CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the Long-term Issuer Default rating (IDR) for Freescale Semiconductor, Inc. (Freescale) to 'B-' from 'CCC'. The rating Outlook is Positive. Fitch's actions affect $5.8 billion of total debt. A full list of ratings for Freescale follows at the end of this release.
The ratings and Outlook reflect Fitch's expectations for strengthening operating performance and free cash flow (FCF), enabling debt reduction and the potential for total debt to operating EBITDA (total leverage) approaching 5.5x over the intermediate term.
Fitch expects strong demand, particularly in automotive, which represents more than 40% of revenues, and wireless infrastructure markets will drive low- to mid-single digit revenue growth in 2014. Longer term, Fitch expects low-single digit growth within the context of the semiconductor cycle.
The combination of higher revenues, increasing utilization rates and efficiencies will drive operating EBITDA toward more than $1 billion in 2014 with mid-cycle operating EBITDA margin ranging from 20% - 25%.
Nearly $150 million of lower interest expense from recent refinancing and debt reduction actions will strengthen annual FCF to $250 million to $500 million through the intermediate-term. Assuming a portion of FCF is used for debt reduction, Fitch believes total leverage could fall below 6x exiting 2014 and 5.5x in 2015.
Positive global vehicle production growth and increased electronics content will drive automotive microcontroller (MCU) and radio frequency (RF) growth, given Freescale's leading share positions and significant exposure to automotive. Cloud penetration and datacenter growth will drive embedded processors demand, and benefitting the networking segment. The multi-year build-out of LTE capacity in China should drive solid growth in communications processors and RF over the intermediate-term, given Freescale's penetration with China's leading wireless providers.
Freescale's $745 million follow-on equity offering in early 2014 supports the company's focus on de-levering the balance sheet. In conjunction with continued debt refinancing to extend upcoming maturities at lower rates, this has reduced annual interest expense by $150 million, strengthening the company's FCF profile.
Fitch believes credit metrics will strengthen over the intermediate-term with total leverage approaching or falling below 5.5x and operating EBITDA to gross interest expense (interest coverage) approaching or exceeding 3x in 2015. For the latest-12-months (LTM) ended March 31, 2014, Fitch estimates total leverage was 6.3x and interest coverage was 2.6x. On an adjusted basis, total debt plus capitalized operating leases to operating EBITDA plus rental expense will trend to 5x from 6.7x for the LTM ended March 31, 2014.
KEY RATING DRIVERS
The ratings continue to reflect Freescale's:
--Leading share positions for embedded processors in markets characterized by longer product life cycles, including automotive microcontrollers (MCU), from which Freescale generates 40% of total revenues, and radio frequency (RF) power devices for mobile wireless infrastructure;
--Secular growth in key end markets, including unit growth and increased content in automotive, proliferation of mobile devices and demand for bandwidth in networking, and increased connectivity for industrial, translating into low- to mid-single digit longer-term revenue growth; and
--Expectations for low but growing annual FCF, driven by interest expense reductions and more stable revenues.
Ratings concerns center on Freescale's:
--Limited financial flexibility from significant debt levels and interest expense, which Fitch believes will require refinancing to meet debt maturities given modest expectations for annual FCF;
--Structural challenges growing market share due to meaningful incumbent supplier advantages associated with long-term design collaboration, which at the same time fortify Freescale's long-term customer relationships and leading market positions; and
--Significant fixed investments in research and development (R&D) and capital spending in aggregate to maintain competitive technology roadmap.
RATINGS SENSITIVITIES
Positive rating actions could occur if Freescale:
--Achieves annual FCF of more than $250 million from solid revenue growth and profit margin expansion; and
--Uses a portion of FCF to reduce debt resulting in total leverage approaching 5.5x.
Conversely, negative rating actions could occur if:
--FCF is below expectations from lower than anticipated revenue growth and profit margin contraction, likely due to customer market share losses, pressured demand in China or automotive markets; or
--Freescale does not meaningfully reduce debt with FCF, resulting in only modestly lower total leverage.
Fitch believes Freescale's liquidity was sufficient as of March 31, 2014 and consisted of:
--$709 million of cash and equivalents, roughly two-thirds of which is located outside the U.S.; and
--$384 million (net of $16 million of letters of credit) of remaining availability under the $400 million senior secured RCF due 2019.
Fitch's expectations for more than $250 million of annual FCF also support liquidity.
Total debt was approximately $5.8 billion as of Mar. 31, 2014 and consisted of:
--$2,714 million of senior secured term loans due 2020
--$796 million of senior secured term loans due 2021
--$500 million of senior secured notes due 2021
--$960 million of senior secured notes due 2022
--$853 million of senior unsecured notes due 2020.
The Recovery Ratings (RR) reflect Fitch's belief that Freescale's enterprise value, and hence recovery rates for its creditors, will be maximized as a going concern rather than liquidation scenario. In estimating a distressed enterprise value, Fitch assumes post-reorganization operating EBITDA of $750 million. Fitch applies a 5x distressed EBITDA multiple to reach a reorganization enterprise value of approximately $3.75 billion.
As is standard with Fitch's recovery analysis, the revolver is assumed to be fully drawn and cash balances fully depleted to reflect a stress event. After reducing the amount available in reorganization for administrative claims by 10%, Fitch estimates the senior secured debt would recover 51% - 70%, equating to 'RR3' Recovery Ratings. The senior unsecured and senior subordinated debt tranches would recover 0% - 10%, equating to 'RR6' Recovery Ratings and reflect Fitch's belief that minimal if any value would be available for unsecured note holders.
Fitch's upgrades Freescale's ratings as follows:
--IDR to 'B-' from 'CCC';
--Senior secured bank revolving credit facility (RCF) to 'B/RR3' from 'CCC+/RR3';
--Senior secured term loans to 'B/RR3' from 'CCC+/RR3';
--Senior secured notes to 'B/RR3' from 'CCC+/RR3';
--Senior unsecured notes to 'CCC/RR6' from 'CC/RR6'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology -- Effective 12 August 2011 to 8 August 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Additional Disclosure
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