Fitch Upgrades Seagate's IDR to 'BBB-'; Outlook Stable
NEW YORK -- May 1, 2013
Fitch Ratings has upgraded the following ratings on Seagate Technology plc
(Seagate) and its subsidiaries:
--Issuer Default Rating (IDR) to 'BBB-' from 'BB+'.
Seagate HDD Cayman
--IDR to 'BBB-' from 'BB+';
--Senior unsecured debt to 'BBB-' from 'BB+'.
Furthermore, Fitch has affirmed the credit facility rating for the
co-borrowers, Seagate and Seagate HDD Cayman, at 'BBB-' and withdrawn the IDR
and secured second lien notes ratings for Seagate Technology International
(STI), since the entity is now debt free.
The Rating Outlook is Stable.
Approximately $3 billion of total debt is affected by Fitch's action,
including the company's undrawn $350 million unsecured revolving credit
KEY RATING DRIVERS
The Ratings Upgrades and Outlook reflect:
--Expectations for relatively stable hard disk drive (HDD) pricing going
forward due to a highly consolidated industry structure, as the top two
companies, Seagate and Western Digital Corp. (WDC), control 88% of the market;
strong HDD growth in Exabytes (EB) shipped (30%-40% annually) in excess of
areal density growth largely driven by the cloud and usage of Internet-enabled
mobile devices; increasing shipment linearity and tightly managed capital
expenditures across the supply chain that minimizes the risk of supply and
The increasing linearity in HDD shipments reflects the declining correlation
with PC demand due to strong growth in near-line enterprise HDD storage for
use in cloud data centers. IDC estimates worldwide PC shipments declined 15%
sequentially in the first quarter of 2013, yet the total addressable market
for HDDs was nearly flat sequentially (-0.2%), according to WDC.
--Positive profitability implications from a favorable mix shift towards
higher capacity HDDs for cloud computing that require greater media and heads
per drive, thereby absorbing a greater amount of fixed-cost investments than
lower capacity PC drives. Seagate's average drive capacity increased 60%
year-over-year to 823 gigabytes in the quarter ended Dec. 28, 2012, despite
acquiring Samsung's predominantly notebook HDD business.
--Seagate's solid liquidity and financial flexibility are supported by $2
billion in cash, the vast majority of which is readily accessible without
adverse tax considerations, generally positive annual free cash flow (FCF),
and an undrawn $350 million senior unsecured revolving credit facility due
Fitch believes Seagate's FCF volatility will continue to moderate due to a
more stable HDD pricing environment, lower demand volatility, favorable
product mix shift and cautious approach to capital investments that increase
HDD manufacturing capacity. Seagate has generated positive FCF for four
consecutive years on a trailing 12-month basis.
STI's redemption of $315 million of its 10% senior secured second-priority
notes previously due in 2014 for existing cash on hand also strengthens
liquidity since it eliminates all long-term debt maturities until 2016, when
$600 million of unsecured notes mature.
--Strong credit protection metrics and management's commitment to conservative
--Broad product portfolio and significant scale in HDD industry;
--The company's vertically integrated model, which reduces per-unit
manufacturing costs and facilitates new product time to market.
Fitch's rating concerns consist of:
--Long-term threat of technology substitution from NAND flash-based SSDs,
including risk of consumers substituting traditional notebooks with HDDs for
ultrabooks equipped with solid state disk (SSD) or media tablets with
The high relative cost of flash-based storage compared with HDDs continues to
limit the amount of storage capacity on PCs and tablets, increasing demand for
data storage in the form of hybrid HDDs, cloud and external storage, areas
where Seagate continues to be well positioned. Seagate's Pulsar 800GB
(gigabyte) multilevel cell (MLC) SAS enterprise SSD currently retails for
$6,599, or $8.25 per GB, nearly 12x the cost per GB of a HDD.
Fitch expects PC demand to recover in the second half of calendar 2013 due to
normal seasonality and a plethora of new convertible notebook PCs that more
closely align with user requirements, including lower price points enabled in
part by lower cost hybrid solid state drives, and improved battery life
supported by Intel's upcoming, more efficient microprocessor, codenamed
--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 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.
--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.
--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 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 nearly $3.1 billion in the latest 12 months (LTM)
ended Dec. 28, 2012 compared with $519 million 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 2015 ended June 29.
Financial covenants in the credit agreement consist of a minimum fixed-charge
coverage of 1.5x and a maximum net leverage ratio of 1.5x. In addition, the
facility requires minimum liquidity of $500 million.
Leverage (total debt/operating EBITDA) decreased to 0.6x as of Dec. 28, 2012
from 1.4x in the year-ago period, benefitting from elevated ASPs following the
Thailand flood. ASPs have since receded, as Fitch expected, given the recovery
in the HDD supply chain. Nonetheless, Fitch anticipates Seagate's leverage
will remain below 1x as $315 million of debt reduction offsets lower ASPs
compared with the immediate aftermath of the Thai flood.
Interest coverage (operating EBITDA/gross interest expense) increased to 19.2x
in the LTM ended Dec. 28, 2012 compared with 8.1x last year. Fitch anticipates
interest coverage will remain above 17x through fiscal 2015.
Fitch estimates total debt, pro forma for the redemption of STI's 10% senior
secured second-priority notes due previously in May 2014, is approximately
$2.5 billion and consists of:
--$600 million of 6.8% senior notes due October 2016 (Seagate HDD);
--$697 million of 7.75% senior notes due December 2018 (Seagate HDD);
--$600 million of 6.875% senior notes due May 2020 (Seagate HDD);
--$600 million of 7% senior notes due November 2021.
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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
John M. Witt, CFA, +1-212-908-0673
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Jason Pompeii, +1-312-368-3210
Mark Oline, +1-312-368-2073
Brian Bertsch, +1-212-908-0549
Press spacebar to pause and continue. Press esc to stop.