Fitch Rates Seagate HDD Cayman's Sr. Unsecured Notes 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB-' rating to Seagate HDD Cayman's (Seagate HDD) proposed private placement of 10.5-year senior unsecured notes. The notes will be guaranteed by Seagate Technology plc (Seagate), the parent company of Seagate HDD. The Rating Outlook is Stable.

Net proceeds from the debt offering will be used for general corporate purposes, including the potential repayment of existing higher interest-bearing debt via a tender offer, capital expenditures and other investments.

Fitch believes the private placement and concurrent tender offer are consistent with Seagate's efforts to reduce its weighted average cost of debt and extended its debt maturity schedule.

Seagate's issuance of $500 million or $800 million of new notes both yield a net increase of $263 million in debt, assuming the tender offers detailed below are fully subscribed. The net increase in debt would be $463 million, assuming $1 billion of new debt issuance and fully subscribed tender offers. In this scenario, Fitch estimates a modest increase in leverage to 1.4x from 1.2x currently, which is manageable in the context of the company's 'BBB-' rating.

Concurrent with the private placement, Seagate HDD commenced a cash tender offer at 107.793 for the remaining $237 million of 7.75% senior unsecured notes due 2018. The tender offer expires on May 27, 2014 unless extended or terminated earlier by Seagate HDD.

Seagate HDD will also commence a cash tender offer for up to $300 million principal amount of 7% senior notes due 2021 ($528 million outstanding) and 6.875% senior notes due 2020 ($557 million outstanding), assuming the issuance of at least $800 million of new notes and availability of sufficient funds, as determined by Seagate HDD.

KEY RATING DRIVERS

The Ratings and Outlook reflect:

--Continued expectations for relatively stable hard disk drive (HDD) pricing due to a highly consolidated industry structure, with the market leaders, Seagate and Western Digital Corp. (WDC), controlling approximately 84% of the market; solid long-term growth in heads and media, key components of an HDD; and tightly managed capital expenditures across the supply chain that minimizes the risk of supply and demand imbalances.

--Positive profitability trends from a favorable mix shift towards higher capacity HDDs for cloud computing that utilize greater media and heads per drive, thereby absorbing a greater amount of fixed-cost investments than lower capacity PC drives.

--Solid liquidity and financial flexibility are supported by $2.3 billion in cash, the vast majority of which is readily accessible without adverse tax considerations, positive annual free cash flow (FCF), and an undrawn $500 million senior unsecured revolving credit facility due 2018.

--Strong credit protection metrics and management's commitment to conservative financial policies;

--Broad product portfolio, significant scale in HDD industry and vertically integrated model, which reduces per-unit manufacturing costs and facilitates new product time to market, albeit resulting in a greater fixed cost base that exacerbates cyclical effects.

Fitch's rating concerns consist of:

--Long-term threat of technology substitution from NAND flash-based solid state drives. However, Fitch believes the high relative cost of flash-based storage will continue to limit SSD storage capacity in PCs and tablets, thereby increasing demand for HDDs in external or cloud storage. Enterprises utilizing SSDs deploy a multi-tiered storage strategy whereby the vast majority of data is stored on HDDs and only data for high performance applications is stored on higher cost SSDs.

--Substantial historical volatility in earnings and free cash flow due to the cyclicality of HDD demand and significant fixed costs;

--Moderating, but still consistent declines in average selling prices for HDDs due to low HDD switching costs;

--Event risk associated with implementation of aggressive shareholder-friendly activities, primarily debt-financed share repurchases;

--Seagate's ability to sustain a time to market advantage critical to achieving market share gains and maintaining overall profitability, given formidable competition from WDC.

RATING SENSITIVITIES

Positive:

--Future ratings upgrades are currently unlikely due to the long-term threat of technology substitution from SSD, where Seagate lacks a dominant product position relative to HDDs.

Negative:

--If the cost per gigabyte differential between enterprise HDD and SSD narrows significantly, resulting in greater than expected cannibalization of enterprise HDDs, and Seagate's enterprise SSD products are uncompetitive;

--If Seagate's enterprise market share materially erodes on a sustained basis due to more formidable competition from WDC;

--If the company pursues more aggressive financial policies, such as sizable debt-financed share repurchases.

--If Ultrabooks with SSD materially cannibalize the traditional notebook market, SSHs fail to achieve significant penetration in the Ultrabook market and growth in near-line enterprise and external HDDs is insufficient to offset the decline in EBs shipped to the notebook HDDs.

FCF (post dividends) was $1.3 billion in the latest 12 months (LTM) ended March 28, 2014, compared with $2.8 billion in the corresponding year ago period due to supply shortages from the Thailand flood that significantly inflated average selling prices (ASPs). Fitch forecasts at least $1.9 billion of FCF annually through fiscal 2016 ended June 29.

Financial covenants in the credit agreement consist of minimum fixed-charge coverage of 1.5x and maximum net leverage ratio of 1.5x. In addition, the facility requires minimum liquidity of $500 million.

Gross leverage (total debt/operating EBITDA) increased to 1.2x as of March 28, 2014 from 0.7x in the year-ago period, benefiting from elevated ASPs following the Thailand flood. ASPs have since receded, as Fitch expected, given the recovery in the HDD supply chain. Fitch anticipates Seagate's leverage will remain at approximately 1x through 2016.

Interest coverage (operating EBITDA/gross interest expense) decreased to 14.4x in the LTM ended March 28, 2014 compared with 16.3x last year. Fitch anticipates interest coverage will remain above 15x through fiscal 2016.

Fitch estimates total debt, all of which was issued by Seagate HDD Cayman, is approximately $3.5 billion and consists of:

--$334 million of 6.8% senior notes due October 2016;

--$800 million of 3.75% senior notes due November 2018;

--$237 million of 7.75% senior notes due December 2018;

--$557 million of 6.875% senior notes due May 2020;

--$529 million of 7% senior notes due November 2021;

--$1 billion of 4.75% senior notes due June 2023;

Fitch rates Seagate and its subsidiary as follows:

Seagate

--Issuer Default Rating (IDR) 'BBB-';

--Senior unsecured revolving credit facility 'BBB-'.

HDD Cayman

--IDR at 'BBB-';

--Senior unsecured revolving credit facility 'BBB-';

--Senior unsecured debt 'BBB-'.

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

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830963

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Contacts

Fitch Ratings
John M. Witt, CFA
Senior Director
+1 212-908-0673
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Jason Pompeii
Senior Director
+1 312-368-3210
or
Committee Chairperson
John Culver, CFA
Senior Director
+1 312-368-3216
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
John M. Witt, CFA
Senior Director
+1 212-908-0673
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Jason Pompeii
Senior Director
+1 312-368-3210
or
Committee Chairperson
John Culver, CFA
Senior Director
+1 312-368-3216
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com