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Rating Action:

Moody's downgrades Freescale to B1; outlook negative

06 Dec 2007
Moody's downgrades Freescale to B1; outlook negative

Approximately $10.2 billion of rated debt affected

New York, December 06, 2007 -- Moody's Investors Service lowered the ratings of Freescale Semiconductor, Inc. ("Freescale") and maintained the negative outlook. Moody's also affirmed the speculative grade liquidity rating at SGL-1. This concludes the review for possible downgrade that was initiated on October 24, 2007.

The downgrade to B1 reflects Freescale's weakened credit profile evidenced by continued high financial leverage, reduced capacity utilization levels and lower earnings prospects over the near term. It also incorporates Moody's expectations of: (i) continued weakness in the company's wireless segment, which accounts for roughly one third of Freescale's revenues; (ii) moderating demand in the company's networking segment (approximately 22% of revenues) due to subdued North American wireline and wireless infrastructure spending as the large communications equipment providers continue to delay purchases amid network consolidation; (iii) lackluster revenue growth in the transportation segment; and (iv) long product lead times before semiconductor design win activity transitions to the production phase and contributes to margins and earnings.

While Freescale maintains relatively high gross and operating margins as well as very good liquidity, the negative outlook reflects Moody's concerns regarding the difficult end market and customer conditions, which have negatively impacted EBITDA and free cash flow levels. This has delayed leverage reduction, causing debt and credit protection measures to migrate to levels more comparable to mid single-B rated peers. The negative outlook captures Moody's view that Freescale will be challenged to reduce leverage to under 6.0x EBITDA on a sustained basis over the next twelve months. It also takes into consideration the company's thin interest coverage and reduced financial flexibility, which is magnified by diminished operating cash flow, a limited track record as a standalone company and lack of historical performance during a downturn.

The ratings could experience downward pressure if end market demand weakens further or remains soft for a protracted period resulting in lower-than-anticipated operating cash flow, weak free cash flow generation, Moody's adjusted debt to EBITDA above 6.0x for an extended period and/or erosion of liquidity sources.

The B1 rating recognizes Moody's view that Freescale: (i) maintains strong market leadership positions and a rich product portfolio comprising breadth and depth of technology; (ii) benefits from a diversified revenue base with exposure to the relatively stable and less volatile transportation and networking segments which tend to exhibit slower growth prospects but longer product life cycles than the wireless space; (iii) could benefit from its near-sole source provider status for baseband and power management ICs in Motorola's recent line-up of handsets and its status as a RF transceiver supplier in newly-launched mobile devices from both RIM and Motorola, to the extent consumer uptake materializes; (iv) is positioned to benefit longer-term from increasing content in existing mobile OEM customer platforms as design solicitations are won (especially in 3G) and shipments ramp; (v) has considerably improved its operating efficiency since the Motorola spin-off and has taken steps to reduce operating costs in the challenging business environment; and (vi) has a defensive operating model that allows it to quickly reduce expenses and capex in response to weak market conditions.

The SGL-1 rating reflects the company's very good liquidity in spite of diminished internal cash generation. LTM free cash flow has declined to levels well-below Moody's expectations. Over the next twelve months, Moody's anticipates free cash flow (excluding asset sales) to remain below 2% of total debt and EBITDA interest coverage to remain under 2.0x. We expect this to be driven by: (i) weak operating cash generation given our expectations of continued softness in Freescale's addressable end markets; and (ii) sizeable interest payments (approximately $800 million per year). The company's depressed cash flow is offset by strong balance sheet liquidity consisting of cash and short-term investments totaling $772 million (as of September 2007) and potential cash proceeds of $200 -- $300 million from asset sales. The SGL-1 rating also incorporates the company's ability to suspend roughly $137 million of cash interest payments through the use of a PIK toggle structure on $1.5 billion of senior notes. However, Moody's notes that continued weakness in internal cash generation could force the company to draw down on its cash balance and/or credit facilities, which would place downward pressure on the liquidity rating. Presently, external liquidity remains solid through an undrawn $750 million revolver that expires in 2012. The bank credit facilities contain a financial covenant that subjects Freescale to a first-lien secured debt incurrence test. The company currently has sufficient headroom under this covenant and full access to the revolver.

The following ratings were downgraded:

Corporate Family Rating (New) to B1 from Ba3

Probability of Default Rating to B1 from Ba3

$ 750 Million Senior Secured Revolving Credit Facility due 2012 to Ba1 (LGD-2, 17%) from Baa3 (LGD-2, 16%)

$3.50 Billion Senior Secured Term Loan B Facility due 2013 to Ba1 (LGD-2, 17%) from Baa3 (LGD-2, 16%)

$2.35 Billion Senior Unsecured Notes due 2014 to B2 (LGD-4, 65%) from B1 (LGD-4, 63%)

$ 500 Million Senior Unsecured Floating Rate Notes due 2014 to B2 (LGD-4, 65%) from B1 (LGD-4, 63%)

$1.50 Billion Senior Unsecured Toggle Notes due 2014 to B2 (LGD-4, 65%) from B1 (LGD-4, 63%)

$1.60 Billion Senior Subordinated Unsecured Notes due 2016 to B3 (LGD-6, 92%) from B2 (LGD-6, 91%)

The following rating was affirmed:

Speculative Grade Liquidity Rating - SGL-1

Moody's subscribers can find additional information in the Freescale Credit Opinion published on Moodys.com.

Headquartered in Austin, TX, Freescale Semiconductor, Inc. designs and manufactures embedded semiconductors for the transportation, networking and wireless markets. The company was separated from Motorola via IPO in July 2004 and taken private in a leveraged buyout in December 2006. Revenues for the twelve months ended September 28, 2007 (LTM) were $5.8 billion.

New York
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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