NEW YORK--()--Fitch Ratings has rated the new senior secured term loan facilities of Freescale Semiconductor, Inc. 'CCC+/RR3'. The Rating Outlook is Stable. Fitch's actions affect approximately $6.8 billion of total debt, including the currently undrawn RCF.
The new $2.74 billion term loan facility consists of a $350 million term loan that will mature in December 2016 and a $2.39 billion term loan that will mature in March 2020. The new facility extends approximately $1.8 billion of debt maturities from 2016 to 2020, reducing debt maturities over the next five years to approximately $770 million.
The ratings and Rating Outlook continue to reflect Freescale's weak free cash flow (FCF), driven by substantial interest obligations and negative revenue growth since the 2010 rebound. 2012 FCF was a Fitch calculated $58 million after adjusting for $96 million of insurance proceeds related to business interruption and lost inventory.
Freescale's FCF for 2012 also benefited from $86 million of deferred intellectual property (IP) revenue related to IP sales or licensing agreements. While part of Freescale's growth strategy, cash flows from IP sales or licensing are likely to be uneven.
Fitch believes FCF should strengthen to $100 million to $200 million in 2013 from expectations for further profitability expansion and flat revenue growth. Fitch's expectation for flat 2013 revenue growth is driven by more balanced inventory levels at distributors offset by cautious semiconductor demand and the wind-down of Freescale's cellular business.
Fitch expects operating EBITDA margin expansion from restructuring in the near term and operating leverage upon the resumption of revenue growth. These factors could drive upside to Freescale's free cash flow. The completion of Freescale's planned production facility closures in 2012 should produce approximately $70 million of annual cost savings.
Credit protection measures should remain highly cyclical. Pro forma for the new term loans, Fitch estimates total leverage (total debt to operating EBITDA) for 2012 was approximately 7.9 times (x), compared with 6.0x for 2011. Interest coverage (operating EBITDA to gross interest expense) was approximately 1.6x for 2012, down from 1.9x for 2011.
Debt reduction from free cash flow resulting in total leverage approaching 5.5x could result in positive rating actions. Conversely, negative rating actions could occur if Freescale uses significant free cash flow over a multi-year period, which Fitch believes likely would be the result of a meaningfully weakened competitive position.
The ratings continue to reflect Freescale's:
--Leading share positions in microcontrollers (MCU) and embedded processing markets, particularly automotive. These markets are characterized by longer product lifecycles;
--Fundamental end market demand and increasing electronics content for automotive electronics, industrial products, consumer electronics, and networking infrastructure equipment remains healthy and poised for low- to mid- single digit growth over the longer term; and
--Low capital intensity from the company's 'asset-light' manufacturing strategy.
Ratings concerns center on Freescale's:
--Revenue expansion challenges from focus on markets with meaningful incumbent supplier advantages, although such advantages also fortifies Freescale's leading market positions in microcontrollers;
--Limited financial flexibility from highly leveraged capital structure
with significant interest expense and debt maturities;
--Minimal free cash flow in recent years, driven by operating EBITDA that remains below cyclical peak levels.
Fitch believes Freescale's liquidity was sufficient as of Dec. 31, 2012 and consisted of: i) approximately $711 million of cash and equivalents, $148 million of which was held in the U.S.; and ii) approximately $408 million (net of $17 million of letters of credit) of remaining availability under the $425 million senior secured RCF due July 1, 2016.
Pro forma for the term loans refinancing, total debt was approximately $6.4 billion as of Dec. 31, 2012 and consisted of:
--$350 million of senior secured term loans due 2016;
--$2.4 billion of senior secured term loans due 2020;
--$2 billion of senior secured notes due 2018;
--$155 million of senior unsecured notes due 2014;
--$1.2 billion of senior unsecured notes due 2020; and
--$264 million of senior subordinated notes due 2016.
The $2.2 billion term loan maturing in 2020 could be accelerated should Freescale fail to meet a Sept. 2017 leverage test and reduce outstanding senior secured notes due 2018 to $500 million or less by Dec. 1, 2017.
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 40% discount to its estimate of Freescale's operating EBITDA for the LTM ended Dec. 31, 2012 of approximately $809 million. Fitch applies a 5x distressed EBITDA multiple to reach a reorganization enterprise value of approximately $3 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.
Fitch rates Freescale as follows:
--Senior secured bank revolving credit facility (RCF)
--Senior secured term loans 'CCC+/RR3';
--Senior secured notes 'CCC+/RR3';
--Senior unsecured notes 'C/RR6';
--Senior subordinated notes 'C/RR6'.
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' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology