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Rating Action:

MOODY'S ASSIGNS FIRST TIME CORPORATE FAMILY RATING OF B3 TO SPANSION TECHNOLOGY INC. OUTLOOK IS STABLE

05 Dec 2005
MOODY'S ASSIGNS FIRST TIME CORPORATE FAMILY RATING OF B3 TO SPANSION TECHNOLOGY INC. OUTLOOK IS STABLE

$400 Million of Debt Securities Affected

New York, December 05, 2005 -- Moody's Investors Service assigned first time corporate family rating of B3 to Spansion Technology Inc. (Spansion), a leading provider of flash memory semiconductors. Spansion, currently owned 60% by Advanced Micro Devices (AMD) and 40% by Fujitsu Limited (Fujitsu), is expected to execute an initial public offering with approximately one third of the company being held publicly upon completion. The rating outlook is stable.

The following first time ratings have been assigned to Spansion:

Corporate Family Rating -- B3

$400 million senior unsecured note due 2015 -- Caa1

Speculative Grade Liquidity rating -- SGL-2

Concurrent with the initial public offering, Spansion expects to issue $400 million senior unsecured notes in a private placement under Rule 144A without registration rights. Net proceeds from the note issuance will be used to repay approximately $300 million of borrowings owed to its current owners, AMD and Fujitsu, with the remainder going to its balance sheet, which when combined with expected IPO proceeds of about $667 million before fees and expenses will constitute Spansion's opening balance sheet cash of approximately $780 million.

The ratings reflect: (1) the high degree of business risk inherent to the capital intensive, volatile, and technologically evolving flash memory market; (2) the prospect that, despite strong bit demand driven by the cell phone market, continued aggressive pricing could cause Spansion's free cash flow to be negative over the near to intermediate and trigger the need for additional debt financing; (3) fairly limited financial flexibility notwithstanding good balance sheet liquidity pro forma the pending IPO and note issuance; (4) Spansion's limited ability to weather sustained market weakness or technological or manufacturing missteps; (5) the significantly larger financial resources and business diversity of some of its key competitors; and (6) the company's impending stand alone status, although Moody's recognizes that Spansion has been migrating to a stand alone operation over the last several quarters and service agreements with its current owners are in place through 2006.

The ratings also consider: (1) Spansion's strong position in the NOR flash memory market, although this traditional, $8 billion market directed primarily at the cell phone and embedded end markets is mature and slow growing; (2) strong customer relationships among a range of end market customers including all of the top cell phone, consumer electronics, and automotive OEM's; (3) the potential for Spansion's proprietary flash architecture called MirrorBit, which effectively doubles the density of each memory cell, to gain increased market acceptance as electronic devices require greater data density at lower cost per bit.

The stable outlook reflects our expectation that Spansion will be able to continue good execution of its manufacturing and technology roadmap, including the continued market penetration of its MirrorBit technology whose richer average selling prices could help to improve its profit profile.

The ratings are not likely to experience upward pressure until Spansion is able to achieve operating profitability, with the prospect that such performance can be sustained through cycles. This in turn would improve its ability to internally fund the significant capital expenditure requirements that are necessary to remain technologically and cost competitive and bolster its financial flexibility so that it can continue to sustain critical R&D and process technology advances even during sector downturns.

The ratings could face negative pressure if (1) the company struggles to move towards profitability, which we believe would be driven by a combination of top line growth and more importantly, gross margin expansion given the relatively fixed nature of R&D and SG&A costs; (2) fails to advance its MirrorBit technology with cell phone OEM's and other applications, (3) experiences increased competitive pressures from the very fast growing NAND flash technology, or (4) the company's liquidity profile weakens.

Pro forma the pending IPO and note issuance, Spansion will have cash of about $784 million and $740 million of debt, including the proposed $400 million senior unsecured note issuance and about $340 million of secured credit facilities and capital leases that mature at various points over the next three years. Given Spansion's liquidity and free cash flow prospects during this time, we believe it will need to refinance this debt. Pro forma debt to latest twelve month EBITDA measures about 2.7 times. As noted above, a critical challenge for Spansion relates to its ability to improve cash flow generation to fund the significant capital expenditures that are necessary to remain competitive. For the latest twelve months ended September, EBITDA of $271 million compared to about $427 million of capital expenditures. Over the near to intermediate term, we expect about double the level of capital expenditures.

The SGL-2 reflects (1) Spansion's good balance sheet liquidity following the IPO that when combined with cash flow from operations should be sufficient to fund necessary capital expenditures over the next twelve months, (2) external liquidity in the form of its undrawn $175 million borrowing base revolving credit facility that matures September 2010, that should maintain good room under its one financial covenant, a minimum EBITDA, and (3) our view that Spansion has limited non core assets that could be readily sold if liquidity pressures were to develop.

Spansion Technology Inc., headquartered in Sunnyvale, California, is one of the largest Flash memory providers and the largest company in the world dedicated exclusively to developing, designing and manufacturing Flash memory. For fiscal 2004 and the first nine months of fiscal 2005, net sales were $2.3 billion and $1.4 billion, respectively.

New York
Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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