Moody's cuts Solectron ratings

Moody's Investors Service lowered the ratings of Solectron Corp., including cutting its $200 million 364-day guaranteed senior secured revolving credit facility due 2004 and $250 million guaranteed senior secured revolving credit facility due 2005 to Ba3 from Ba2, $500 million 9 5/8% senior notes due 2009, $150 million 7 3/8% senior notes due 2006 $10 million (accreted value) LYONs due 2020 and $931 million (accreted value) LYONs due 2020 to B1 from Ba3 and $1.07 billion 7¼% subordinated adjustable-conversion-rate equity security units (ACES) due 2006 to B3 from B2. The speculative-grade liquidity rate was confirmed at SGL-3.

Moody's said the action reflects prospects for continued weak operating performance and challenges for near term improvement in key operational metrics.

The outlook is stable, predicated in part on the company's successful execution of a restructuring plan and non-strategic asset divestitures.

Moody's said it is concerned with Solectron's ability to achieve both material gross margin enhancement beyond the near term 6% goal and operating cost reductions to the extent required for attaining its intermediate goal of 4% to 5% operating margins.

There is further concern with the company's near term cash flow generating potential.

Specifically, as Solectron continues to report negligible operating profitability in coming quarters, it becomes increasingly uncertain how much cash flow the company can squeeze from its already streamlined working capital base, Moody's said.

During 2001 and 2002, the company generated $2.8 billion in operating cash flow, with the majority derived from such asset velocity enhancements.

Until tangible benefits are permanently realized from restructuring activities, it becomes ever more essential for Solectron to continue managing down this working capital base and narrowing the 25% gap in its cash conversion cycle compared to the industry.

S&P puts FelCor on watch

Standard & Poor's put FelCor Lodging Trust Inc. on CreditWatch negative including its senior secured debt at B+, senior unsecured debt at B and preferred stock at CCC+.

S&P said the action follows FelCor's weaker-than-expected operating performance in its third quarter and S&P's expectation that debt leverage will be higher than previously anticipated at year-end.

If a rating action is ultimately taken, S&P does not expect that ratings will decline by more than one notch.

S&P rates Northwest convertible B-

Standard & Poor's assigned a B- rating to Northwest Airlines Corp.'s new $225 million 7.625% convertible senior notes due 2023 and confirmed all other ratings including its corporate credit at B+.

The convertible and other senior unsecured debt are rated lower than the corporate credit rating because a high proportion of secured debt and leases in the capital structure places unsecured creditors in an essentially subordinated position.

The outlook is negative. Ratings could be lowered if the nascent recovery in earnings and cash flow generation falters due to renewed industrywide revenue weakness or the company's inability to reduce operating costs, S&P said.

Northwest, like other large U.S. airlines, faces weak revenues, substantial debt and pension obligations, and a need to lower its labor costs. However, the airline's credit profile benefits from substantial liquidity, with $2.8 billion of unrestricted cash (the largest amount, relative to the company's size, of any large U.S. airline, excepting Southwest Airlines Co.), and ongoing stringent cost-cutting efforts, S&P said.

Fitch rates Northwest convertible B

Fitch Ratings assigned a rating of B to the $225 million in convertible senior unsecured notes issued by Northwest Airlines Corp. The outlook is negative.

The rating reflects concern over Northwest's ability to generate levels of operating cash flow sufficient to strengthen its balance sheet in light of large cash obligations in 2004 and 2005, Fitch said.

The airline is engaged in negotiations with its labor unions to achieve pay and benefit concessions. If successful in this effort, Northwest could lower operating expenses to levels of other restructured network carriers but without progress there a return to sustained profitability will be difficult to achieve.

Northwest's credit profile has clearly benefited from the focus on cash conservation during the industry revenue crisis, Fitch noted. Liquidity remains a source of relative strength. At Sept. 30, Northwest reported an unrestricted cash balance of $2.8 billion - about 30% of projected 2003 total revenues and the strongest liquidity position of all U.S. network carriers.

Calendar year 2003 pension plan contributions have now been satisfied, with the airline contributing a total of $413 million to its plans. Given the level of underfunding in the plans, however, it is safe to assume that the airline faces several years of heavy pension plan contributions.

Scheduled debt maturities over the next several quarters are large, with $641 million due in 2004 and $1.44 billion due in 2005.

In an effort to reduce some of the liquidity pressure associated with these maturities, Northwest on Oct. 30 announced the launch of an exchange offer for $850 million of unsecured notes maturing between 2004 and 2006 with Class D pass-through certificates backed by 64 aircraft with a 10.5% coupon.

Moody's rates Cincinnati Bell notes B3, loan B1

Moody's Investors Service assigned a B3 rating to Cincinnati Bell Inc.'s new $540 million 8 3/8% senior subordinated notes due 2014 and a B1 to its proposed $525 million senior secured term loan D due 2008 and confirmed its existing ratings including its senior secured bank facility at B1, senior secured notes at B1, 7.25% senior unsecured notes due 2013 at B2, 16% senior subordinated discount notes at B3 and 6.75% convertible preferred stock at B3 and Cincinnati Bell Telephone's senior unsecured debt at Ba2. The outlook remains positive.

