Moody's Investors Service ("Moody's") downgraded Motorola Solutions (NYSE: MSI) senior unsecured rating to Baa3 from Baa2. The downgrade was driven by the proposed $1 billion increase in debt and $2 billion share repurchase plan. The ratings outlook was changed to negative from stable.

Ratings Rationale

The Baa3 senior unsecured rating reflects high leverage pro forma for the convertible note issuance and relatively aggressive financial policies . The rating is supported by MSI's very strong business profile which to some degree mitigates the high leverage. MSI's pro forma leverage would however be an outlier among Baa rated companies.

Leverage pro forma for the convertible note issuance is approximately 4.6x but has the potential to decrease to under 4x over the next eighteen months if the company can improve revenues and EBITDA levels. Pro forma free cash flow to debt is also considered weak at approximately 4%, though it has the potential to increase to above 10% over the next eighteen months if the company returns to growth and continues to improve its margins. The increased level of share purchases funded with a combination of debt and cash balances, represents a shift to more aggressive financial policies. While cash balances post the announced $2 billion of buybacks will remain relatively strong at $2.1 billion, balances are expected to decline further during 2016 as the company continues its aggressive buyback program at levels that far exceed its cash generating capabilities.

The rating recognizes MSI's broad geographic and product diversification through its leading position in the communications equipment business as well as its cash generating potential. The rating is supported in particular by the strength and market position of the government and public safety business across its many product lines and the relative stability of this business in economic downturns. However, given the high leverage and relatively aggressive financial policies, MSI is considered weakly positioned in the Baa3 category.

Liquidity is expected to be very good in the near term based on its substantial though declining cash balances, a $2 billion undrawn revolver and expectations of solid free cash flow generation.

The negative ratings outlook reflects the material risk that leverage could remain at elevated levels if the company fails to achieve revenue and profitability growth or engages in further aggressive financial policies.

The ratings could be downgraded if the company does not demonstrate revenue growth, improving margins and significantly greater free cash flow generation. The ratings could also be downgraded if leverage is not on track to fall below 4.25x (and 3.25x excluding pensions) or if cash balances fall below $1.5 billion before such milestones are met.

The following ratings were affected:

Downgrades:

..Issuer: Motorola Solutions, Inc.

.... Issuer Rating, Downgraded to Baa3 from Baa2

.... Subordinated Shelf, Downgraded to (P)Ba1 from (P)Baa3

.... Senior Shelf, Downgraded to (P)Baa3 from (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

Outlook Actions:

..Issuer: Motorola Solutions, Inc.

....Outlook, Changed To Negative From Stable

The principal methodology used in these ratings was Global Communications Equipment Industry published in June 2008. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.