Moody's cuts Baxter outlook

Moody's Investors Service confirmed the ratings of Baxter International (senior unsecured at A3) but changed the rating outlook to negative from stable.

The negative outlook reflects Moody's concerns regarding weaker than expected cash flows, exacerbated by ongoing plasma pricing pressure and higher working capital requirements, as well as debt levels that are higher than anticipated due in part to Baxter's aggressive acquisition strategy. Moody's notes that although Baxter's plasma operations may begin to stabilize following execution of the recently announced rationalization plan, Baxter's ability to deleverage will remain limited during 2003.

The A3 ratings reflect the company's good market presence in a variety of critical care product lines, as well as prospects for improved cash flow due largely to the imminent launch of Advate, a new protein-free Factor VIII product. The ratings also incorporate the expectation that Baxter's restructuring efforts-involving closure of a plasma plant and 26 plasma collection centers-will help keep supply and demand for plasma fractionated products in better balance and contribute to improved cash flow for the company.

Finally, the ratings assume that Baxter will not increase debt levels to terminate the remainder of its equity forward program. If it appears that Baxter's prospects for cash flow improvement-largely due to the successful launch of Advate - will not result in significantly reduced leverage, the ratings could be downgraded. On the other hand, if the company is able to demonstrate improved operating and free cash flow generation as a result of new product launches, rationalized plasma operations and working capital improvements, the outlook may be changed back to stable.

Supporting the negative outlook, Moody's notes that Baxter has increased both its balance sheet debt and its operating leases over the past several years. Further, a $550 million pension liability as of September 2002 could result in a $100 million funding requirement by September 2004. Operating cash flow has been affected by higher working capital demands and weak plasma pricing due in part to an oversupply of fractionated products and European competitors entering the US plasma market.

Moody's puts Motorola on review for downgrade

Moody's Investors Service put Motorola Inc. on review for possible downgrade, due to concerns that the rebound in revenues and a return to meaningful levels of profitability from the current depressed levels may be protracted.

The review reflects the deteriorating outlook for nearly all of Motorola's operating units, as indicated in the guidance provided by the company with its second quarter earnings release. Despite significant cost reduction efforts, margin improvement is expected to be modest and may lag expectations.

While the review will focus primarily of the uncertain operating outlook, Moody's will also consider the relatively strong position Motorola enjoys in the two-way radio business, a liquid balance sheet, modestly positive cash generation, the expected equity injection in late 2004 related to its outstanding equity units and limited debt maturities in the next several years.

Moody's noted that the amendments to the company's bank agreements have lowered the springing lien trigger to a speculative grade rating from either Moody's or S&P. As a result, a one notch decline in Motorola's credit quality would not create the possibility of structural subordination of unsecured creditors to $1.6 billion in bank debt. The potential lien covers domestic inventory and receivables.

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