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21 Oct 2010
Approximately $425 million of debt rated
New York, October 21, 2010 -- Moody's Investors Service assigned to Microsemi Corporation ("Microsemi")
a first-time Corporate Family Rating (CFR) of Ba1, Probability
of Default Rating (PDR) of Ba2 and Speculative Grade Liquidity rating
of SGL-1. The rating outlook is stable. Concurrently,
Moody's assigned a Ba1 rating to Microsemi's proposed credit
facilities consisting of a $375 million 7-year senior secured
term loan and $50 million 5-year senior secured revolver.
Term loan proceeds will be used to partially finance the proposed acquisition
of Actel Corporation ("Actel") for roughly $595 million,
excluding transaction fees and expenses ($430 million net of Actel's
closing cash balance). Actel is a supplier of low-power,
mixed-signal, and radiation-tolerant field programmable
gate arrays (FPGAs) serving the military/aerospace, industrial,
communication and consumer markets with annual revenues of roughly $200
million. The assigned ratings are subject to review of final documentation
and no material change in the terms and conditions of the transaction
as advised to Moody's.
The following is a summary of today's rating actions:
Corporate Family Rating -- Ba1
Probability of Default Rating -- Ba2
$ 50 Million Senior Secured Revolver due 2015 -- Ba1 (LGD-3,
$375 Million Senior Secured Term Loan due 2017 -- Ba1 (LGD-3,
Speculative Grade Liquidity Rating - SGL-1
Microsemi's Ba1 CFR reflects the company's strong market position
across its high-performance analog (HPA) and mixed-signal
portfolio, plus the strength of its high-margin business
model and robust cash flow generation owing to the favorable characteristics
of the analog semiconductor industry that support stronger and more stable
operating performance compared to non-analog and more commoditized
semiconductor peers. It also recognizes the company's broad
product, geographic, customer and end market diversification
and sticky customer base driven by Microsemi's differentiated,
high-reliability products. The CFR acknowledges Microsemi's
favorable business mix in which approximately 55% of pro forma
combined revenues are derived from less volatile aerospace and defense
markets (high entry barriers); de-emphasis on more cyclical
consumer electronics and communications markets (require scale to be competitive);
and increasing focus on fast-growing industrial and medical markets
At the same time, the Ba1 CFR is constrained by Microsemi's
small scale compared to its semiconductor peers. It also considers
the company's exposure to the inherently volatile and cyclical semiconductor
sector and the ongoing challenges to sustain a pipeline of design wins
against strong competitors. Though integration risk associated
with the Actel purchase is considered low, the rating factors possible
delay in achieving cost synergies.
The CFR is supported by our expectation that Microsemi will maintain a
highly variable cost structure, good operating expense discipline
through business cycles and generate solid free cash flow (FCF) given
its high-margin profile and low capital intensity. Though
the Ba1 rating reflects the company's moderate leverage, we
also expect Microsemi to quickly reduce leverage below the current pro
forma level of 2.9x total debt to LTM EBITDA (Moody's adjusted).
The Ba1 rating incorporates our expectation that Microsemi will apply
a sizable amount of FCF towards debt reduction over the next 12-18
months, refrain from large stock purchases and dividend payments,
and make small-to-mid-sized acquisitions to support
its growth strategy.
The stable rating outlook reflects the company's exposure to the
relatively more stable aerospace & defense (government supplier) sectors,
focus on long product life-cycle HPA semiconductors, well-diversified
IC portfolio in which Microsemi is the only (or principal) supplier,
and our expectation the company will continue to move up the value chain
by increasing board-level and system-level IC content in
its customers' electronic system platforms.
The SGL-1 rating recognizes Microsemi's very good liquidity
from internal sources to meet its working capital and capex requirements
over the next twelve months. This is based on roughly $80
million of pro forma cash balances (after Actel closing) and our expectation
of $80-$100 million of FCF generation over the next
year. We expect relatively strong conversion of EBITDA to FCF owing
to the low working capital and capex needs of Microsemi's 'fab-lite'
analog model. External liquidity is supported by full access to
an undrawn $50 million revolver (the revolver will be drawn briefly
at closing and repaid shortly thereafter to bridge access to Actel's
cash). Further supporting Microsemi's overall liquidity is
our expectation of significant headroom for covenant compliance over the
It is unlikely Microsemi's ratings could migrate higher over the
near-to-intermediate term. However, over the
long-term ratings could experience upward pressure if the company
were to continue to demonstrate good execution of its business model resulting
in revenue and operating margin growth to a higher sustainable range implying
strength in technological leadership, continued migration up the
value chain leading to a favorable shift in product mix and share gains
across key end markets. Ratings could also move higher if Microsemi
were to demonstrate higher EBITDA, strong FCF generation,
and lower financial leverage and avoid sizable debt-funded acquisitions.
Elimination of secured debt from the capital structure could also prompt
a ratings upgrade.
Ratings could experience downward pressure if Microsemi experienced sustained
market share erosion, revenue contraction or ASP pressure as a result
of loss of technological leadership, as well as reduced profitability
resulting in adjusted EBITA margins below 10% on a sustained basis.
A more aggressive use of financial policies and leverage such that adjusted
FCF to debt declined below 15% or adjusted total debt to EBITDA
exceeded 3.5x for an extended episode could also result in negative
Moody's subscribers can find additional information in the Microsemi
Credit Opinion published on www.moodys.com.
The principal methodologies used in rating Microsemi were Global Semiconductor
Industry published in November 2009, and Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009. Other methodologies and
factors that may have been considered in the process of rating this issuer
can also be found on Moody's website.
Microsemi, headquartered in Irvine, CA, is a global
supplier of high-performance analog (HPA) and mixed signal integrated
circuits as well as high-reliability discrete semiconductors targeted
to the security/defense, aerospace, enterprise/commercial
and industrial/alternative energy end markets. Pro forma for the
acquisition of Actel, combined revenues for the twelve months ended
June 27, 2010 (LTM) were approximately $684 million.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service's information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns first-time Ba1 CFR to Microsemi; outlook stable
250 Greenwich Street
New York, NY 10007
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