Fitch rates Sanmina-SCI bank loan BB+, notes BB, B+

Fitch Ratings initiated coverage of Sanmina-SCI Corp., assigning a BB+ rating to its first-lien senior secured bank facility, a BB to its second-lien senior secured notes and a B+ to its senior subordinated notes. The outlook is stable.

The ratings reflect customer and industry concentration, pricing pressures including for printed circuit board (PCB) fabrication, lower but improved capacity utilization levels and execution risk relating to the company's various restructuring programs, Fitch said.

Also considered are the company's leading position in the Electronics Manufacturing Services (EMS) industry, consistent operating cash flow and free cash flow, improved capital structure and working capital metrics and unique operating model and strong long-term management team.

The stable outlook reflects the company's consistent revenue base, stabilizing but still challenging demand environment for its end markets and cost cutting initiatives, especially for the PCB segment, which continues to experience operating losses but is generating cash. Even though Fitch expects third quarter weakness for the European market as well continued pressure on telecommunications capital spending, Sanmina has flexibility within the current ratings for moderate operational and industry shortfalls.

Even though profitability has held steady the last few quarters, credit protection measures have deteriorated slightly for the latest 12 months ended June 28, 2003 compared to fiscal year-end 2002 mostly as a result of the increased debt and interest associated with the refinancing in December 2002, Fitch said. Interest coverage fell to 3.8x from 5.3x and leverage, as measured by total debt-to-EBITDA, increased to 6.4 times from 6.2x for the same period.

Fitch expects Sanmina's leverage will improve slightly going forward as a result of the recently completed $264 million convertible note redemption, which will also reduce gross annual interest expense by approximately $11 million. Interest coverage, however, should remain below 4x on a rolling basis due to the higher interest expense associated with the secured debt.

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