By Karen Brettell
NEW YORK, Nov 13 (Reuters) - Reports Motorola Inc may sell off one of its units has raised uncertainty over whether this could lead to deteriorating debt values and potentially cause its credit default swaps to split in two.
Sources said on Wednesday Motorola is in the early stages of examining a potential sale of its television set-top box and network equipment business, Home and Networks Mobility, for about $4.5 billion. Motorola declined comment. For details, see
Debt analysts have expressed concerns Motorola could divest healthy assets, and use the proceeds to reward shareholders, while keeping its money-losing handset business.
'Motorola CDS is currently trading near multi-year tights,' analysts at Bank of America Merrill Lynch said in a report. The potential sale, 'likely will cause investors to re-evaluate whether these levels are justified.'
The cost to insure Motorola's debt with credit default swaps rose to 148 basis points on Friday, or $148,000 per year for five years to insure $10 million in debt, from 131 basis points before the news, according to Markit Intraday.
'The sale of Home and Networks Mobility and/or any other assets within Enterprise and Public Safety would be very bad for bond holders, in our view,' said analysts at credit research firm CreditSights.
'Selling off the 'good' assets will leave all the debt to Mobile Devices, unless the company repays the debt - a scenario which we believe is unlikely given the company's emphasis on enhancing shareholder value,' they said.
LOW BALL PRICE
Motorola, which has been losing market share in its cellphone business for years, said on Wednesday it was still focused on its previously stated plan to separate its handset business from the rest of the company.
Many analysts view the reported $4.5 billion price that Motorola is reportedly seeking for the Home and Networks unit, as low enough that it could also indicate problems related to the company's credit quality.
'Given the relatively strong profitability of this unit, the low ball price does raise the question on whether this segment will see more than expected deterioration in 2010,' CreditSights said.
Moody's Investors Service said on Friday Motorola would be at risk of being cut into junk territory if it sold healthy, cash-generating assets but retained its mobile devices unit.
Moody's currently rates Motorola Baa3, the lowest investment grade, and has a negative outlook on the company.
Fitch Ratings also ranks Motorola the lowest investment grade, with a negative outlook, while Standard & Poor's rates the firm junk.
CDS SUCCESSION?
Meanwhile if Motorola does decide to offload the Home and Networks unit it may choose to spin it off, which would be more tax efficient than an outright sale, Bank of America said.
In this case, the company could undertake a debt-for-debt exchange, which could cause a succession event on Motorola's credit default swaps, they said.
If between 25 percent and 75 percent of debt underlying a company's credit default swap is transferred to a new entity, the contracts are split evenly between the two businesses, which can radically change the value of the contracts.
Motorola could undertake a spin off similar to that of Alltel, which spun off its traditional phone business in 2006 to form Windstream Corp, Bank of America said.
The analysts recommend buying CDS protection on Motorola and funding the position by selling protection on Xerox, which it views as a more solid company for its mid-BBB ratings and at less risk of downgrade.
(Additional reporting by Sinead Carew; Editing by Andrew Hay) For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide..................... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook.................. U.S. municipal bond market report...... Keywords: MARKETS CREDIT/ (karen.brettell@thomsonreuters.com; +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, Nov 13 (Reuters) - Reports Motorola Inc may sell off one of its units has raised uncertainty over whether this could lead to deteriorating debt values and potentially cause its credit default swaps to split in two.
Sources said on Wednesday Motorola is in the early stages of examining a potential sale of its television set-top box and network equipment business, Home and Networks Mobility, for about $4.5 billion. Motorola declined comment. For details, see
Debt analysts have expressed concerns Motorola could divest healthy assets, and use the proceeds to reward shareholders, while keeping its money-losing handset business.
'Motorola CDS is currently trading near multi-year tights,' analysts at Bank of America Merrill Lynch said in a report. The potential sale, 'likely will cause investors to re-evaluate whether these levels are justified.'
The cost to insure Motorola's debt with credit default swaps rose to 148 basis points on Friday, or $148,000 per year for five years to insure $10 million in debt, from 131 basis points before the news, according to Markit Intraday.
'The sale of Home and Networks Mobility and/or any other assets within Enterprise and Public Safety would be very bad for bond holders, in our view,' said analysts at credit research firm CreditSights.
'Selling off the 'good' assets will leave all the debt to Mobile Devices, unless the company repays the debt - a scenario which we believe is unlikely given the company's emphasis on enhancing shareholder value,' they said.
LOW BALL PRICE
Motorola, which has been losing market share in its cellphone business for years, said on Wednesday it was still focused on its previously stated plan to separate its handset business from the rest of the company.
Many analysts view the reported $4.5 billion price that Motorola is reportedly seeking for the Home and Networks unit, as low enough that it could also indicate problems related to the company's credit quality.
'Given the relatively strong profitability of this unit, the low ball price does raise the question on whether this segment will see more than expected deterioration in 2010,' CreditSights said.
Moody's Investors Service said on Friday Motorola would be at risk of being cut into junk territory if it sold healthy, cash-generating assets but retained its mobile devices unit.
Moody's currently rates Motorola Baa3, the lowest investment grade, and has a negative outlook on the company.
Fitch Ratings also ranks Motorola the lowest investment grade, with a negative outlook, while Standard & Poor's rates the firm junk.
CDS SUCCESSION?
Meanwhile if Motorola does decide to offload the Home and Networks unit it may choose to spin it off, which would be more tax efficient than an outright sale, Bank of America said.
In this case, the company could undertake a debt-for-debt exchange, which could cause a succession event on Motorola's credit default swaps, they said.
If between 25 percent and 75 percent of debt underlying a company's credit default swap is transferred to a new entity, the contracts are split evenly between the two businesses, which can radically change the value of the contracts.
Motorola could undertake a spin off similar to that of Alltel, which spun off its traditional phone business in 2006 to form Windstream Corp, Bank of America said.
The analysts recommend buying CDS protection on Motorola and funding the position by selling protection on Xerox, which it views as a more solid company for its mid-BBB ratings and at less risk of downgrade.
(Additional reporting by Sinead Carew; Editing by Andrew Hay) For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide..................... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook.................. U.S. municipal bond market report...... Keywords: MARKETS CREDIT/ (karen.brettell@thomsonreuters.com; +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.