Hong Kong, October 24, 2005 -- Moody's Investors Service has changed the outlook for CMC Magnetics Corporation's (CMC) Ba3 corporate family rating and Baa3.tw national scale issuer rating to negative from stable. This rating action reflects Moody's view of intensified refinancing risk for CMC in the near term.

The rating agency notes the company's current tightening in liquidity stems from its aggressive capex spending as well as the poor operating environment for 1H05. The situation is draining the company's cash reserves.

Similar to other Taiwanese corporates, CMC previously relied on euro-convertible bonds (ECB) for capex and debt refinancing. However, its recent failure to issue a US$150M ECB means that it has to look for alternative funding, thereby heightening refinancing concerns, given large maturing debts in the next 12-18 months.

The company is currently arranging long-term loan to meet its near-term refinancing requirement up to June 06. We believe further refinancing is required to cover its approximately NT$8.5 billion in debt maturing in December 06 (including a US$200 million ECB with a put option). Moody's notes that CMC has maintained long-established relationships with domestic banks, and management is confident to put in place an appropriate refinancing arrangement. However, should such refinancing initiative fail to complete by end-1Q06, the ratings will be downgraded.

The current ratings continue to reflect CMC's strong position in the industry, where the company is one of the largest optical storage media manufacturers in the world and the largest in Taiwan.

Further on the positive side, we note a turnaround in the industry from the latter part of 2Q05, including an increasing penetration rate for DVD readers/writers. CMC recorded sequential margin improvements in 2Q05, thanks to the pick-up in DVDR demand and higher average selling prices. We believe that it is well positioned to capture upcoming growth with a favourable sales mix towards higher-margin DVDR products, and is projected to generate positive free cash flow in the coming years with a more restrained capex program.

The rise in raw material prices was one of the major factors contributing to industry-wide margin pressures in the latter part of last year and 1H05. Polycarbonate (PC) constitutes CMC's major raw material cost -- around 40% of DVD production costs. The PC price more than doubled from the beginning of 2004 with most of the hikes occurring in 2H04 due to supply shortages. Although we note that the price remains at a cyclical high, it stabilized in 3Q05, and is expected to moderately trend down due to new PC production capacity scheduled in the pipeline. Therefore, margins for CMC are expected to improve moderately next year.

Moody's considers that the chance of an upgrade in the ratings as remote, given the current negative outlook. However, the successful refinancing of its maturing debts - which would improve liquidity for the next 18 months - could stabilize the ratings.

On the other hand, an inability to refinance maturing debts in 2006 - which heightens liquidity risk - will trigger a rating downgrade. A deterioration in cash flow generation, arising from unexpected increases in raw material costs and weakening DVD demand, or an aggressive capex investment and dividend payment that further weaken the company's liquidity, would also be negative for the ratings.

Copyright 2005, Moody's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved.

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