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Rating Action:

MOODY'S RATES ASAT'S GTD SENIOR NOTES B1 AND ASSIGNS Ba3 RATINGS TO ITS GTD SENIOR SECURED CREDIT FACILITIES; RATINGS OUTLOOK IS POSITIVE

08 Oct 1999
MOODY'S RATES ASAT'S GTD SENIOR NOTES B1 AND ASSIGNS Ba3 RATINGS TO ITS GTD SENIOR SECURED CREDIT FACILITIES; RATINGS OUTLOOK IS POSITIVE Moody's Investors Service assigned a B1 rating to the proposed $150 million guaranteed senior notes, due 2006, of ASAT (Finance) LLC, a wholly owned subsidiary of ASAT Limited. At the same time, Moody's assigned Ba3 ratings to the company's guaranteed senior secured credit facilities consisting of a $40 million term loan, due 2004, and a five-year $20 million revolving credit facility, which will remain undrawn upon closing. ASAT Limited, a leading developer and assembler of advanced semiconductor packages, and its subsidiaries, including ASAT, Inc., will serve as guarantors of the notes and the credit facilities. The senior implied rating is B1. This is the first time that Moody's has rated the company's debt. The ratings outlook is positive.

Moody's ratings reflect ASAT's highly leveraged pro forma capitalization resulting from the pending recapitalization in which an investor group led by Chase Asia Equity Partners will acquire a 50% ownership share of the company from QPL International Holdings Limited and repay the company's existing indebtedness. The notes and funded debt will be accompanied by a cash equity investment of about $112 million. The overall consideration being paid has been augmented by a concurrent repayment of $83.6 million promissory notes that were just issued on July 17, 1999 by ASAT to QPL in conjunction with upstreaming a special declared dividend to the parent. Upon consummation of the transaction and various other asset divestitures, QPL, which manufactures integrated circuit leadframes and electroplating chemicals and operates a semiconductor assembly and test facility in France, will continue to own the remaining 50% of ASAT. However, after the recapitalization ASAT will operate as a stand-alone company. ASAT's financial support of QPL and its affiliates, which led to the deterioration of ASAT's balance sheet in FY1999, will be terminated, as will all claims by QPL creditors against ASAT.

The ratings additionally take into account the company's narrow pro forma free cash flow coverage of 1.6 times fixed charges, based on planned FY2000 capital expenditures of $30 million which are expected to be funded from internal cash generation; the company's limited scale of operations; the relatively high 53% concentration of sales among the five largest customers; a moderately high 3.4 times debt to cash flow ratio; the highly cyclical nature of the semiconductor industry; declining average selling prices for semiconductor packages, which are susceptible to added downward pressure from semiconductor manufacturers during protracted industry downturns; increasing competition from Taiwanese packaging companies, which benefit from their proximity to several major semiconductor wafer foundries; and the company's limited operating history as an independent concern. Although the company employs teams of customer application engineers and service representatives at five locations around the United States, its principal base of operations encompassing an integrated design and assembly facility is situated in Hong Kong. While real estate in Hong Kong tends to be expensive, ASAT pays only about $3 million under a five-year facility lease with QPL which is renewable for an additional five years, and labor, which accounts for only about 10% of production costs, is comparable to prevailing rates in Taiwan and Korea.

The ratings and outlook derive their support from ASAT's pro forma 2.1 times EBIT coverage of interest requirements; the company's favorable returns on assets and investment; and the incipient recovery in demand for semiconductors, which has led to the more confident near-term outlook for semiconductor sales. Activity has been particularly robust in packaging design for the telecommunications, Internet access and networking industries, which has become the principal focus of ASAT's development efforts. Additionally, the company should benefit from packaging innovations expected to be marketed by early 2000 such as leadless plastic chip carriers for use in mobile communications, flexible ball grid array packages for cellular telecommunications applications, and, with qualification beginning in late 1999, its CamPak digital imaging package for fingerprint recognition systems, cameras and video applications. The company's handsome gross margins could be sustained by the higher average selling prices derived from its advanced technologies, which are growing rapidly and are expected to comprise nearly 38% of FY2000 revenues. Although actual revenues from advanced technologies were substantially less than those derived by two of its leading competitors, Amkor Technology and ChipPAC, the company's 33.5% gross margin for the LTM ended July 31, 1999 was nearly twice the amount Amkor and ChipPAC recorded over similar periods. ASAT also provides testing services for digital logic and analog products, and is a leader in providing mixed signal testing for advanced semiconductor applications. Mixed signal testing, which involves testing both analog and digital functions on a single chip, is increasingly necessary for complex end-applications. Testing services accounted for 12.1% of LTM revenues.

