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Gateway's credit rating cut

January 8, 2002 Posted: 1112 GMT

NEW YORK (CNN/Money) -- Moody's Investors Service on Tuesday cut Gateway's credit rating to "junk" status, citing concerns about the PC maker's revenue and market share prospects.

After the closing bell, Moody's said it cut Gateway's "issuer" and senior unsecured debt ratings to "Ba1," its highest junk grade, from "Baa3."

The rating agency said the downgrade "reflects growing concerns regarding the company's ability to maintain or grow revenues and market share in the intensely competitive U.S. personal computer market, and therefore to achieve its goals of returning to stronger levels of profitability."

"Junk" refers to a bond or issuer with a credit rating of double-B or lower. Issuers whose credit is assigned such a status face higher costs of borrowing because of the higher yields investors demand from them.

Moody's said Gateway (GTW: down $2.56 to $7.69, Research, Estimates) has "good near-term liquidity," but warned that the company remains under review for a possible further downgrade.


Gateway's stock price plunged more than 26 percent on the New York Stock Exchange Tuesday after the company said its fourth-quarter revenue is likely to be much lower than recently expected because of lower unit sales.

At the same time, the company said the products it did sell were more profitable and therefore helped the company turn a profit for the quarter, where expectations previously had been for a loss.

The smallest of the U.S.-based, top-tier PC vendors, Gateway which was especially hard hit last year by a fierce pricing war and by a sharp decline in demand for PCs, has put in place a massive restructuring plan which includes cutting its work force by more than 25 percent.

The company also has pulled out of the International market altogether, choosing to concentrate its efforts exclusively in the United States.

Moody's on Tuesday pointed out that the company's fourth-quarter unit sales fell 15 percent sequentially, which follows an 11 percent sequential decline in the third quarter, which "stands in contrast to management's expectations that second half 2001 results would show sequential increases in unit sales."

The rating agency also said Gateway's exit from the international market could limit its participation in the PC market to one that is insufficient for its cost structure over time.

Several equity analysts made similar remarks about the company's long-term prospects Tuesday as well.




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