NOTE: On August 24, 2020, the press release was corrected as follows: In the first sentence of the sixth paragraph of the Ratings Rationale section, the description of the Loan was changed to “Senior Secured Term Loan.“ Revised release follows.
New York, August 17, 2020 -- Moody's Investors Service, ("Moody's") rated
ON Semiconductor Corp.'s ("ON Semi") new Senior
Unsecured Notes due 2028 ("New Notes") at Ba2; upgraded
the speculative grade liquidity ("SGL") rating to SGL-1;
and affirmed ON Semi's other ratings, including the Ba1 Corporate
Family Rating ("CFR"). The outlook is stable.
ON Semi plans to use the net proceeds of the New Notes plus balance sheet
cash to repay about $1 billion of the nearly $2 billion
outstanding under the Senior Secured Revolving Credit Facility ("Revolver").
Proforma for the New Notes and the Revolver repayment, leverage
should decline from about 4.8x adjusted debt to EBITDA (twelve
months ended July 3, 2020) to about 4.3x.
Moody's expects that ON Semi will repay the 1% Convertible
Senior Notes ("Convertibles"), which mature on December
1, 2020, with existing cash balances. Proforma for
the repayment of the Convertibles, leverage would be reduced by
an additional 0.6 turns to about 3.7x adjusted debt to EBITDA
(twelve months ended July 3, 2020). Moody's projects
that ON Semi will generate increasing EBITDA and free cash flow ("FCF")
over the coming quarters as the automotive market recovers and will direct
FCF toward debt reduction, driving leverage to below 3x over the
next 12 to 18 months.
Assignments:
..Issuer: ON Semiconductor Corporation
....Senior Unsecured Regular Bond/Debenture,
Assigned Ba2 (LGD5)
Affirmations:
..Issuer: ON Semiconductor Corporation
.... Corporate Family Rating, Affirmed
Ba1
.... Probability of Default Rating,
Affirmed Ba1-PD
....Senior Secured Bank Credit Facility,
Affirmed Baa3 (LGD3) from (LGD2)
Upgrades:
..Issuer: ON Semiconductor Corporation
.... Speculative Grade Liquidity Rating,
Upgraded to SGL-1 from SGL-2
Outlook Actions:
..Issuer: ON Semiconductor Corporation
....Outlook, Remains Stable
RATINGS RATIONALE
ON Semi's Ba1 CFR reflects the company's strong market position,
with the second largest market share in the Power Discrete semiconductor
segment behind industry leader Infineon. Moreover, Moody's
expects that ON Semi's increasing exposure to relatively high growth,
high margin analog end markets (automotive, industrial, mobility)
will produce some modest further increases in the EBITDA margin over time.
Nevertheless, with the global economic recession driven by the coronavirus
outbreak, Moody's expects revenues and EBITDA to remain weak,
though improving, over the near term with adjusted debt to EBITDA
remaining above 3.5x for the remainder of 2020. This reflects
ON Semi's exposure to the global automotive market, which
Moody's estimates will record a 20% unit sales decline in
2020, and to the industrial markets, which is also highly-cyclical.
ON Semi's rating profile is also constrained due to the significant
exposure to the mobile phone market, which is subject to very short
product life cycles, requiring ongoing research and development
to obtain share in new customer platforms.
The stable outlook reflects Moody's expectation that revenues,
EBITDA, and FCF will improve over the near term as ON Semi's
end markets, particularly the automotive end market, recover
from the coronavirus-related demand disruption. Moody's
expects that ON Semi will use FCF and cash balances to make additional
debt repayments over the near term. With the anticipated recovery
in EBITDA and the debt repayments, Moody's expects that ON
Semi will reduce leverage to below 3x adjusted debt to EBITDA over the
next 12 to 18 months.
The rapid spread of the coronavirus outbreak, deteriorating global
economic outlook, low oil prices, and high asset price volatility
have created an unprecedented credit shock across a range of sectors and
regions. Moody's regards the coronavirus outbreak as a social risk
under our ESG framework, given the substantial implications for
public health and safety. The credit profile reflects the impact
on the company of the deterioration in credit quality the pandemic has
triggered, given the company's exposure to the semiconductor supply
chain. This has left the company vulnerable to shifts in market
demand and sentiment in these unprecedented operating conditions.
The rating is supported by governance considerations, specifically
ON Semi's decision to forego share repurchases and direct FCF toward debt
repayment. Moody's expects that ON Semi will continue to follow
a conservative financial policy, refraining from debt funded shareholder
returns.
The upgrade of the SGL rating to SGL-1 from SGL-2 reflects
ON Semi's consistent FCF generation during the currently depressed business
environment. Moody's expects that ON Semi will keep at least $750
million of cash following the $1 billion repayment on the Revolver
and the repayment of the Convertibles and will generate FCF of at least
$400 million over the next year. On March 24, 2020,
ON Semi drew down the remaining $1.2 billion of available
borrowing capacity on the $1.97 billion Revolver to build
the cash balance. Moody's expects that ON Semi will reduce
the Revolver balance further over the next 12 to 18 months, providing
additional external liquidity.
The Baa3 rating on the Revolver and the Senior Secured Term Loan (collectively
the "Credit Facilities") reflects the collateral, which includes
a first priority lien on all assets, and benefits from a cushion
of unsecured liabilities, including two tranches of convertible
senior notes. The Ba2 rating on the New Notes reflects the absence
of collateral and the effective subordination to the Credit Facilities,
which benefits from collateral.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be upgraded if:
• the EBITDA margin (Moody's adjusted) is sustained at least
in the upper twenties percent
• debt to EBITDA (Moody's adjusted) is sustained below 2x and
• ON Semi maintains a very good liquidity profile
The rating could be downgraded if:
• Moody's believes than ON Semi is losing market share or
• EBITDA margin is less than 20% (Moody's adjusted)
or
• ON Semi engages in debt funded share repurchases or distributions,
or highly-leveraging acquisitions, such that debt to EBITDA
(Moody's adjusted) is sustained above 3x
ON Semiconductor Corp., based in Phoenix, Arizona,
manufactures a broad array of discrete and integrated circuit analog,
mixed-signal, and logic semiconductors and sensors,
serving the automotive, industrial, mobile telephony,
and consumer electronics markets.
The principal methodology used in these ratings was Semiconductor Industry
published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130733. Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Terrence Dennehy, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
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JOURNALISTS: 1 212 553 0376
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