Furthermore, the potential exists for the 21% share of assembly, packaging and test services that are outsourced by the semiconductor manufacturers to increase, due to the integrated device manufacturers' inability to provide the advanced technical specifications that are more frequently being required in packaging technologies. Additionally, the multitude of assembly and test options required to support the proliferation of new semiconductor technologies has made it difficult for individual semiconductor companies to manage the attendant research and development activities and amass the testing equipment that would be required. Among the company's major customers are Motorola, which currently accounts for about 20% of revenues, Analog Devices, Altera, Broadcom, Lucent and STMicroelectronics. The composition of leading customers has changed significantly over the past five years as the company has reoriented its packaging focus away from semiconductors designed for personal computer, disk drive and consumer electronics end uses to telecommunications and Internet applications as well as advanced logic and analog/mixed signal purposes. Revenues from advanced BGA packaging services are expected to grow industry-wide by a CAGR of nearly 33% over the next five years.

After recording a 9.3% decline in sales from $243 million in FY1998 to $221 million in FY1999, ASAT registered a solid 29% growth in sales revenue for FY2000Q1 over FY1999Q1. Substantially all of the company's revenues are denominated in United States dollars. Based on pro forma EBIT plus rentals, ASAT's ROA and ROI were impressive at 17.8% and 20.9%, respectively, for the LTM ended July 31, 1999. At 3.4 times EBITDA plus rentals (EBITDAR), the company's pro forma debt to cash flow ratio, factoring capitalized operating leases into the equation, would be moderately high. Pro forma EBITDAR coverage of fixed charges is fair at 2.4 times. On a pro forma basis, ASAT's capitalization will feature $190 million debt and $87 million of capitalized operating leases. The pro forma balance sheet reflects negative retained earnings and shareholders' equity. The company's research and development expenses are modest, running at about 2% of revenues. ASAT is able to largely avert inventory risk because it does not take title to the semiconductor wafers consigned to it by its customers, and the customers are responsible for the raw materials, such as substrate, if they go unused.

The ratings on the guaranteed senior secured credit facilities recognize the perfected first priority security interests in, and mortgages on, substantially all tangible and intangible assets of ASAT and its subsidiaries. The $219 million assets identified from the April 30, 1999 audit are substantially greater than the term facility and a prospective fully drawn revolver. Although about 84% of the company's total assets are situated in Hong Kong, Moody's would have confidence in the collateral pledge based on the long established and enforceable code of bankruptcy law that exists in Hong Kong. Hong Kong's legal institutions have remained in place since its status changed to being a Special Administrative Region of the People's Republic China. Financial covenants under the facilities restrict ASAT and its subsidiaries to a maximum debt to cash flow ratio of 3.25 times through December 31, 1999, declining to 2 times by May 1, 2004; require minimum 2.5 times EBITDA coverage of cash interest, calculated on a rolling four-quarter basis; set maximum capital expenditure levels; and require the maintenance of a 1.25 times current ratio through the end of FY2000, increasing to 1.5 times thereafter.

The notes will be sold in a privately negotiated transaction without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution in violation of the Act. The issuance has been designed to permit resale under Rule 144A and for the notes to become registered within the next six months.

ASAT Limited, a provider of semiconductor packaging and test services, is headquartered in Hong Kong, where it maintains its sole manufacturing facility.

Moody's Investors Service assigned a B1 long-term debt rating to ASAT (Finance) LLC for its US$ 150 Million gtd senior notes.

No Related Data.
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