US CREDIT-Motorola debt could weaken if good assets sold

By Karen Brettell

NEW YORK, Nov 13 (Reuters) - Reports Motorola Inc (MOT.N)
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
[ID:nN11372198]

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 (WIN.N), 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)