Fitch: Limited Debt Covenant Protection for Motorola Bondholders in LBO

Business Wire, Jan 18, 2007

NEW YORK -- Due to heightened investor interest in technology leveraged buyouts (LBOs) and the decline in Motorola Inc.'s (Motorola) market capitalization over the past few months to below $50 billion, Fitch Ratings has examined LBO risk for Motorola by assessing the level of bondholder protection provided by bond indentures, specifically change of control provisions and limitations on secured debt. Fitch notes that existing bank credit facilities are usually refinanced and therefore, in general, provide limited protection to bondholders, specifically for event risk such as an LBO. In addition, Fitch has evaluated expectations for projected company growth rates, consolidation trends, free cash flow profile post LBO, and Motorola's ability to support meaningfully higher leverage.

Fitch has concluded that in general Motorola's bondholders have limited protection in the event of an LBO. In terms of change of control provisions, while the indentures related to the $400 million 7.5% debentures and $400 million 6.5% debentures enable bondholders to put the bonds to the company upon a 50% change in ownership, the bond indentures related to the $1.2 billion 4.6% senior notes and approximately $530 million 7.625% senior notes lack any change of control provision. All of Motorola's indentures include limitations on liens covenants. These limitations provide that existing unsecured debt will be equally and ratably secured with any new secured debt funding incurred in an LBO in the event that total secured debt, excluding certain permitted liens, exceeds 5% of net tangible assets, or approximately $1.1 billion as of Sept. 30, 2006, according to Fitch's estimates. Fitch also believes Motorola's bond indentures do not contain financial covenants or restrict asset sales or the incurrence of additional unsecured debt.

Fitch's LBO model projects free cash flow and a solid internal rate of return (IRR) for potential equity sponsors that could support Motorola as an LBO candidate. However, Fitch believes the resultant reduction in financial flexibility could limit the company's ability to invest in new technologies, particularly vis-a-vis its conservatively capitalized competitors. Although Motorola's 'asset light' model has lowered capital spending as a percentage of revenues, Fitch believes Motorola's ongoing research and development (R&D) investments will continue to be substantial and could increase. Furthermore, near-term LBO prospects could be limited by Motorola's integration of its recent and significant acquisitions, including the $3.9 billion Symbol Technologies, Inc. transaction, Good Technology Group, and Tut Systems, Inc. In addition, the reduced financial flexibility associated with an LBO could limit Motorola's ability to make sizable technology-driven acquisitions.

Fitch's LBO model considers the current equity market value plus an equity premium of 20%, assumption of existing debt, and transaction and converted share and option costs equal to 3% and 1.5%, respectively, of the controlling equity value. Transaction funding assumes the LBO sponsor contributes 30% of the equity, Fitch's estimate of excess cash is applied to the purchase price and any residual value is funded with debt. Total interest expense is based on the pro forma debt balance, an interest rate of 9.5% and a tax rate of 35%. Fitch estimates pro forma leverage and interest coverage metrics relative to EBITDA, cash flow from operations, and free cash flow excluding any previously paid dividends. Fitch tests the sensitivity of these credit metrics to changes in assumptions, including equity contribution, equity premium and free cash flow. Fitch derives an LBO sponsor's IRR assuming a three-year investment horizon, all projected free cash flow is used for debt reduction and the sponsor sells the company for the same transaction multiple it paid originally. No intermediate cash flows from assets sales or special dividends to the sponsors were contemplated in the model.

Fitch currently rates Motorola as follows:

-- Issuer Default Rating (IDR) 'A-';

-- Senior unsecured debt 'A-';

-- Senior credit facility 'A-';

-- Commercial paper (CP) 'F1'.

The Rating Outlook is Stable.

The brief report 'Limited Debt Covenant Protection for Motorola Bondholders in LBO' provides a detailed LBO scenario as well as additional analysis on Motorola's bond indentures. The report can be found on the Fitch Ratings web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.