NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the $350 million four-year first-lien senior secured credit facility obtained by Seagate HDD Cayman (HDD Cayman), an indirect wholly owned subsidiary of Seagate Technology plc (Seagate). The credit facility is guaranteed by Seagate and certain material subsidiaries of the company and is secured by a lien on substantially all tangible and intangible assets located in the U.S., the Cayman Islands, Northern Ireland, Singapore, as well as Seagate's assets in Ireland, excluding certain permitted liens.
The new credit facility supplants and is identical to Seagate's prior secured facility with respect to borrowing capacity, rank, security and collateral package that the company cancelled early in the second calendar quarter of 2010. Similar to the prior termination of the credit facility, the re-establishment of a comparable credit facility has no effect on the ratings of the company or its subsidiaries since the current ratings previously incorporated Fitch's expectations that the company would obtain a new comparable secured facility in the near term.
Fitch currently rates Seagate and its wholly owned subsidiaries as follows:
Seagate
--Issuer Default Rating (IDR) at 'BB+';
HDD Cayman
--IDR rated 'BB+';
--First-lien senior secured credit facility rated 'BBB-';
--Senior unsecured notes rated 'BB+'.
Seagate Technology International's (STI)
--IDR rated 'BB+';
--Secured second lien notes rated 'BBB-'.
The Rating Outlook is Stable.
The ratings and Stable Outlook reflect:
--Seagate maintains solid liquidity supported by $2.8 billion of cash as of Dec. 31, 2010, the vast majority of which is readily accessible without adverse tax considerations, generally positive annual free cash flow (FCF) and a staggered debt maturity schedule. In the latest 12 months (LTM) ended Dec. 31, 2010, Seagate's FCF declined to nearly $650 million compared with approximately $1.1 billion in the prior year due to Seagate's unsustainably high enterprise market share in the year-ago period following a competitor's execution misstep and a currently challenging hard disk drive (HDDs) pricing environment attributable to the relative uniformity and maturation of HDD products in the marketplace and weakness in consumer demand, which Fitch partially attributes to strong near-term consumer demand for smartphones and media tablets equipped with flash storage rather than HDDs.
--Broad product portfolio, leading revenue market share in the overall HDD industry.
--The company's scale and vertically integrated model, which reduces per-unit manufacturing costs.
--Continued growth of digital rich media by consumers and enterprise storage requirements, which bode favorably for longer term HDD unit demand.
Fitch's rating concerns consist of:
--Substantial volatility in earnings and FCF due to the cyclicality of the HDD industry and significant fixed costs;
--Event risk associated with a potential revival of recently unsuccessful leveraged buyout negotiations or implementation of aggressive shareholder friendly activities, primarily debt-financed share repurchases. Fitch believes Seagate has up to $1.5 billion of incremental debt capacity remaining without adversely affecting its IDR of 'BB+', assuming no material deterioration in liquidity and/or financial performance.
--Long-term threat of technology substitution from NAND flash-based solid state drives (SSD), including risk of consumers substituting traditional notebooks with HDDs for media tablets equipped with flash-based storage;
--Consistent declines in average selling prices for HDDs due to intense competition and low switching costs;
--Seagate's ability to sustain a time to market advantage critical to achieving market share gains and maintaining overall profitability, given formidable competition, especially from Western Digital Corporation (WDC) and Hitachi Global Storage Technologies (Hitachi);
Seagate's credit protection metrics as of Dec. 31, 2010 are relatively unchanged compared with the year-ago period. Leverage (total debt/operating EBITDA) was 1.3 times (x) and 1.2x as of Dec. 31, 2010 and Dec. 31, 2009, respectively, while interest coverage (operating EBITDA/gross interest expense) was nearly 13x and 11x. However, Fitch anticipates modest deterioration in credit metrics in the next six months given the aforementioned industry challenges that will continue to pressure profit margins until new more cost efficient products are introduced in the second half of calendar 2011, assuming no further deterioration in the HDD supply and demand environment. Fitch projects leverage is likely to increase approximately half a turn to 1.8x by fiscal year-end (June 30, 2011). Furthermore, the company's pre-funding of $559 million of senior unsecured notes due October 2011 through a $750 million debt offering in early December 2010 will result in a material near-term increase in interest expense, thereby reducing interest coverage in fiscal 2011 to approximately 8x compared with nearly 17x in fiscal 2010.
As of Dec. 31, 2010, total debt was approximately $2.9 billon, primarily consisting of:
--$559 million of 6.375% senior notes due October 2011 (HDD Cayman);
--$415 million of 10% senior secured second-priority notes due May 2014; (STI)
--$600 million of 6.8% senior notes due October 2016 (HDD Caymen);
--$750 million of 7.75% senior notes due December 2018 (HDD Caymen);
--$600 million of 6.875% senior unsecured notes due May 2020 (HDD Cayman).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 13, 2010);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 24, 2009);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007);
--'Full Rating Report on 'Seagate Technology public limited company' (July 8, 2010).
Applicable Criteria and Related Research:
Seagate Technology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=539102
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006
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