Motorola downgraded to junk status

Ratings agency downgrades Motorola on worries about the impact of the global financial crisis on mobile phones

Motorola fell into junk territory yesterday after Standard & Poor’s (S&P) downgraded the telecoms company.

The ratings agency cut Motorola’s rating by two notches to BB+ from BBB, putting the company one notch below investment grade.

S&P blamed problems in Motorola’s mobile phone business, saying that the ratings action reflected “continual operational challenges … which are not likely to be reversed over the intermediate term”.

The agency said that the problems at the mobile phone unit would hit the company’s profits and diminish free cash flows.

Yesterday’s cut followed Tuesday’s threat by Moody’s to downgrade Motorola from Baa2, which is the ratings agency’s second-lowest investment grade.

Motorola announced plans in late October to cut 3,000 jobs and delay the spin-off of the mobile phone business after being hit by a $397 million loss in the third quarter of the year.

Sanjay Jha, head of the mobile phone business, said at the time that there was no quick fix for the division, which saw its revenue fall 31 per cent to $3.1 billion in the third quarter after a dramatic drop in handset sales.

The telecoms company had propmised to spin off the mobile phone division following demands by investor Carl Icahn but said in October that macroeconomic conditions made the spin-off impossible.

Motorola, which had already slashed 9,000 jobs prior to October’s announcement, said that it intended to pursue the spin-off at a later date.

The company will report lower-than expected results for the fourth quarter and the mobile phone business is expected to continue to struggle next year.

The cost of insuring $10 million of Motorola’s debt with a credit default swap has jumped by 447.5 basis points since early October as investors become increasingly concerned about the company’s survival.

Yesterday’s ratings cut will make it more expensive for Motorola to raise debt, adding to the difficulty of turning around the company.

December 5, 2008
Christine Seib

Source: Times Online

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