Motorola debt risks further weakness

NEW YORK (Reuters) - Motorola Inc's (MOT.N) credit spreads have doubled as the company struggles with losses from its mobile phone division and explores alternatives for the unit, and its spreads face further weakness because of the great uncertainties ahead.

Motorola said on Thursday it was considering separating its mobile phone unit, in an apparent concession to demands from activist investor Carl Icahn.

Icahn also said on Friday he has nominated four directors for the board of the company.

"There is no question that this is welcoming news for shareholders," CreditSights analysts Zhiping Zhao and Allen Chachkes said in a report on Friday. "The impact to bondholders is much less clear."

News of a potential spinoff comes after Motorola said on January 23 it will post an operating loss in the current quarter as its mobile phone business is taking longer than expected to turn around.

The cost to insure Motorola's debt with credit default swaps has more than doubled in the past two weeks to 196 basis points, or $196,000 per year for five years to insure $10 million in debt, according to Markit Intraday.

In spite of the weaker credit spreads, large risks to bondholders remain and the credit spreads do not yet account for these, CreditSights said.

Options include spinning off or selling the phone division, which accounts for about half of revenue. Motorola also makes television set-top box and network equipment.

"Potential buyers are not likely to be attracted to a mobile unit that is clearly struggling," Gimme Credit analyst Dave Novosel said in a report. "Buyers may look to buy something on the cheap but that certainly does not benefit Motorola bondholders."

"Break-up scenarios usually include a significant leveraging of the individual units as well," he added. "We are skeptical that any measures would provide enhanced valuations for shareholders or bondholders. But the process is likely to weigh heavily on spreads in the meantime."

RATINGS

Fitch Ratings and Standard & Poor's both have Motorola's debt on review for downgrade, after both cutting the company to "BBB," the second-lowest investment grade, on the profit warning. Moody's Investors Service has the company on review for downgrade from "Baa1," the third-lowest investment grade.

A key concern for credit investors is where the debt will reside in the event the mobile phone unit is sold or spun off, the CreditSights analysts said.

"We expect the Mobile Devices business to have a significantly lower credit rating than Motorola's current rating," they said. "However, we expect the remaining two divisions to be a much more stable business, albeit having lower secular growth rates in the longer term."

As of the end of 2007, Motorola had $8.6 billion in cash, cash equivalents and short-term investments on its balance sheet, compared to $4.3 billion of debt.

"Whether the management/board will decide to significantly change the company's capital structure is unclear," CreditSights said.

"While there are significant uncertainties in terms of the bonds, we believe there are additional risks given Motorola's intention to 'enhance shareholder value'," they said. "How much of a risk depends on the shapes and forms of things to come."

(Editing by James Dalgleish)