Fitch Affirms Freescale's IDR at 'CCC'; Outlook Stable
NEW YORK -- April 18, 2013
Fitch Ratings has affirmed Freescale Semiconductor, Inc.'s (Freescale)
long-term Issuer Default Rating (IDR) at 'CCC'. The Rating Outlook is Stable.
Fitch's actions affect approximately $6.8 billion of total debt, including the
currently undrawn RCF.
The ratings and Outlook reflect Freescale's weak free cash flow (FCF) and
revenue growth. Cumulative free cash flow (FCF) since being taken private six
years ago has been minimal after stripping out non-recurring cash flows.
Additionally, Fitch estimates revenues (excluding cellular handset sales) have
declined in the low single digits from pre-recession levels.
Fitch calculates 2012 FCF was $58 million, after backing out $96 million of
non-recurring cash flows from business interruption and inventory insurance
recoveries. 2012 FCF also benefited from $86 million of deferred intellectual
property (IP) revenue. IP licensing is part of Freescale's revenue growth
acceleration strategy but cash flows should be volatile and non-recurring.
Higher profitability from restructuring and healthier inventory levels should
strengthen FCF. Freescale's manufacturing facility closures related to
2008-2009 restructuring initiatives will reduce costs by $120 million once
fully realized. The company's 2012 focus product group reorganization will
yield an additional $35 million to $40 million of annual cost savings.
Utilization rates should increase from the low 70s and, in conjunction with
meaningful operating leverage, should drive operating profit margin expansion.
Distribution inventory returned to within a normal 9-10 week range by the end
of 2012 after Freescale lowered factory loadings during the year to reduce
excess inventory levels.
As a result, Fitch believes operating EBITDA will exceed 22% by 2014 versus a
Fitch estimated 19.4% for 2012. This assumes low-single digit revenue growth
over at least the next two years. Within this context, Fitch expects more than
$100 million of annual FCF over the next few years.
Fitch's expectation for low single digit near-term organic revenue growth is
driven by a cautious overall semiconductor demand environment. Book-to-bill is
greater than 1 time (x) exiting 2012, following six consecutive quarters of
negative year-over-year revenue growth.
Automotive demand should be offset by cautious industrial demand. U.S. auto
production increasing to 15 million units in 2013 from 14.5 million units in
2012 and increasing electronics content per vehicle will drive automotive
strength. Demand in the U.S. is being tempered by weakness in Europe, while
automotive unit growth in China, to which Freescale is less exposed, also will
Over the longer term, Fitch expects low-single digit mid-cycle revenue growth.
Freescale's reorganization intends to accelerate revenue growth by shifting
sales resources to faster growing China and India and increasing analog and
sensors and radio frequency penetration in industrial, consumer and medical
Credit protection measures should remain highly cyclical. Fitch estimates
total leverage (total debt to operating EBITDA) for 2012 was approximately 8.3
x, compared with 6.0x for 2011. Interest coverage (operating EBITDA to gross
interest expense) was approximately 1.5x 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. This will require the reversal
of negative revenue growth trends.
Conversely, negative rating actions could occur if Freescale uses significant
free cash flow over a multi-year period. Fitch believes this would be the
result of a weakened competitive position, due to lost market share or product
The ratings are supported by Freescale's:
--Leading share positions in microcontrollers and embedded processing markets,
particularly automotive. These markets are characterized by longer product
--Increasing electronics penetration in automobiles and industrial and medical
applications, as well as consumer electronics growth and solid long-term
networking infrastructure investment requirements over the longer term;
--Low capital intensity from the company's 'asset-light' manufacturing
Ratings concerns center on Freescale's:
--Revenue growth challenges, given a combination of difficulty displacing
incumbent embedded suppliers, macroeconomic headwinds, and structurally lower
revenues from the wind down of the company's cellular business over the past
--Limited ability to organically reduce debt, given minimal FCF in recent
--Significant debt levels and interest expense.
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 Freescale's March 2013 term loan refinancing transaction, 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;
--$264 million of senior subordinated notes due 2016.
The $2.4 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 March 2013 $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. Proceeds from the new facility extended
approximately $1.9 billion of debt maturities from 2016 to 2020, reducing debt
maturities over the next five years to approximately $770 million.
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 assumes post-reorganization
operating EBITDA of $725 million. Fitch applies a 5x distressed EBITDA
multiple to reach a reorganization enterprise value of approximately $3.6
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 reflect Fitch's belief that
minimal if any value would be available for unsecured noteholders.
Fitch affirms Freescale's ratings as follows:
--Senior secured bank revolving credit facility (RCF) at
--Senior secured term loans at 'CCC+/RR3';
--Senior secured notes at 'CCC+/RR3';
--Senior unsecured notes at 'CC/RR6';
--Senior subordinated notes at 'CC/RR6'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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