S&P puts Solectron on watch

Standard & Poor's put Solectron Corp. on CreditWatch negative including its $1 billion ACES at B, $150 million 7.375% senior notes due 2006, $2.9 billion zero-coupon LYONs due 2020, $4.025 billion zero-coupon LYONs due 2020 and $500 million 9.625% senior notes due 2009 at BB- and $200 million 364-day senior secured revolving credit facility and $250 million senior secured revolving credit facility at BB.

S&P said the watch placement follows Solectron's announcement of lower-than-expected profitability in the May 2003 quarter, as well as a bank covenant violation and a number of large accounting charges.

Sales levels in the May 2003 quarter, at $2.8 billion, met expectations. However, Solectron announced that net profitability fell below expectations because of a loss from a revalued tax benefit that stemmed from lowered expectations for operating performance, as well as a shift in sales mix toward lower margin products, S&P said.

While Solectron has made some progress in restructuring its operations and rationalizing selling expenditures, a further delay in recovery in the company's industry beyond already-stressed expectations, would negatively affect the company's performance outlook.

S&P said its current ratings for Solectron had incorporated the expectation for improving operating performance and credit measures over the intermediate term; that expectation now appears much more uncertain.

Credit measures remain very weak for the rating, as net debt-to-EBITDA for the 12 months ended May 2003 exceeded 7x, S&P said. Operating margins before depreciation and amortization were 1.3%, less than one-half of expected levels.

Moody's puts Solectron on review

Moody's Investors Service put Solectron Corp.'s ratings on review for possible downgrade including its $200 million 364-day guaranteed senior secured revolving credit facility due 2004 and $250 million guaranteed senior secured revolving credit facility due 2005 at Ba2, $500 million 9 5/8% senior notes due 2009, $150 million 7 3/8% senior notes due 2006, $8 million zero-coupon LYONs due 2020 and $1.1 billion zero-coupon LYONs due 2020 at Ba3 and $1.05 billion 7¼% ACES due 2006 at B2.

Moody's said the review follows Solectron's announcement of its third quarter performance, which entailed a $31 million loss from operations, adjusted for goodwill and intangibles impairment as well as restructuring expense. The magnitude of the aggregate charges taken, also including a write-down of the deferred tax asset carried heretofore on the company's balance sheet, was in excess of $3 billion.

The adjustment of the deferred tax asset, mandated under FAS 109 in light of the improbability of its utilization within the foreseeable future, places the company in violation of the net worth covenant accompanying its $450 million guaranteed senior secured revolving credit facilities. Additionally, the company would have failed, if not for a waiver in the third quarter, to meet a cash interest coverage covenant that is applicable until it raises additional external funds by means of certain capital market events or asset disposition.

The review is prompted by concerns over Solectron's liquidity, with the pendency of the likely May 2004 tender of the 3¼% zero-coupon LYONs due November 2020 and currently accreted to $1.1 billion, as well as the company's reversion to operating at a loss after having turned modestly profitable from operations during the first half.

The company ended the third quarter with nearly $1.6 billion of unrestricted cash, cash equivalents and short-term investments. The company's cash needs are in the range of $500-700 million, and it believes that an amendment permitting access to its $450 million revolving credit will be forthcoming. It could be that the prospect of charges in the third quarter and the company's plan to commence sales of non-strategic assets deterred the company from accessing the markets in recent months at what might have been perceived as a propitious time for raising capital, Moody's noted.

Funding may now be more costly for the company, and the planned asset sales may be more time consuming and difficult to negotiate than the company may have expected.

Fitch puts Solectron on watch

Fitch Ratings put Solectron Corp.'s BB senior unsecured debt, BB+ $450 million senior secured credit facility and B+ Adjustable Conversion Rate Equity Security Units on Rating Watch Negative.

Fitch said the action follows Solectron's report of a net loss of $3.1 billion for the quarter ended May 31, 2003. The writedown resulted in the company not being in compliance with a tangible net worth covenant for the bank credit facility, which is currently undrawn.

Fitch's ratings review will incorporate the outcome of the discussions with the bank group to obtain an amendment for the covenant violation. Additionally, Fitch will focus on the company's restructuring efforts and management's expectations for the timing of a return to profitability.

Fitch upgrades Xerox senior unsecured, rates convertibles B, loan BBB-

Fitch Ratings upgraded Xerox Corp. and its subsidiaries' senior unsecured debt rating to BB from BB-, confirmed the B convertible trust preferred securities and assigned a B rating to the new mandatorily convertible preferred stock and a BBB- from the new $1.0 billion bank credit facility. The outlook is stable.

The rating actions and stable outlook reflect the company's improved credit protection measures and adequate liquidity profile (which is enhanced by the recent capital markets transactions), stabilized financial performance and simplified capital structure, Fitch said.

Xerox continues to execute its operating strategy and significant cost reduction programs and Fitch believes stable operating performance could be achieved despite challenging prospects for growth in the near-term. In addition, execution risk of the remaining restructuring program is minimal and the management team seems to have stabilized.

