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Rating Action:

MOODY'S DOWNGRADES CORNING'S DEBT RATINGS (SENIOR TO Baa3; SHORT-TERM TO PRIME-3); RATINGS REMAIN UNDER REVIEW FOR POSSIBLE DOWNGRADE

08 May 2002
MOODY'S DOWNGRADES CORNING'S DEBT RATINGS (SENIOR TO Baa3; SHORT-TERM TO PRIME-3); RATINGS REMAIN UNDER REVIEW FOR POSSIBLE DOWNGRADE

Approximately $5 Billion of Debt Securities Affected.

New York, May 08, 2002 -- Moody's Investors Service has downgraded both the long-term and short-term debt ratings of Corning Incorporated (Corning). The ratings remain under review for possible further downgrade. The rating actions reflect the rating agency's growing concern that the recovery in the company's telecommunications operations will be delayed until well into 2003, as end users of its products have continued to dramatically scale back capital expenditures. While recognizing Corning's leadership position in the markets it serves and its current strong liquidity position, the rating agency noted that the rapid fall off of business in the telecommunications sector will curtail internal cash generation more severely than originally anticipated, prolonging its cash burn rate. At the same time, Corning's debt protection measures have weakened considerably, and will remain weak over the near-to-intermediate-term. Moody's said that the recent announcement of further pre-tax cost initiatives of approximately $600 million, which will be spread over the second and third quarters, represents management's resolve to "rightsize" its cost structure in an environment of declining revenues. The rating agency believes that it may be some time before telecommunication revenues stabilize.

Moody's indicated that its continuing review will focus on the development of demand for fiber, cabling and photonics products in the telecommunication business segment, as well as ongoing actions by the company to achieve an appropriate cost structure to support its declining revenue base. The rating agency expressed concern that increases in bandwidth demand -- which would in turn fuel a rise in capital expenditures by the telecom carriers, positively impacting Corning -- may not occur until late in 2003 or early in 2004. While the company has aggressively attacked its cost structure to date, Moody's said telecom revenues have not bottomed out, and the timing and strength of rebuilding revenues is uncertain. Until a rebound in demand occurs, Corning's fixed asset investments will be significantly underutilized, and this poor asset efficiency will result in continued poor financial returns. The ongoing review will address the need for further initiatives by the company to adjust its cost base if its revenues continue to decline. In addition, the likelihood for debt reduction through proceeds from asset sales from smaller businesses, offset by any future cash payments with respect to contingent liabilities associated with the bankruptcy of Pittsburgh Corning, will be evaluated.

Ratings lowered and under review:

Corning Incorporated -- senior, unsecured notes, debentures, and IRBs to Baa3 from Baa1; to (P)Baa3 from (P)Baa1 for senior, unsecured securities and to (P)Ba2 from (P)Baa3 for preferred stock issued pursuant to its 415 universal shelf registration; senior, unsecured long-term debt rating for bank revolving credit facility to Baa3 from Baa1; and short-term debt rating to Prime-3 from Prime-2.

Corning Finance B.V. -- to (P)Baa3 from (P)Baa1 for senior, unsecured securities issued pursuant to its 415 universal shelf registration, guaranteed by Corning.

Oak Industries Inc. -- $100 million 4.875% convertible subordinated debt, guaranteed by Corning to Ba1 from Baa2.

The rating agency said that although Corning is diversified into three distinct business segments -- telecommunications, advanced materials and information display, the main driver of revenues and operating profit stems from fiber, cabling and photonic products serving the telecommunications market. In 1999 telecom represented 59% of total segment revenues of $4.3 billion and 54.5% of total segment operating profits of $470 million. At the height of the telecom boom in 2000, Corning derived $5.1 billion of revenue and over $1 billion in operating profit from telecom, representing about 72% and 65% of total segment revenues and operating profit, respectively. During the last half of 2001 demand for Corning telecom products fell sharply. Longhaul carriers have excess "dark" fiber in the ground that will take time to be utilized, and increased photonic sales to "light" these unused fibers may take some time. While volume growth is expected in the use of fiber in metropolitan areas and for local access, total demand is expected to be a fraction of last years' production. Although Corning's other business segments provide meaningful earnings and cash flows, such cash flow contributions will not offset negative financial results anticipated in the telecom segment. As a result, previously announced cost initiatives will be implemented to improve asset efficiency and align the company's cost structure to match declining revenues.

Moody's noted that Corning has historically maintained a sound liquidity position. As of March 31, 2001, Corning had $1.8 billion of balance sheet cash, $2.0 billion of available term bank credit facilities and limited near-term debt maturities (including $277 million of outstanding commercial paper). Moody's expects that the company will reduce capital expenditures, while the benefits of cost savings measures will be realized in the second half of 2002. However, cash flow will be negative until business prospects improve.

Corning's credit metrics have weakened and may deteriorate further. For the latest twelve month period ending March 31, 2002, Corning had an operating loss of about $630 million before impairment and restructuring charges of about $5.7 billion, down significantly from an operating profit of about $701 million in year 2000. Meanwhile, for the same two periods, interest coverage deteriorated to -3.6x from 7.7x, and leverage rose to about 47% from 28%, mainly due to net losses caused by charges associated with goodwill and impairments.

Corning Incorporated, headquartered in Corning, NY, focuses in three business segments: Telecommunications, Advanced Materials, and Information Display through a global network of businesses, subsidiaries, and equity-venture companies.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
George A. Meyers
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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