NEW YORK-Motorola Credit Corp. has sold $500 million of euro-denominated bonds paying 6.75 percent interest in order to raise capital for lending money to purchasers of wireless equipment from its parent, Motorola Inc.
In its first assessment of Motorola Credit’s long-term bonds, Moody’s Investors Service Inc. said July 6 it had assigned a middle-tier investment grade rating of A1 to the newly sold issue.
“Motorola’s rating reflects the company’s relatively limited debt burden, its significant market presence, the range of its products and cost savings benefits from the company’s restructuring program,” said Robert Konefal, managing director, and Robert Ray, senior vice president, of Moody’s New York-based corporate finance group.
They noted that Motorola’s outstanding debt increased by about $2 billion last year, largely due to increased vendor financing by Motorola Credit and the cash costs of restructuring. However, the Moody’s analysts also said they expected the company will be able to remain “modestly cash positive” and reduce its debt burden, partly because the corporate restructuring will save Motorola about $1 billion.
Nevertheless, they cautioned that a good chunk of those savings will be used to fund Motorola’s increased investments in research and development and to help it remain competitive against other handset makers amid downward price pressures, resulting from the burgeoning mass market for wireless communications.
“In its infrastructure segment, the buildout of start-up cellular operations will continue to require vendor financing as part of a competitive marketing package,” Konefal and Ray said.
“While this will increase (its) exposure to the credit risk of its infrastructure customers, we expect Motorola to be prudent in its extension of credit.”
The mid-level investment grade rating Moody’s assigned to Motorola Credit’s new bond issue also took into account several negative prospects for the Schaumberg, Ill., manufacturer of wireless end-user and network equipment, including the reduced degree of predictability in Motorola’s financial performance; competitive pressures in wireless communications equipment and semiconductors; and Motorola’s significant exposure to Iridium L.L.C., a troubled new low-earth-orbit satellite services provider. Moody’s low-tier speculative grade rating of Caa3 on Iridium’s senior unsecured debt is under review for downgrade.
The rating agency analysts also commended Motorola’s cash gain of $1.6 billion from the sale of its semiconductor component business. This unit was buffeted by reduced demand in Asia, as well as Asian currency devaluations, which gave Asian competitors a price advantage.
As it copes with Iridium’s troubles, Motorola has achieved financial flexibility because of the asset sale and “equity investments such as Nextel (Communications Inc.), which are worth substantially more than book value,” Konefal and Ray said.
Much of Motorola’s ongoing restructuring has been devoted to “reducing its cost basis in semiconductors,” the Moody’s analysts added.
“While this should result in improved operating margins, they are not expected to return to the levels enjoyed in 1995 and prior years,” they said.
