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

CHICAGO--()--Fitch Ratings has assigned a 'BBB-' rating to Seagate HDD Cayman's (Seagate HDD) $300 million of 20-year senior unsecured notes offering. 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 the redemption of all outstanding 6.8% senior notes due 2016, of which $331 million were outstanding as of Oct. 3, 2014. The senior notes offering and concurrent redemption (the transaction) are consistent with Seagate's efforts to reduce its weighted average cost of debt and extend its debt maturity schedule.

Seagate's net $31 million debt reduction will result in a Fitch estimated decrease in total leverage (total debt to operating EBITDA) to 1.36x as of Oct. 3, 2014, from 1.37x prior to the transaction. Fitch anticipates Seagate's leverage will remain near 1x through the intermediate term.

Fitch anticipates interest coverage (operating EBITDA to gross interest expense) will remain near 15x through the intermediate term. Fitch estimates this metric will increase to 13.6x versus 13.4x prior to the transaction.

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 toward 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 supported by $2.2 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 April 2018.

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

--Broad product portfolio, significant scale in the 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 include:

--Long-term threat of technology substitution from NAND flash-based solid state drives. Fitch believes, however, 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 using 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 FCF 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.

Fitch forecasts more than $1.9 billion of annual FCF (cash from operations less capital expenditures and dividends) through the intermediate term and calculates FCF was $1.35 billion in the latest 12 months (LTM) ended Oct. 3, 2014. This is down from $1.39 billion in the corresponding year ago period.

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.

Fitch estimates total debt, all of which was issued by Seagate HDD Cayman, is approximately $3.78 billion pro forma for the transaction and consists of:

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

--$506 million of 6.875% senior notes due May 2020;

--$172 million of 7% senior notes due November 2021;

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

--$1 billion of 4.75% senior notes due January 2025;

--$300 million of senior notes due November 2034.

Fitch has the following ratings on Seagate and its subsidiary:

Seagate

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

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

HDD Cayman

--IDR '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' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=932476

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
John Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
John Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com