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Rating Action:

MOODY'S DOWNGRADES ABB'S SENIOR DEBT RATINGS TO Ba2 (FROM Baa3) AND KEEPS THE RATINGS ON REVIEW FOR POSSIBLE FURTHER DOWNGRADE

31 Oct 2002
MOODY'S DOWNGRADES ABB'S SENIOR DEBT RATINGS TO Ba2 (FROM Baa3) AND KEEPS THE RATINGS ON REVIEW FOR POSSIBLE FURTHER DOWNGRADE

Approximately $8.4 Billion of Debt Securities Affected.

Frankfurt, October 31, 2002 -- Moody's Investors Service has downgraded the senior debt ratings of ABB Ltd. (ABB) and its supported financial subsidiaries to Ba2 from Baa3, keeping the long-term ratings on review for possible further downgrade and confirming the Not-Prime rating for short-term debt. The rating downgrade reflects the deteriorating operating performance and cash flow generation of ABB, the liquidity and refinancing needs faced by the group, the execution risks related to the accelerated restructuring program and the disposals of key assets. It also factors the uncertainties around the resolution of the company's exposure to asbestos litigation.

The current rating assumes that ABB will successfully complete the disposal of the structured finance portfolio, a cornerstone to ABB's de-leveraging strategy. This would likely lead to a confirmation of the rating at the Ba2 level.

The following ratings remain on review for possible further downgrade:

ABB Ltd. - Ba2 Issuer Rating,

ABB Holdings, Inc. - Ba2 Backed Issuer Rating,

ABB International Finance Limited - Ba2 Backed Senior Unsecured Rating,

ABB Asea Brown Boveri Ltd. - Ba2 Issuer Rating and Senior Unsecured Rating,

ABB Finance Inc. - Ba2 Backed Senior Unsecured Rating,

ABB Capital B.V. - Ba2 Backed Senior Unsecured Rating,

ABB Financial Services Australia Ltd. - Ba2 Backed Senior Unsecured Rating

Short-term ratings were confirmed at:

ABB Ltd. - Not Prime Short-term Issuer Rating,

ABB Treasury Center (USA) Inc. - Not Prime Backed Commercial Paper Rating,

ABB Capital B.V. - Not Prime Backed Commercial Paper Rating

ABB Financial Services Australia Ltd. - Not Prime Backed Short-term Debt Rating

On October 21th, ABB issued a profit warning and subsequently announced a revision of its earnings outlook and medium targets. This was followed on October 24th by the release of third quarter financials. These announcements reflect the deterioration of the operating performance and cash flow generation of the group against expectations as well as historic results. For the nine months period ending September 30th, cash flow generated from operations was a negative $ 234 million. While the company confirmed in its result announcements that it expects positive cash flows from operations in Q4 2002, Moody's expects the surplus for the year to remain modest in the context of substantial refinancing needs. Moody's anticipates also that an improvement in the group's operating performance will require decisive and rapid implementation of its cost reduction plan and no further deterioration of the trading environment. Accordingly Moody's assumes that ABB will continue to perform substantially below historic cash flow patterns well through next year and will rely almost exclusively on asset disposals in a difficult investment climate to reduce its debt and return to debt protection measures reflective of the current Ba rating.

At this critical stage, ABB faces a substantial refinancing risk with debt maturities of about $4.0 billion over the next 15 months and of $1.4 billion in Q4 2002. Sources for the refinancing rely critically on the timely conclusion of the Structured Finance divestment before December 17th, a cornerstone of the refinancing strategy, as well as a near-term generation of free cash flows to create financial flexibility. Given ABB's seasonal cash flow pattern of negative cash flow generation in the first half of a calendar year, the continuous support of its key banks will be needed to execute a timely refinancing or replacement of the company's current credit facility to gain financial headroom or provide interim funding should the assets disposals be delayed. The current rating assumes the successful completion of the Structured Finance Portfolio disposal which would likely lead to a confirmation of the rating at the Ba2 level.

ABB's options to address the asbestos liabilities of its US subsidiary Combustion Engineering include a possible reorganisation under Chapter 11 of the US Bankruptcy code. Such a strategy, if chosen, is regarded by Moody's to carry significant uncertainties and execution risk. There is still considerable uncertainty as to the ability of ABB to obtain a settlement and at what cost. In a scenario where a settlement would not be reached, ABB is likely to face attempts to pierce its corporate veil with execution into the group's US and perhaps international assets. It is ABB's position that Combustion Engineering's asbestos liabilities can only be asserted against Combustion Engineering.

ABB Ltd., headquartered in Zurich, Switzerland, is a global engineering group with leading positions in power and automation technology products serving the manufacturing, process and consumer industries, utilities, and the oil and gas market. In the first nine months of fiscal year 2002, the group generated total revenues of US$16.2 billion.

Frankfurt
Wolfgang Draack
Senior Vice President
European Corporates
Moody's Deutschland GmbH
+49 69 707 30 700

Frankfurt
Pia C. Schulze
Asst Vice President - Analyst
European Corporates
Moody's Deutschland GmbH
+49 69 707 30 700

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