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Rating Action:

Moody's rates Enterprise Networks Holding B3, outlook negative

19 Oct 2010

First-time rating for Enterprise Networks Holdings B.V.

Frankfurt am Main, October 19, 2010 -- Moody's Investors Service has today assigned a B3 Corporate Family Rating (CFR) and B3 Probability of Default Rating (PDR) to Enterprise Networks Holdings B.V. (ENH) of Netherlands, the 2008 carve-out from Siemens AG's (A1, stable) enterprise networks business. The proposed EUR200 million bonds to be issued by EN Germany Holdings B.V., Netherlands (EN Germany) will be guaranteed on a senior secured basis by ENH as well as certain key intermediate holding companies and operating subsidiaries of the group.

Moody's has assigned a (P)B3 rating with a loss-given-default (LGD) rating LGD3, 46% to these proposed bonds. The outlook for the ratings is negative reflecting the limited visibility of revenue and earnings stabilization currently. This is the first time that Moody's has assigned ratings to Enterprise Networks Holdings.

Moody's issues provisional ratings for debt instruments in advance of the final sale of securities or conclusion of credit agreements. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the different capital instruments. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

"The B3 CFR for ENH is based on Moody's expectation that the recent uptick in order inflow will lead over the next few quarters to a stabilization in revenues allowing the company to harvest the benefits of its restructuring and cost saving actions in order to stop within the next twelve months the cash consumption from operations and stay within the scope of its liquidity arrangements" says Wolfgang Draack, a Senior Vice President in Moody's Corporate Finance Group. In the basically mature industry of communication systems for corporate users (i.e. private business exchanges) with some growth potential driven by a technology transition to internet-based telephony (VoIP), management sees its cash flow opportunities in migrating existing customers to its broad offering of VoIP products and systems and keeping its structures lean and efficient. Current priorities are to stop revenue erosion, to conclude the restructuring measures and expenditures and to quickly achieve free cash flows, which would be required to maintain the B3 rating

After several years of revenue contraction, operating losses and cash consumption, ENH's performance metrics are reaching stability in fiscal year 2010. Revenues are projected to find their low point in mid-2011 only, but the benefits of cost savings are already coming in and have returned operating profit to break-even during the first three quarters FYE2010. Moody's B3 rating for ENH follows this trend and anticipates a consistent upward trend in operating income and progressive lower cash consumption, mostly caused by restructuring expenditures, to end in FY2011 so that the company can maintain a liquidity cushion sufficient to absorb future revenue volatility. We do understand that the risks to this scenario are significant, lying primarily in a subdued appetite to upgrade corporate telephone networks leading to industry price pressure and ENH's elevated cost base compared to competitors impacted also by having more than two thirds of employees in Europe (36% in Germany). Yet, the results of the first three quarters of FY 2010 with break-even adjusted operating income and the recent stabilization in the communications equipment industry despite supply shortages give some comfort in the business plan. The proposed refinancing serves to shore up liquidity as well as to fund distributions to the sponsors in form of management fees leading to pro-forma leverage metrics that are still moderate reflective of the substantial business risk in this industry.

"The negative outlook for the ratings reflects Moody's concern that (i) ENH's renewed customer focus (go-to-market) may be insufficient to reverse its trend of declining revenues year-on- year, (ii) that accelerating price pressure in a concentrated market and the disadvantage of a largely European cost base may necessitate additional restructuring measures, and that (iii) ENH's financial resources to fund downsizing is limited to its balance sheet cash (EUR312 million pro-forma) and a EUR40 million revolving credit facility. Moody's has not factored financial support by the company's sponsors into its analysis. Moody's would consider a rating downgrade if ENH's business keeps shrinking over the next few quarters or the company's cash balances were to erode below EUR 200 million.

For stabilizing the rating outlook, ENH will have to show clear year-on-year revenue growth supported by positive order trends and a sustained recovery of profitability leading to gross debt leverage falling below 5.0x (5.4x pro-forma). A rating upgrade then would then require a track record of free cash flows and leverage below 4.5x.

In line with Moody's LGD approach, the rating agency groups ENH's debt into three classes of creditor protection: (i) the secured revolving credit with superpriority ranking in liquidation (ii) €200 million senior secured bonds and €300 million trade payables at LGD3 (46%), and (iii) about €100 million senior unsecured credit facilities and lease arrangements of operating subsidiaries.

Issuer: EN Germany Holdings B.V.

..Assignments:

....Senior Secured Regular Bond/Debenture, Assigned (P)B3, LGD3, 46%

Issuer: Enterprise Networks Holdings B.V.

..Assignments:

.... Probability of Default Rating, Assigned B3

.... Corporate Family Rating, Assigned B3

The principal methodologies used in rating Enterprise Networks Holding S.A. were Global Communications Equipment Industry published in June 2008, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

ENH is a leading global provider of communications-related products and services to enterprises, including businesses, government agencies and other organizations. It is jointly owned by private equity firm The Gores Group (51%) and Siemens AG (49%). ENH, with corporate headquarters in Munich, Germany, generated EUR2.5 billion revenues in it last fiscal year ending 30 September 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

However, the credit rating action was based on limited historical data.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's rates Enterprise Networks Holding B3, outlook negative
No Related Data.
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