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Related Issuers
Rating Action:

Moody's assigns Baa2 rating to NetApp's senior notes

17 Jun 2020

New York, June 17, 2020 -- Moody's Investors Service ("Moody's") affirmed NetApp, Inc.'s existing Baa2 senior unsecured and Prime-2 short-term ratings, and assigned a Baa2 rating to the proposed senior notes that will be issued under an existing shelf registration. The proceeds from the new notes will be used to refinance existing debt and augment cash position. The ratings outlook is stable.

RATINGS RATIONALE

NetApp's total debt to EBITDA (including Moody's standard analytical adjustments and repatriation tax liability) was 1.9x at fiscal year ended April 2020 (1.5x, excluding repatriation tax liability). The company has strong liquidity but declining EBITDA and the potential increase in debt from the proposed transaction will erode the cushion available at the existing rating.

The affirmation of the Baa2 rating reflects Moody's expectation that NetApp will maintain a conservative financial strategy, including a strong cash position and low leverage. Moody's further expects that share repurchases will moderate from their elevated levels since US tax reform and will be in line with free cash flow generation.

NetApp's conservative financial profile mitigates its high business risks that result from an intensely competitive enterprise storage industry and a large exposure to the networked storage hardware market that is declining largely due to the increasing adoption of cloud computing. NetApp's credit profile is additionally constrained by its moderate scale, concentration of revenues in the enterprise storage industry, and revenue volatility from a high proportion of product-centric sales.

NetApp's growth strategy is focused on expanding its position in growing parts of the storage market, such as flash storage and private cloud solutions, and by enabling its customers to manage data in hybrid computing environments through its software and storage solutions. But the execution of the strategy has been inconsistent and it will need to be proved in an evolving market. NetApp's strong liquidity, a strong portfolio of storage offerings, and the recent additions in sales capacity position the company well to execute this long-term strategy.

The rapid and widening spread of the coronavirus outbreak, the weak global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

Moody's expects the economic shock caused by the pandemic will erode IT spending and demand for enterprise storage in 2020, but if the pandemic is contained, demand should recover in 2021. Moody's estimates that NetApp's revenues will decline by 3% to 4% in FY '21 and grow by 3% in FY '22. NetApp's leverage will likely remain elevated over the next 12 months but we expect the company to maintain total debt to EBITDA below mid 2x (Moody's adjusted and excluding repatriation tax liability) and free cash flow of about 15% of total adjusted debt over this period. We expect NetApp to maintain its strong operating margins.

The stable ratings outlook reflects Moody's expectation that NetApp will maintain its share in the data storage market and adjusted operating margins (as reported by the company) of more than 20%. Moody's expects a tempered pace of share repurchases in line with the free cash flow generation.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Over the longer term, Moody's could upgrade NetApp's rating if the company generates sustained growth in operating profits, maintains or grows market share, and Moody's expects conservative financial policies such that total total debt to EBITDA is sustained below 1.75x (Moody's adjusted and excluding transition tax liability) with strong liquidity. Conversely, the ratings could be downgraded if operating challenges or an aggressive financial policy results in total debt to EBITDA above 2.5x (Moody's adjusted and excluding transition tax liability) and free cash flow below 10% of total adjusted debt (excluding transition tax liability) on a sustained basis.

Rating action:

Assignments:

..Issuer: NetApp, Inc.

....Senior Unsecured Regular Bond/Debenture, Assigned Baa2

Affirmations:

..Issuer: NetApp, Inc.

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

..Issuer: NetApp, Inc.

....Outlook, Remains Stable

NetApp Inc. is a leading global provider of storage and data management solutions to enterprise and government customers.

The principal methodology used in these ratings was Diversified Technology published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737. 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 agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Raj Joshi
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

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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