US CREDIT-NXP debt could suffer if JV terms renegotiated

By Karen Brettell

NEW YORK, July 23 (Reuters) - Weaker-than-expected earnings
by Dutch chip maker NXP [NXP.UL] have sparked fears its
impending joint venture with STMicroelectronics could be
renegotiated so that NXP is paid a lower price, and if this
occurred it could lead to further weakness in its debt.

NXP, which specializes in chips for mobile phones, cars and
televisions, said on Tuesday second quarter earnings before
interest, tax, depreciation and amortization (EBITDA) fell to
$114 million, from $190 million in the second quarter of 2007.

"The surprise to me in the quarter was first of all their
cash flow usage was much worse than expected," said Robert Lee,
credit analyst at KDP Investment Advisors, who changed his
recommendation on NXP's debt to "sell," from "buy."

"I had built in an improvement in EBITDA for the next three
quarters and the fact that they went down really caused a
reassessment for the outlook for the second half," he added.
"The bottom line was a pretty major adjustment in my estimates
for this year."

Credit markets reacted negatively to the results.

NXP's 9.5 percent bond due 2015 plunged more than 10 cents
to 73.75 cents on the dollar, according to MarketAxess.

The cost to insure its debt with credit default swaps
jumped to 1082 basis points on Wednesday, or $1.08 million per
year for five years to insure $10 million in debt, from 887
basis points before the earnings, according to Markit
Intraday.

Moody's Investors Service on Wednesday cut NXP's
counterparty credit rating one notch to "B2," five steps below
investment grade, and cut its senior unsecured debt one notch
to "Caa1," seven steps below investment grade. The ratings
remain on review for further downgrade.

Net cash consumption of about $830 million for the first
half 2008 has reduced NXP's liquidity buffer and its liquidity
profile is increasingly reliant on completing its wireless
joint venture with STMicroelectronics, Moody's said.

NXP, which was spun off from Philips (PHG.AS) in 2006, will
receive $1.55 billion in cash and own 20 percent of the joint
venture.

RENEGOTIATION
RISK

NXP said in its earnings release that the joint venture was
on track to be completed in the third quarter. Analysts,
however, fear that the terms of the deal may be renegotiated so
NXP is paid less.

"Management refused to comment on whether or not the deal
with STMicroelectronics might need to be renegotiated in light
of the poor results in the mobile sector," said KDP's Lee. "We
would not be surprised if this deal is revised."

The mobile business had a loss for the quarter as it
suffered from a shift to low end phones that have less
semiconductor content, Lee said. This makes the phones less
profitable for NXP.

Analysts at credit research firm CreditSights also view the
renegotiation of terms of the joint venture as likely. They
changed their recommendation on NXP's debt to "underweight,"
from "overweight."

"The deterioration of the wireless business and its
desperation for cash could open the door for STMicroelectronics
to seek renegotiation," analysts Zhiping Zhao and Scott Sable
said in a report.

NXP's cash flows have been hurt in large part from poor
working capital management, they said.

"The second quarter results seem to suggest that the
working capital issues at NXP are not a one-time blip-as we had
understood exiting the first quarter," CreditSights said. "We
lost the confidence of management to solve working capital
issues in a reasonable timeframe following the second quarter
results."