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Rating Action:

Moody's affirms Seagate's ratings; assigns Ba1 to new notes; outlook stable

12 Sep 2006
Moody's affirms Seagate's ratings; assigns Ba1 to new notes; outlook stable

Approximately $1.9 billion of rated debt affected.

New York, September 12, 2006 -- Moody's Investors Service has affirmed the ratings of Seagate Technology HDD Holdings ("Seagate") and the ratings of Maxtor Corporation ("Maxtor"), a wholly owned subsidiary of Seagate Technology US Holdings. At the same time, Moody's assigned new ratings to a proposed new debt issuance of $1.25 billion to finance Seagate's recently announced $2.5 billion stock buyback program, as well as refinance Seagate's existing $400 million 2009 notes.

The following ratings were affirmed:

(i) Seagate's Corporate Family Rating -- Ba1

(ii) Maxtor's remaining $135 million of the $230 million 6.8% convertible senior notes, due 2010 -- Ba1

(iii) Maxtor Corporation's $60 million 5-3/4% convertible subordinated debentures, due 2012 -- Ba2

(iv) SGL Rating -- SGL--1

The following ratings have been assigned:

(i) Floating rate notes due 2009 (amount to be determined) -- Ba1

(ii) Senior notes due 2011 (amount to be determined) -- Ba1

(iii) Senior notes due 2016 (amount to be determined) -- Ba1

The following ratings will be withdrawn upon refinancing:

(i) Seagate's $400 million senior notes 8%, due 2009 -- Ba1

The rating outlook remains stable.

The ratings continue to reflect Seagate's dominant position in the disk drive industry and incorporate the sector's capital intensity, volatility, and the commoditized nature of the disk drive business that is characterized by short product life-cycles and maturation linked ASP declines. Seagate's financial performance has been robust in recent years with generally stable gross margins, improving operating margins, and increasing generation of free cash flow. As a result, credit metrics are strong for the Ba1 rating category. Moody's is increasingly subscribing to the view that the HDD industry volatility may have become less severe going forward due to the sector's on-going consolidation, channel visibility may have improved which may reduce excess inventory buildup in the future, and Seagate's credit metrics may be less impacted in the next down cycle.

However, several factors offset the company's strong metrics and possible upward pressure on the ratings currently. Key among these is a more aggressive financial policy, as partly evidenced by the current largely debt-financed share buyback, and the possibility that leverage may increase further in the future. Other factors Moody's has cited previously are execution risk in the current product transitioning to perpendicular technology, and some integration risks vis-a-vis the Maxtor acquisition, both of which we will evaluate over the next 12-18 months as the company completes its product transitioning and the Maxtor integration.

What could move the ratings -- up

1) Continued strong financial performance, including revenue growth consistent with industry growth, stable to improving profitability metrics, and free cash flow generation despite a sizable step-up in capital expenditures planned for the next 2 years;

2) Maintenance of a reasonable capital structure, including prudent management of share buybacks and dividends, with credit metrics maintained at current levels, pro forma for current financings (e.g. debt to EBITDA less capex at 3x)

3) Successful product transitioning to perpendicular technology and integration of the Maxtor acquisition.

4) Greater visibility with respect to management's future acquisition strategies and financial policies following the company's transition from private to public ownership

What could move the ratings -- down

1) Significant decline in cash flow generation as a result of product transitioning issues vis-a-vis perpendicular technology, the Maxtor integration, and emerging technology becoming a more meaningful threat;

2) Significant increase in leverage as a result of dividends and additional share buyback programs;

3) Significant decline in the company's liquidity position as a result of operating issues and/or funds returned to shareholders

Seagate, with primary offices in Scotts Valley, California, is a worldwide leader in the design, manufacture and marketing of rigid disc drive products used as the primary medium for storing electronic information in systems ranging from personal computers and consumer electronics to data centers delivering information over corporate networks and the Internet.

New York
Tao Wu
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
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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