Fitch Rates Freescale's $960MM Senior Secured Notes 'CCC+/RR3'
CHICAGO -- November 1, 2013
Fitch Ratings assigns a rating of 'CCC+/RR3' to Freescale Semiconductor,
Inc.'s (Freescale) private placement of $960 million 6% senior secured notes
due 2022. The ratings assume the final loan documents will be substantially
similar to the company's other secured notes documents. A full list of the
company's existing ratings follows at the end of this release. The Rating
Outlook is Stable.
Freescale privately placed $960 million of 6% senior secured notes due 2022.
The company will use net proceeds from the private placement to redeem $884
million of all outstanding 9-1/4% senior secured due 2018 and to pay the
related redemption premium and fees. The company also will pay for a portion
of related expenses with cash on hand.
The refinancing extends senior secured debt maturities to 2022 from 2018 and
reduces interest expense to 6% from 9-1/4%. Covenants related to the 6% senior
secured notes are substantially similar to Freescale's other existing senior
The ratings and Outlook continue to reflect Freescale's weak free cash flow
(FCF) and tepid revenue growth. Cumulative FCF since being taken private six
years ago has been minimal after stripping out non-recurring cash flows. FCF
for 2013 will likely fall short of Fitch's expectations of more than $100
million but be flat from 2012 levels (adjusted for proceeds from business
interruption and inventory insurance recoveries).
However, this senior secured notes refinancing transaction reduces cash
interest expense and, in conjunction with the expectation for low single digit
revenue growth and restructuring driven profit margin expansion beyond the
near term, should goose FCF generation. Deferred intellectual property (IP)
revenue from IP licensing, which is part of Freescale's revenue growth
acceleration strategy, will add volatile and non-recurring cash flows.
Macroeconomic concerns continue to weigh on revenue growth prospects across
the semiconductor industry and Freescale is no exception. Seasonally strong
consumer demand and continued growth in industrial and networking markets
drove revenue growth in the recently ended third quarter. Nonetheless, long
term demand within Freescale's key embedded and automotive end markets remains
Meanwhile, Fitch expects profitability to benefit from past restructuring
initiatives. 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.
Fitch's estimated operating EBITDA margin increased to more than 22% for the
third quarter, on track with Fitch's expectations. Year-to-date (YTD)
operating EBITDA is up 4.6% from the comparable 2012 period, versus 3.9% YTD
revenue growth, driven by operating leverage and lower costs from
Credit protection measures should strengthen from lower interest expense but
remain cyclical. Pro forma for the senior secured notes redemption, Fitch
estimates total leverage (total debt to operating EBITDA) for the LTM ended
Sept. 30, 2013 was approximately just under 8 times (x), flat from the
comparable year ago period. Interest coverage (operating EBITDA to gross
interest expense) was flat from the year ago period at approximately 1.5x but
should increase to just under 1.7x, pro forma for the secured notes
Debt reduction from FCF resulting in total leverage approaching 5.5x could
result in positive rating actions. This will require continued positive
Conversely, negative rating actions could occur if Freescale uses significant
FCF over a multi-year period. Fitch believes this would be the result of a
weakened competitive position, due to lost market share or product
KEY RATING DRIVERS
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 Sept. 30, 2013 and
consisted of: i) approximately $700 million of cash and equivalents, $179
million of which was held in the U.S.; and ii) approximately $400 million (net
of $25 million of letters of credit) of remaining availability under the $425
million senior secured RCF due July 1, 2016.
Pro forma for the private placement and senior secured notes redemptions,
total debt was approximately $7.1 billion as of Sept. 30, 2013 and consisted
--$348 million of senior secured term loans due 2016;
--$2.4 billion of senior secured term loans due 2020;
--$792 million of senior secured term loans due 2021;
--$500 million of senior secured notes due 2021;
--$960 million of senior secured notes due 2022;
--$57 million of senior unsecured notes due 2014;
--$1.2 billion of senior unsecured notes due 2020;
--$264 million of senior subordinated notes due 2016.
With the full redemption of the senior secured notes due 2018, Freescale
eliminates the potential acceleration of the $2.4 billion term loan maturing
in 2020 in September 2017.
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 $714 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 assigns the following ratings:
'CCC+/RR3' to $940 million of 6% senior secured notes due 2022;
'CCC+/RR3' to $800 million senior secured term loan due 2021.
Fitch currently rates Freescale as follows:
--Issuer Default Rating 'CCC';
--Senior secured bank revolving credit facility (RCF) 'CCC+/RR3';
--Senior secured term loans 'CCC+/RR3';
--Senior secured notes 'CCC+/RR3';
--Senior unsecured notes 'CC/RR6';
--Senior subordinated notes 'CC/RR6'.
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: Including Short-Term Ratings and Parent and
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.
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Jason Paraschac, CFA
James Rizzo, CFA
Brian Bertsch, New York, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.