hard Disk Drive division, which have now been optimized between the company's existing Singapore disk assembly operations and its outside contract manufacturer.

The ratings additionally reflect the industry's challenges in ramping to effective yield on the 80 gigabyte per platter drive, for which Maxtor's execution has continued to improve.

The ratings take into consideration Maxtor's moderately high 4.4 times (3.5 times, if adjusted for the $96 million pro rata share of principal attributed to Quantum's Hard Disk Drive division that will be repaid or possibly retired through open market purchases) pro forma debt to EBITDA for the 12 months to March 29, 2003. Free cash flow from operations over the last 12 months would not have covered fixed charges, including $136 million capital expenditures incurred over the period.

However, the ratings are mitigated by the company's satisfactory liquidity, evidenced by pro forma cash and investments in excess of $500 million, Moody's said. Maxtor will additionally have available capacity under a new $100 million receivables securitization facility that is being arranged contemporaneous with the convertible senior notes transaction.

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