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Rating Action:

MOODY'S ASSIGNS Ba2 RATING TO SEAGATE TECHNOLOGY'S SENIOR NOTES AND Ba1 RATING TO ITS NEW GTD SENIOR SECURED CREDIT FACILITIES; SENIOR IMPLIED RATING RAISED TO Ba1

19 Apr 2002
MOODY'S ASSIGNS Ba2 RATING TO SEAGATE TECHNOLOGY'S SENIOR NOTES AND Ba1 RATING TO ITS NEW GTD SENIOR SECURED CREDIT FACILITIES; SENIOR IMPLIED RATING RAISED TO Ba1

Approximately US$ 1.87 Billion of Debt Securities Affected.

New York, April 19, 2002 -- Moody's Investors Service assigned a Ba2 rating to the proposed senior notes and a Ba1 rating to the new $500 million guaranteed senior secured credit facilities of Seagate Technology HDD Holdings, the rigid disc drive subsidiary of Seagate Technology Holdings, in conjunction with Seagate's refinancing of its existing indebtedness. The ratings outlook is stable. A summary of the ratings and attendant actions follows:

(i) Assigned Ba2 rating to Seagate Technology HDD Holdings' proposed senior notes, which will be issued in an aggregate principal amount of at least $300 million;

(ii) Assigned Ba1 rating to Seagate Technology HDD Holdings' new $350 million guaranteed senior secured term loan facility, due 2007;

(iii) Assigned Ba1 rating to Seagate Technology HDD Holdings' new $150 million guaranteed senior secured revolving credit facility, due 2007, which will not be drawn as part of the refinancing;

(iv) Confirmed the Ba3 rating on Seagate Technology International's $210 million 12-1/2% senior subordinated notes, due 2007;

(v) Confirmed the Ba1 rating on Seagate Technology International's $180 million guaranteed senior secured term loan A, due 2005, which will be withdrawn upon repayment;

(vi) Confirmed the Ba1 rating on Seagate Technology International's $493 million guaranteed senior secured term loan B, due 2006, which will be withdrawn upon repayment;

(vii) Confirmed the Ba1 rating on Seagate Technology International's $200 million guaranteed senior secured revolving credit facility, due 2005, which will be withdrawn upon closing;

(viii) Senior implied rating raised to Ba1 from Ba2;

(ix) Senior unsecured issuer rating raised to Ba2 from Ba3.

The ratings, which reflect upgrades of the company's senior implied and senior unsecured issuer ratings, take into account Seagate Technology's preeminent position in the high margin enterprise drive segment of the business; the company's sustained profitability in the wake of deteriorating end market demand; and the contrasting marginal performance of Seagate's leading competitors, particularly perennial rival IBM, which has lost substantial enterprise market share. The ratings acknowledge the vicissitudes of the disc drive industry, under which Seagate could be susceptible to circumstances reminiscent of the predecessor company's fiscal year ended June 30, 1998 when IBM led the transition to 7,200 RPM enterprise drives. Yet, Moody's believes the company is capable of sustaining its recent momentum, aided and abetted by the more disciplined pricing environment that has accompanied industry consolidation, and an eventual recovery in enterprise spending on information technology. The refinancing will result in a 15% reduction in outstanding debt, while enabling the company to maintain a moderately low 0.9 times pro forma debt to LTM EBITDA (1.6 times, if viewed on a debt to EBIT basis). LTM EBIT would have provided 8.5 times estimated pro forma interest requirements, while pro forma free cash flow coverage would have been 4.2 times, dramatically higher than the 1.8 times coverage established over the LTM ended September 30, 2000 just prior to the company's leveraged recapitalization. In Moody's view, some of the luster from the operating performance and improved credit metrics is tarnished by the company's election to take $200 million from the combined proceeds of its new senior secured credit facilities, proposed senior notes and available cash on hand, and apply it toward a return on capital distribution to shareholders, as well as a distribution to participants in Seagate Technology Holdings' deferred compensation plans. Nevertheless, Seagate will retain $750 million of balance sheet cash, and the company anticipates continued significant cash generation over the near-term. Furthermore, even in FY1998, in which a sudden acceleration in average selling price (ASP) declines led the company to twice restructure operations and record charges totaling $347 million, the company's cash erosion, while significant, was limited to about $275 million, net of acquisitions. Its FY1998 operating loss was limited to $138 million, adjusted for acquisition-related write-offs and the restructuring charges. Whereas it is highly improbable that a further upgrade, restoring Seagate to investment grade, would ensue over the foreseeable future, the ratings could be lowered if the company failed to execute on a major platform transition.

The ratings are buttressed by Seagate Technology's impressive operating performance over the LTM ended March 29, 2002, highlighted by significant reductions in manufacturing costs and SG&A expenses. Seagate recorded sequential improvement in operating margin in each quarter of FY2002, attaining a remarkable 13.1% EBIT margin in FY2002Q3, as the company's innovative "factories of the future" accounted for the dominant share of its enterprise and high performance desktop drive production. A milestone in Seagate's continuing campaign to rationalize its worldwide manufacturing infrastructure, the factories of the future launch enabled the company to reduce unit production costs at a rate that outpaced the inexorable declines in ASPs. The company's ability to execute on its long-term strategy is enhanced further when juxtaposed against the challenging market conditions which prevailed over this period, notably the first annual decline in personal computer sales worldwide and a retrenchment in enterprise investment in storage hardware. Notwithstanding credit concerns and execution challenges confronting certain of Seagate's rival drive manufacturers, the disc drive business remains intensely competitive, and time-to-market and time-to-volume ramp leadership could be vulnerable. Maxtor (B2 senior implied) and Western Digital (B2 senior implied) have demonstrated that drive operations turnarounds can succeed on a fragile capital base, and IBM, which has struggled on its latest platform transitions, may be better able to commercialize its technology through the joint venture with Hitachi announced earlier this week. While Seagate maintains a commanding share of the enterprise drive market, where product qualifications are protracted, customer relationships are firmly entrenched, and penetration by newer entrants does not come easy, the company's long awaited reentry into the mobile drive market, an initiative Seagate has contemplated since its withdrawal from the segment in 1998, could be daunting, particularly with the dominance in the smaller 2-1/2 form factor drive established by IBM and Toshiba. The company's seasoned management team, and the credibility management has established with Moody's over the past decade, additionally engender confidence in the ratings upgrade.

The refinancing is premised on a successful tender for the outstanding $210 million senior subordinated notes, for which holders are being offered a premium equivalent to 21% above par value and significantly higher price than the recent trading range. It is being undertaken for the purpose of eliminating or modifying substantially restricted covenants and related provisions of the senior subordinated notes indenture, thereby enhancing the company's operational flexibility.

The notes will be sold in a privately negotiated transaction without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution in violation of the Act. The issuance has been designed to permit resale under Rule 144A and for the notes to become registered within the next six months.

Seagate Technology Holdings, based in Scotts Valley, California, is a worldwide leader in the design, manufacturing and marketing of products for storage, retrieval and management of electronic data, including rigid disc drives primarily used in personal computers, workstations, servers and mainframes.

New York
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Howard Sitzer
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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