Fitch Rates Freescale's Senior Secured Term Loan Offering 'B-/RR3'

CHICAGO--(BUSINESS WIRE)--Fitch rates Freescale Semiconductor Holdings I, Ltd.'s (Freescale) $500 million senior secured notes offering 'B-/RR3'. Fitch currently rates Freescale as follows:

--Issuer Default Rating (IDR) at 'CCC';

--Senior secured bank revolving credit facility (RCF) at 'B-/RR3';

--Existing senior secured term loans at 'B-/RR3';

--Senior secured notes at 'B-/RR3';

--Senior unsecured notes at 'C/RR6'; and

--Senior subordinated notes at 'C/RR6'.

The Rating Outlook is Positive. Fitch's actions affect approximately $6.6 billion of total debt, including the currently undrawn RCF and pro forma for the transaction and repayment of senior subordinated or senior unsecured notes with net proceeds.

Freescale is seeking lender consent to amend the senior secured credit agreement and enter into $500 million of senior secured term loans. The company plans to use net proceeds to repay a portion of the senior subordinated notes due 2016 or senior unsecured notes due in 2014. Fitch anticipates the term loans will be pari passu with Freescale's existing senior secured debt.

With this latest refinancing transaction, Freescale will reduce debt due within the next five years. However, debt maturities remain formidable with approximately $2.8 billion due over this time frame, excluding term loan amortization.

Fitch continues to believe Freescale will be challenged to meet these obligations with free cash flow and will require ongoing capital markets access within the context of lackluster aggregate demand and limited visibility. Fitch acknowledges few 'CCC' or 'B' category companies are capable of organically funding debt service through the intermediate term. Nonetheless, Fitch estimates Freescale's aggregate free cash flow (cash from operations less capital expenditures) over the past three years has been approximately $68 million.

Furthermore, Fitch estimates total leverage (total debt to operating EBITDA) exiting 2011 was approximately 6.1 times (x), still elevated despite approximately $1 billion of net debt reduction during 2011 and estimate high single digit growth in operating EBITDA. With Fitch's expectations for flat to low single digit revenue growth in 2012, Fitch anticipates Freescale's free cash flow could approach $250 million for the year enabling debt reduction and the company's total leverage to fall below 5.5x. Fitch believes this milestone could result in positive rating actions.

The ratings continue to reflect Freescale's:

--Leading share positions and in microcontrollers (MCU) and embedded processing markets, particularly automotive. These markets are characterized by longer product lifecycles;

--Substantial and increasing customer and end-market diversification, driven by solid design wins in microcontrollers and embedded processing and increased attach rates within the company's Analog and Sensors segment; and

--Low capital intensity from the company's 'asset-light' manufacturing strategy.

Ratings concerns center on Freescale's:

--Onerous capital structure with significant interest expense and debt maturities;

--Challenges to achieving the revenue and operating EBITDA growth rates necessary to organically meet debt service requirements, which are exacerbated by the company's focus on end-markets with meaningful incumbent supplier advantages; and

--Minimal free cash flow in recent years, driven by operating EBITDA that remains well below cyclical peak levels.

Positive rating action could result from meaningful debt reduction from:

--Free cash flow, likely driven by operating profitability outgrowing what Fitch anticipates will be modest near-term revenue growth; or

--Proceeds from further equity issuances, which Fitch considers to be less likely given Fitch's belief that Freescale's IPO was consummated at a cyclical peak.

Negative rating action could result from the company's inability to grow revenues and benefit from meaningful operating leverage, most likely from diminished competitiveness, a downturn in the semiconductor market, or a double-dip recession. Fitch believes any of these scenarios would meaningfully reduce the potential for debt reduction.

Fitch believes Freescale's liquidity, pro forma for the new term loan and anticipated debt redemption, was sufficient as of Dec. 31, 2011 and consisted of: i) approximately $772 million of cash and equivalents and ii) approximately $408 million of remaining availability under the $425 million senior secured RCF due July 1, 2016. Fitch's anticipation for annual free cash flow approaching $250 million over the intermediate-term also supports liquidity.

Total debt, pro forma for the new term loan but before debt redemption (since the company is seeking the option to repay senior subordinated notes due 2016 or senior unsecured notes due 2014), was approximately $6.6 billion as of Dec. 31, 2011 and consisted of:

--$500 million of new term loan facilities;

--Approximately $2.2 billion of senior secured term loans due Dec. 1, 2016;

--Approximately $2 billion of senior secured notes due 2018;

--Approximately $355 million of senior unsecured notes due 2014;

--Approximately $1.2 billion of senior unsecured notes due 2020; and

--$764 million of senior subordinated notes due 2016.

The Recovery Ratings (RR) for Freescale reflect Fitch's recovery expectations under a distressed scenario, as well as 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 deriving a distressed enterprise value, Fitch applies a 43% discount to its estimate of Freescale's operating EBITDA for 2011 of approximately $1.1 billion. Fitch applies a 5x distressed EBITDA multiple to reach a reorganization enterprise value of approximately $3.1 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 reflecting Fitch's belief that minimal if any value would be available for unsecured noteholders.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 12, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.