ALERT: rumors that MOT may file soon too!
By Mark Gilbert
London, April 6 (Bloomberg) -- The Securities and Exchange Commission acts as a kind of confessional for corporate America. Motorola Inc. will need more than a couple of Hail Marys to atone for the sins it confessed in its March 30 filing.
Here's an executive summary of the note: Motorola is up to its neck in short-term debt, and if its credit rating gets cut, the market is likely to turn off the money taps that are keeping the company afloat. Oh, and for good measure, the company is owed a staggering $1.7 billion by a single customer in an emerging market country.
``We're beginning to think the unthinkable about Motorola,'' said Carol Levenson, author of the Gimme Credit bond newsletter in Chicago who spotted the landmines buried in the company's SEC filing. ``Motorola's liquidity has rapidly moved into crisis mode.''
The No.2 cellular phone maker has been gorging in the debt markets. Its short-term debt, mostly commercial paper borrowing, more than doubled in the year to the end of 2000, surging to $6.4 billion from $2.5 billion in December 1999.
On Feb. 23, Moody's Investors Service and Standard & Poor's Corp. put the company's debt ratings on review for downgrade, citing Motorola's warning that day that it wouldn't meet revenue and earnings expectations and might make a loss from operations in the first quarter, its first in at least 15 years.
Frosty Reception
So Motorola, which is scheduled to post its financial results Tuesday, could lose its all-important ``A1/Prime-1'' commercial paper ratings.
Starting to sound familiar? As Xerox Inc. found to its cost, a company can quickly start to suffocate once it loses its top rating, starved of the financial oxygen supplied by the commercial paper market.
Here's how Motorola described the frosty reception given by lenders in the commercial paper market to lower-rated borrowers and those under the threat of downgrade: ``When a company's credit rating is placed on `credit watch for possible downgrade,' the debt markets typically react by `treating' that company (in terms of interest rates required for borrowing, available maturities for commercial paper, etc.) as if a downgrade had already occurred. The company's recent experience has been consistent with these observations.''
Because the pool of lenders willing to buy commercial paper from a company shrinks when it loses its top-grade commercial paper rating, and because of an increase in the number of such lower-rated companies competing for that limited cash, such as Xerox, ``commercial paper or other short-term borrowings may be unavailable or of limited availability to participants in this market,'' Motorola said.
$6.4 Billion Question
That leaves the Schaumburg, Illinois-based company with a $6.4 billion question: if repeat borrowings in the commercial paper market aren't available, how does it repay those short-term debts as they come due?
The company ``probably has been unable to roll over much of its maturing commercial paper during the past month,'' Levenson at Gimme Credit said. While Motorola sold two bonds worth a total of $2.2 billion in January, the filing says that some of that cash was used for what it calls ``general corporate purposes.'' That means ``it's not safe to assume Motorola's short-term debt fell by the full $2.2 billion,'' Levenson said.
Earlier this week, Motorola filed with the SEC to borrow additional cash in the bond market by selling as much as $2 billion of bonds. At the end of last month, the company hired J.P. Morgan Chase & Co., Citibank NA and Goldman Sachs Group to arrange a new $2 billion loan that it can fall back on if the rating axe falls, according to bankers familiar with the matter.
Check the Filings
In its March 30 statement to the SEC, known as a DEF 14A proxy statement and used by companies as the notice for their annual meetings, Motorola says it has credit facilities worth $3.9 billion, of which it has drawn down $192 million. That leaves a little over $3.7 billion available.
The filing also says Motorola arranged a new $2 billion loan on March 28 for ``general corporate purposes, including repayment of commercial paper indebtedness. The company borrowed $500 million of this facility on March 30, 2001, and expects to borrow the remaining $1.5 billion on April 2.'' That loan is repayable on Nov. 16.
Scott Wyman, the company's director of financial communications, said that loan is an advance on the proceeds the company expects to realize from the sale of its investments in cellular operating companies.
In a March 5 press release, the company said it's received more than $1 billion in cash by selling stakes in five companies in Brazil, Egypt, Israel, Jordan and Pakistan, and expects sales in Hong Kong and Mexico might ``provide up to another $2 billion in cash or stock by the third quarter of this year.''
Motorola has other sources of capital it can use to pare debt. It has $3.7 billion in cash, cash equivalents and short-term investments, said Wyman. In its filing, the company also said it ``views its available-for-sale securities as an additional source of liquidity. The company expects to sell a portion of these available-for-sale securities during 2001.''
Technology Value
Trouble is, the value of those securities -- mostly investments in technology companies -- has plummeted along with the U.S. stock market. They were worth just $4.7 billion by the end of December, down from $7.6 billion a year earlier. Since they were last valued, the Nasdaq Composite Index is down an additional 20 percent, even after yesterday's 9 percent rally though excluding today's action.
Let's turn finally to that $1.7 billion loan the company has made to a single customer in an emerging market. Motorola, along with its peers in the telecom equipment market, engages in an activity known as vendor financing; it supplies the cash its customers need to purchase equipment.
Those loans climbed to $2.6 billion by the end of last year, from $1.7 billion a year earlier, though that's net of losses. ``As of Dec. 31, 2000, approximately $1.7 billion of the $2.8 billion in gross long-term finance receivables related to one customer in Turkey,'' Motorola said in its SEC filing.
Turkish Customer
In February, Motorola said it signed a $1.5 billion contract to provide equipment, phones and services to Telsim, Turkey's No. 2 cellular phone service provider. Telsim is owned by Turkey's Uzan family, and controls about 30 percent of the nation's mobile phone market. Motorola has been selling equipment to the Turkish company since 1994.
Motorola has ``substantial collateral to at least to the value of the loan'' to the Turkish company, said company spokesman Wyman. At least some of that collateral is in the form of stock of Telsim, he said.
The depth of the hole Xerox found itself in only came to light from careful reading of the notes it submitted to the SEC last year. For owners of Motorola stocks and bonds, it might be worth keeping a careful eye on its SEC filings in the coming weeks.
Motorola's $1.2 billion of 7.625 percent bonds repayable in 2010 currently yield about 450 basis points more than U.S. government debt, up from 179 basis points when they were sold in November. Levenson at Gimme Credit said the bonds are ``too risky to consider even at current weak levels.'' |