Moody's said the ratings reflect the highly leveraged profile of Cincinnati Bell compared to its peer group, its vulnerability to any heightening of local and wireless competition in its metropolitan market, and its flat top-line growth prospects.

The ratings are supported, however, by the incumbent strength and dependability of cash flows from the company's core Cincinnati-based businesses, substantial infrastructural and regulatory barriers to entry, and the reputation of the Cincinnati Bell franchise.

The proposed financings represent the latest steps in the company's substantial progress towards addressing its amortization and liquidity issues, Moody's said. These initiatives follow an earlier maturity-extending bank covenant amendment, the issuance of public and private debt, and the sale of its cash burning broadband subsidiary, Broadwing Communications, Inc.

Following the divestiture of BCI, Cincinnati Bell has re-assumed the more mature and dependable profile that characterized its operations prior to the 1999 acquisition of IXC Communications. Nevertheless, Cincinnati Bell remains burdened by a substantial amount of debt, much of it incurred in connection with the IXC acquisition.

At the end of September 2003, pro-forma for the proposed financings, Cincinnati Bell recorded leverage of 5.0 times and interest coverage of 2.0 times. Given the mature nature of its local and wireline operations and the extent of the costs already taken out of the business, Cincinnati Bell will be pressed to attain any further significant near-term deleveraging, in Moody's opinion.

Fitch rates Cincinnati Bell notes B

Fitch Ratings assigned a B rating to Cincinnati Bell, Inc.'s new $540 million subordinated notes due 2014 and confirmed its existing ratings including its senior secured bank facility at BB-, 7.25% senior secured notes due 2023 at BB-, 7.25% senior unsecured notes due 2013 at B+, 16% senior subordinated discount notes at B and 6.75% convertible preferred stock at B-. Fitch also confirmed Cincinnati Bell Telephone's senior unsecured debt at BB+. The outlook is stable.

Fitch said Cincinnati Bell's ratings reflect the strength and stability of the company's incumbent local exchange and wireless businesses, its highly leveraged balance sheet relative to its peer group and expectation that the company is positioned to generate sustained levels of free cash flow that will be utilized to reduce debt levels.

Cash interest expense for Cincinnati Bell is expected to be reduced in 2004 due mainly to an expected re-pricing of its existing bank facility, Fitch said. However, in the near term, some of the bank facility interest savings will be offset by the cash interest payments of the new subordinated notes, which replace the 6.75% subordinated convertible notes that did not require cash interest payments until June 2004.

Cincinnati Bell's debt levels have declined during 2003, but remain high and were incurred by the company in connection with its former broadband business, Fitch said. The company's local exchange business generates the vast majority of EBITDA and continues to grow, albeit at a moderate pace, which is reflective of the local exchange industry. It is expected that leverage will remain high for the foreseeable future, but should trend down as free cash flow is used to reduce debt and EBITDA continues its slow growth.

S&P raises Nextel outlook, rates notes B+

Standard & Poor's raised its outlook on Nextel Communications Inc. to positive from stable, confirmed its existing ratings including its senior unsecured debt at B+ and preferred stock at B- and Nextel Finance Co.'s senior secured bank loan at BB and assigned a B+ rating to the new $500 million 6.875% senior serial redeemable notes due 2013.

The outlook revision reflects S&P's improved view of Nextel's business risk profile. S&P is increasingly confident that Nextel's entrenched subscriber base and experience in delivering differentiated services (i.e. push-to-talk [PTT] and customized applications) will enable the company to maintain strong operations and further improve financial leverage.

With respect to the entrenched subscriber base, many wireless users in several sectors (e.g., construction, transportation, agriculture and landscaping, utilities, communications and media, and government) have come to rely on Nextel for business needs. Since the company operates an exclusive network that is not compatible with those operated by other wireless carriers, subscribers are less likely to churn off, as doing so would entail losing access to critical user groups, S&P said. Also, anyone associated with the aforementioned sectors is more likely to select Nextel as his/her wireless service provider.

With respect to differentiated services, Nextel has years of experience offering these by way of targeting specific industries in terms of marketing and applications support. It will take time for other carriers to acquire the sufficient level of experience to materially challenge the company.

Despite the revised outlook and the company's significant progress in improving financial leverage (down to about 2.6x debt to annualized EBITDA at Sept. 30, 2003, from about 3.8x a year ago), the rating on Nextel still reflects concerns over the company's ability to maintain a competitive edge over the longer term in light of wireless number portability and challenges from other wireless carriers that have started offering (e.g. Verizon Wireless) or are planning to introduce (e.g., Sprint PCS and AT&T Wireless) PTT services, S&P said.

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