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Rating Action:

Moody's upgrades STR's CFR to B1; stable outlook

11 Apr 2011

$259 million in rated debt

New York, April 11, 2011 -- Moody's Investors Service has upgraded Specialized Technology Resources, Inc.'s ("STR") Corporate Family Rating ("CFR") to B1 from B2. Concurrently, the rating on the first lien credit facility was raised to Ba3 from B1, the second lien credit facility rating was raised to B3 from Caa1, and Moody's assigned a first-time liquidity rating of SGL-1. The ratings outlook was changed to stable from positive.

RATINGS RATIONALE

The upgrade of the CFR to B1 from B2 reflects STR's conservative capital structure and very good liquidity profile. Considerably higher revenue and earnings, along with modest debt reduction, have reduced STR's financial leverage to 2.3 times at the end of 2010. Nonetheless, the ratings are constrained by STR's relatively small revenue size despite rapid growth, lack of product line diversification, a meaningful albeit lower level of customer concentration, and potential technology risk. The ratings continue to be supported by globally strong end market demand for renewable energy sources, STR's solid market share in solar encapsulants, and its geographic presence in regions poised for near-term growth.

The SGL-1 Speculative Grade Liquidity rating reflects Moody's expectation of a very good liquidity profile over the next year. Cash on hand of $107 million at December 31, 2010 and projected cash flow generation are expected to fully cover working capital needs and $60 million of capital expenditures planned for 2011, mainly for capacity expansion. We do not anticipate that the $20 million revolver, which matures on June 15, 2012, will be drawn over the next four quarters and cushion on the credit facility's financial covenants is expected to remain ample. However, the SGL rating could be downgraded if STR's cash flow generation weakens or cash is depleted for acquisitions or capital projects.

The stable outlook reflects Moody's expectations that STR will continue to grow consolidated revenues at a double-digit pace in the near term, offsetting potential margin pressure from declining prices and high raw material costs. Nonetheless, Moody's expects free cash flow generation to be minimal after consideration of planned capital expenditures. The ratings or outlook could be raised if Moody's expectations for the long-term fundamentals of the solar industry remain positive and STR continues to grow revenue organically, maintains solid margins and liquidity, and further reduces its customer concentration. The outlook or ratings could be lowered if STR loses market share, margins fall greater than expected, or changes in technology, regulations, or subsidies negatively impact end market demand for solar encapsulants. Specifically, a change in financial policy or acquisition strategy that results in sustained financial leverage above 4 times, interest coverage below 2 times, or a substantial reduction in liquidity could lead to a downgrade.

Moody's upgraded the following ratings (and revised the LGD point estimates):

Corporate Family Rating, to B1 from B2

Probability of Default Rating, to B1 from B2

$20 million first lien revolver due June 2012, to Ba3 (LGD3, 38%) from B1 (LGD3, 36%)

$164 (originally $185) million first lien term loan due June 2014, to Ba3 (LGD3, 38%) from B1 (LGD3, 36%)

$75 million second lien term loan due December 2014, to B3 (LGD5, 87%) from Caa1 (LGD5, 88%)

The following rating was assigned:

Speculative Grade Liquidity rating, SGL-1

For further information, please refer to the Credit Opinion to be posted on moodys.com.

Based in Enfield, Connecticut, STR's parent company is STR Holdings, Inc. (NYSE: STRI). The company operates in two distinct businesses: (i) the manufacturing of encapsulants for photovoltaic solar modules, and (ii) multinational testing and quality assurance services. STR reported revenues of $372 million in 2010.

The principal methodologies used in this rating were Global Manufacturing Industry published in December 2010, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 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, and confidential and proprietary Moody's Investors Service 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.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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.

New York
Lenny J. Ajzenman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Suzanne Wingo
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades STR's CFR to B1; stable outlook
No Related Data.
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