Fitch also continues to focus on the company's need to further improve core operations, the competitive nature of the printing equipment manufacturing industry and the need for Xerox to grow equipment revenues, underfunded pension obligations, uncertain liabilities concerning outstanding litigation and significant core debt maturities the next few years.

Credit protection measures for the latest 12 months ending March 31, 2003, pro-forma of the announced transactions and the $560 million debt reduction in April 2003, will improve, Fitch said. Xerox's leverage, measured by total debt (including the financing segment) to total EBITDA, is estimated to improve to approximately five times compared to 6x and 8x for 2002 and 2001, respectively.

Similarly, Xerox's core leverage (defined as non-financing debt divided by non-financing EBITDA) is expected to decline for the same time period to less than 3.0x compared to 3.4x and 5.4x for 2002 and 2001, respectively, Fitch said. In addition, Xerox's overall interest coverage ratio (including the financing segment) will be greater than 3.0x while core interest coverage (defined as core EBITDA divided by core interest expense) is expected to be greater than 5x compared to a Fitch-estimated 4.0x and 2.5x for 2002 and 2001, respectively. Fitch anticipates overall and core credit protection measures will remain stable and should gradually improve.

S&P cuts Semco to junk

Standard & Poor's downgraded Semco Energy Inc. to junk including cutting its $105 million ROARS due 2003, $30 million 6.5% notes due 2009, $30 million 8% senior notes due 2010, $300 million due 2008 and notes due 2013, $60 million 8% senior notes due 2016, $69.5 million term bank loan due 2004 and $85.5 million revolving credit facility due 2005 to BB from BBB-, Semco Capital Trust I's $40 million trust preferred securities to B from BB and Semco Capital Trust II's $90 million Feline Prides to B from BB. The outlook remains negative.

S&P said the action reflects Semco's announcement of lower cash flows to levels that are not commensurate with the investment-grade threshold given the company's risk profile. Furthermore, Semco's current projections do not meet S&P's expectations regarding cash flows or consequent debt reduction.

Semco's credit quality is pressured by prolonged weakness at the nonregulated construction services unit; a highly leveraged balance sheet (total debt accounts for more than 65% of capital) and total fixed charges that reduce funds from operations (FFO) to total debt below 12% (FFO to debt between 13% and 17% would be adequate for the BB corporate credit rating); execution risk associated with the company's planned debt reduction; longer term pressure to generate consistent earnings on a consolidated basis given the lower projections from the construction services unit; and limited room for additional reductions in capital expenditures beyond those forecast for 2003. S&P noted that provided the company succeeds with its debt-reduction plan, the fixed charge covenant in the bank credit facility would afford Semco only moderate breathing room in 2004.

Positives are the considerable improvement in the company's debt maturity profile after the May 2003 note transaction, the renewal of credit agreements and the dividend reduction.

Moody's raises Pride International liquidity

Moody's Investors Service upgraded Pride International's liquidity rating to SGL-2 from SGL-3.

Moody's said the action indicates good combined direct and alternative liquidity, specifically rising operating cash flow cover of interest expense and capital expenditures, successful refinancing earlier this year of Pride's putable convertible debt, the fact that cash balances, cash flow and fully-undrawn bank revolver availability indicate internal coverage of scheduled capital spending and debt maturities over the next 12 months, a fully undrawn available $250 million revolver and good alternative liquidity.

Moody's cuts FelCor

Moody's Investors Service downgraded FelCor Lodging Trust's senior unsecured debt to B1 from Ba3 and confirmed its preferred stock at B3. The outlook is stable.

Moody's said the downgrade is in response to FelCor's announced $200 million secured facility transaction. This transaction will encumber 13 lodging assets and is intended to provide additional liquidity to the REIT.

The downgrade of FelCor's senior unsecured debt ratings reflects the REIT's shift towards a secured debt funding strategy in a difficult lodging environment and what has been a weak financial profile as it relates to debt protection measures, Moody's said. FelCor's $200 million secured facility is structured so that upon accessing the facility mortgages on identified assets will eventually be securitized.

In conjunction with this transaction, FelCor will also be reducing the commitment of its unsecured bank credit facility to $50 million from $150 million, which is anticipated to have more flexible financial covenants.

The secured facility comes on the heals of the REIT's $150 million CMBS deal that closed in April 2003. The proceeds from the CMBS deal were used to fully pay down the company's line of credit while carrying more than $100 million of excess cash.

Moody's recognizes the benefits to the REIT in improving its liquidity position and lowering its financing cost. These secured debt transactions also reduces FelCor's refinancing risks of the $175 million of senior unsecured bonds coming due in October 2004.

However, these transactions further encumber the REIT's portfolio resulting in increased subordination for the unsecured bondholders, Moody's said. The rating agency believes that the structure of the secured facility is indicative of a longer term orientation toward secured financing.

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