CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Avago Technologies Finance Pte. Ltd., including the 'BB+' Long-term Issuer Default Dating (IDR). Fitch also has affirmed and assigned a recovery rating of 'RR1' to the senior secured revolving credit facility (RCF) and term loan. Fitch's actions affect $6 billion of total debt, including the undrawn $500 million secured RCF. The rating outlook is Stable. A list of current ratings follows at the end of this release.
The ratings and Outlook reflect Fitch's expectations for Avago Technologies Ltd.'s (Avago) solid operating performance from accelerating LTE adoption driven secular demand. As a result, higher smartphone shipments, increasing complexity, growing internet bandwidth demands and greater storage requirements will drive solid organic revenue growth over the next few years.
In addition, Fitch expects solid top line growth, constrained capacity, healthy inventory levels and lower fixed operating expenses from the LSI integration will sustain higher operating EBITDA margins through the intermediate-term. Fitch expects operating EBITDA margin above 40% versus a Fitch estimated 35.3% for the latest 12 months (LTM) ended Feb. 1, 2015. Profitability will remain cyclical with trough operating EBITDA margin in the low 30%.
Fitch expects $500 million of FCF in fiscal 2015 and annual FCF approaching $1 billion through the intermediate-term from growing and higher margin profitability. Expectations for elevated capital spending to alleviate capacity constraints at the company's production facility and potentially higher inventory levels to meet strong demand could temper FCF in the short-term.
Fitch also expects Avago to use FCF for acquisitions to continue diversifying their end market exposure. The company will buy supplier of fiber channel and related products, Emulex, for $606 million, or $609 million net of acquired cash and debt in the second half of fiscal 2015. This transaction should complement Avago's enterprise storage offerings. In conjunction with the company's recent acquisition of PLX Technology and LSI, Avago should generate nearly a third of revenues from enterprise storage markets at higher than corporate wide profit margins.
Fitch expects credit protection measures to strengthen from higher profitability and Avago's plan to repay $600 million of the outstanding secured term loan during the current quarter with available cash. As a result, Fitch anticipates total leverage (total debt to operating EBITDA) will fall and remain below 2.5 times (x) in the absence of significant operating shortfalls or debt financed acquisitions.
KEY RATINGS DRIVERS
The ratings are supported by Avago's :
--Leadership positions in secular growth markets, driven by Avago's technology leadership in integrated high performance FBAR filters.
--Strong profitability with expectations for profit margin expansion from cost synergies.
--Consistent and solid annual mid-cycle FCF, providing ample financial flexibility for debt reduction and to organically fund smaller technology focused acquisitions.
--Expectations for solid credit protection measures for the rating, given voluntary debt reduction and strengthened profitability.
Rating concerns center on:
--Expectations for ongoing and potentially significant debt financed acquisitions, as well as the attendant integration risks, given importance of research and development (R&D) investments.
--Expectations for operating volatility from short-cycle products, particularly smartphones, which require annual design socket wins and should represent 35% to 40% of total sales through the intermediate-term. Fitch also anticipates additional volatility from uneven demand patterns in wireline infrastructure and enterprise and data center spending.
--Improved but still substantial customer and end market concentration, with wireless communications and wired infrastructure representing roughly half of revenues and Avago's top 10 customers accounting for 57% of revenues. Fitch notes exposure to leading handset providers, while a risk, also are driving significant revenue growth, given Avago's technology leadership.
Positive rating action could occur if Fitch expects:
--Total leverage will remain below 2.5x over the longer-term, driven by voluntary debt reduction, structurally higher profitability or management's commitment to maintain financial policies consistent with investment grade; or
--More consistent operating performance through the cycle from reduced customer or end market concentration.
Negative rating actions could result from:
--Market share erosion at a leading customer or in aggregate, indicating an loss of technological advantage; or
--Fitch expects total leverage sustained above 3x from profitability and FCF degradation or large debt financed acquisitions.
As of Feb. 1, 2015, Fitch believes liquidity is solid and consists of:
--$2.6 billion of cash and cash equivalents;
--$500 million undrawn senior secured RCF expiring 2019.
Consistent annual FCF of $500 million to $1 billion also supports liquidity. Cash location is not a concern for Avago, due to the company's incorporation in Singapore.
Total debt is $5.4 billion and consists of:
--$4.6 billion senior secured term loan B maturing in 2019;
--$1 billion of the privately placed convertible note due 2020.
The term loan B amortizes at $46 million (1%) annually until the bullet maturity in 2019.
KEY RATINGS ASSUMPTIONS
--Strong Wireless segment revenue growth (mid-40%) for fiscal 2015, driven by robust smartphone demand from key customers. Fitch assumes more normalized mid-single digit growth beyond the near-term.
--Enterprise segment revenue growth in the low- to mid-single digit, driven by solid enterprise and data center spend.
--Low single digit revenue growth for the Wireline segment, due to solid demand for ASIC and fiber optics.
--Low single digit revenue growth for Industrial, consistent with the broader market.
--Fitch assumes profit margin remains consistent at current levels, resulting in operating EBITDA margin near 40%.
--Inventory levels increase to accommodate robust demand within the context of constrained capacity.
--Dividends grow 10% annually.
--Capex remains at 10% of revenues through forecast period to support growth.
Fitch affirms Avago Technologies Finance Pte. Ltd.'s ratings as follows:
--IDR at 'BB+';
--$4.6 billion Senior Secured Term Loan B at 'BBB-/RR1'; and
--$500 million Senior Secured Revolving Credit Facility (RCF) at 'BBB-/RR1'.
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