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Rating Action:

MOODY'S UPGRADES ABB'S LONG-TERM RATINGS TO Ba2 FROM B1; STABLE OUTLOOK

18 May 2004
MOODY'S UPGRADES ABB'S LONG-TERM RATINGS TO Ba2 FROM B1; STABLE OUTLOOK

Approximately $6.7 Billion Debt Securities Affected

Frankfurt, May 18, 2004 -- Moody's Investors Service has today upgraded the senior implied rating assigned to ABB Ltd Ba2 from Ba3. The senior unsecured long-term debt and issuer ratings of ABB Ltd (ABB) and its financing subsidiaries under a keepwell agreement were upgraded to Ba2 from B1. At the same time, the rating agency assigned a Ba2 rating to the new US$1 billion multi-currency revolving credit facility for ABB Asea Brown Boveri Ltd. and ABB Capital B.V., guaranteed by ABB Ltd. the parent company, maturing 2006. The Not-Prime (N-P) ratings for ABB Ltd. and subsidiaries' short term debt were affirmed. The outlook is stable.

The upgrade in the senior implied rating was based on (i) Moody's expectation of rising earnings and material free cash flows in the core businesses, Power Technology and Automation Technology, which would strengthen key cash flow measures by end 2005 (ii) the anticipated completion of the company's exit strategy from discontinued and other non-core businesses, and (iii) the targeting of sustained reduction in gross debt levels via the allocation of a large part of free cash flows and divestment proceeds to maturing debt obligations.

According to Moody's, ABB's Ba2 rating also reflects (i) the ongoing execution risk related to the company's disposal strategy, (ii) the fact that it reports its results US dollars, whereas adjusted growth and earnings would be significantly lower in the company's domestic currency, (iii) the challenges faced in completing its Step Change Restructuring Programme aimed at material improvements in its cost position versus its peers, (iv) substantial financial obligations and guarantees including a US$1.6 billion pension deficit, annual lease expense in excess of US$400 million, securitized receivables of $898 million and financial guarantees of US$207 million for affiliates as of fiscal year 2004, and (v) the task of limiting asbestos exposure through court confirmation.

ABB's ratings for senior debt instruments were upgraded one additional notch to Ba2 from B1, reflecting notching adjustments after the replacement of a secured bridge facility with a new unsecured bank credit facility (see details below). Moody's maintained its practice of rating ABB and its subsidiaries -- which are supported by keepwell agreements rather than guarantees -- at the same level, due to the intricate link of the subsidiaries as dedicated Financing/Treasury Centers for the group and the comprehensive language of the agreements: even though the contracts are not directly enforceable by bondholders.

Any change in the stable outlook will be predicated upon ABB (i) achieving underlying performance improvements in line with an operating margin target of 10% for both core divisions (before corporate costs) by 2005; (ii) successful completion of the major disposals, with proceeds applied to sustained debt reduction, so that today's relatively weak adj. retained cash flow/net adjusted debt (incl. a.m. financial obligations) for a Ba2 category will move toward a more comfortable percentage level in the high teens and; (ii) not experiencing any major cash calls from asbestos litigation or other contingencies.

ABB's management has focused the group on two core businesses; Power Technology and Automation Technology, both of which have global leadership positions and the potential for sound margins and significant free cash flows, once internal structures are streamlined and overheads have been cut. Moody's said that the businesses are subject to cyclicality and strong competitors, but provide a solid basis for a large, US$18 billion revenues industrial group.

Moody's noted that there are still substantial challenges to the completion of ABB's restructuring programme; these include the company's exit from underperforming non-core and discontinued businesses, and achievement of the US$900 million annual cost savings targeted by ABB's Step Change Programme. Agreements have been signed for the larger divestments, but due-diligence procedures and regulatory reviews are delaying completion and receipt of proceeds. The Step Change Programme, which marks the second phase of ABB's restructuring, is progressing well. To date, ABB has spent US$250 million on the measures (workforce reductions, consolidation of office space and production facilities, and closure of non-profitable units) and estimates that it has realised US$820 million of annualized net cost savings. Continued focus on cost and competitiveness will benefit ABB's margins, going forward.

Aided by its refinancing, ABB has enhanced the company's financial flexibility and obtained the funds to meet its maturing debt obligations, including US$2.5 billion of new equity, a EUR650 million bond, an unsecured US$1.0 billion five-year credit line and the closure of the sale of the Oil & Gas business. At the end of the first quarter of 2004, ABB held about US$3.8 billion of freely available cash and marketable securities, and further disposal proceeds are expected. Moody's said that this liquidity position provides comfort through the company's high seasonality of cash flows and US$800 million debt coming due during the next 12 months.

By replacing its secured bridge facility by an unsecured revolving credit as back-up facility, ABB has eliminated the effective subordination of bond claims to the previously secured creditor position of the bank lenders. Management has, however, in its new bank facility, granted a guarantee for borrowings of ABB Capital B.V, which places lenders in a relatively more direct position to make a claim on ABB Ltd in a default scenario. Under the keepwell agreement bondholders have a contractual but indirect claim on ABB Ltd. In its assessment, Moody's has not made a distinction between the bank position and the bondholders under the keepwell agreement on the basis of (i) the essential function of the finance vehicles to ABB's treasury function (ii) the cross default structure linking bonds and any other indebtedness (iii) the strength of the liquidity promise provided by ABB Ltd and (iv) the pari-passu ranking of guarantee and keepwell claims at ABB Ltd.

The following rating was assigned:

- ABB Asea Brown Boveri Ltd. -- Ba2 Backed Bank Loan Rating

- ABB Capital B.V. -- Ba2 Backed Bank Loan Rating

The following ratings were upgraded to Ba2 from B1:

- ABB Ltd. -- Issuer Rating

- ABB Holdings, Inc. -- Backed Issuer Rating

- ABB International Finance Limited -- Backed Senior Unsecured Rating

- ABB Finance Inc. -- Backed Senior Unsecured Rating

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

The following rating was upgraded to Ba2 from Ba3:

- ABB Ltd. -- Senior Implied Rating

The following short-term ratings were affirmed:

- 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

Headquartered in Zurich, Switzerland, ABB Ltd 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 fiscal year 2003, the group generated total revenues of US$18.8 billion.

Frankfurt
Michael West
Managing Director
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Wolfgang Draack
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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