S&P may raise Motorola rating to investment grade

NEW YORK, Sept 2 (Reuters) - Standard & Poor's on Thursday said it may raise Motorola Inc's MOT.N ratings into investment grade, citing the company's improving liquidity and its potential to reduce debt.

S&P rates Motorola BB-plus, one step below investment grade. Upgrades into high-grade territory can significantly reduce a company's borrowing costs.

Motorola said this week that it will invest $3.5 billion in the phone and set-top box units it plans to spin off next year.

This would leave Motorola with around $5.5 billion in cash and cash equivalents immediately after the separation, accounting for the sale of the Networks division and the repayment of $527 million of debt due in November this year, S&P said.

"This level of liquidity could be sufficient to reduce existing debt or debt equivalents," S&P said. Motorola would need to reduce debt and debt equivalents by around $2.5 billion to cut its leverage from almost 4 times to 2.3 times, which is needed to achieve an investment-grade rating.

Leverage is a measure of debt relative to earnings before interest, taxes, depreciation and amortization. Debt reduction could include repaying debt that matures over the coming two years, pension contributions or other initiatives, S&P said.

S&P would also consider raising Motorola's ratings by two notches to BBB, the second-lowest investment grade, if company management signals its intent to reduce leverage to around 2 times on a sustainable basis, the rating agency said. (Reporting by Karen Brettell; Editing by Dan Grebler)