Hong Kong, February 14, 2014 -- Moody's Investors Service has downgraded Global A&T Electronics'
(GATE) corporate family and first lien senior secured ratings to Caa3
from Caa1.
The ratings outlook is negative.
RATINGS RATIONALE
The rating action follows confirmation that a group of bondholders (the
plaintiffs) filed a lawsuit against GATE, UTAC (unrated) and its
controlling shareholders. Under the summons, the plaintiffs
seek to unwind the debt exchange executed in September 2013. That
exchange allowed second lien note holders to effectively swap their notes
into first lien priority notes and rank pari passu with the existing $625
million first lien senior secured bondholders.
"The filing with the New York Supreme Court on 10 February formalizes
the dispute. While we recognize that the outcome of the dispute
remains uncertain, we believe there is a high likelihood it will
affect the company's fundamental operating performance and liquidity
position," says Annalisa Di Chiara, a Moody's
Vice President and Senior Analyst.
"In particular, the dispute heightens credit risks and challenges
GATE's revenue growth, cash flow generation, liquidity
and ability to access to capital markets. Moreover, should
a default occur, we believe the prospect of recovery of full principal
and interest will be low for first lien bondholders," adds
Di Chiara.
In the summons, the plaintiffs assert (1) breach of contract of
the intercreditor agreement dated as of October 30, 2007 and amended
as of February 7, 2013, (2) breach of the implied covenants
of good faith and fair dealing and (3) fraud and fraudulent inducement
against GATE for its misrepresentations and omissions on which certain
bondholders relied in purchasing the $625 million first lien senior
secured bonds. GATE has 20 days to respond to the complaint.
The plaintiffs are seeking to unwind the exchange so as to restore creditors
to their original priority of claim positions. This would mean
around $500 million of notes would be restored to their second
lien position and original maturity of November 2015.
"Unwinding the debt exchange would create a high degree of refinancing
risk the over the next 18 months, considerably increasing the likelihood
of default thereafter. Considering GATE's already weak operating
performance, a potentially tarnished reputation in the capital markets
due to the dispute, would challenge its ability to successfully
refinance the $500 million notes," says Di Chiara.
A portion of the plaintiffs has also stipulated that they are entitled
to rescind their purchase of the senior secured notes as a result of the
fraudulent inducement. If allowed, this would require the
company to tender for the original price of the bonds plus costs,
which would have a significant adverse impact on the company's liquidity
position.
In addition, should these plaintiffs be successful, bondholder's
not participating in the lawsuit may also need to be given the opportunity
to tender their bonds.
Either scenario -- unwinding of the exchange or tender of a portion
or all of the bonds -- will considerably increase the likelihood
of GATE's default.
Moody's estimates the company has around $200 million of
cash on its balance sheet. With over $150 million in interest
and capex obligations in 2014, there is little room to absorb revenue
shortfalls, higher legal fees or substantial cash payouts to bondholders
to resolve the dispute.
The negative outlook reflects ongoing pressure on GATE's operating performance
and the uncertainty regarding the outcome of the dispute with some if
its bondholders which could pose material liquidity pressures potentially
resulting in a default situation. It also considers the company's
weak operating performance expected in 2014.
A rating upgrade is unlikely in the near term, given the negative
outlook. However, the outlook could revert to stable should
the bondholder dispute be resolved with limited adverse effect on the
company's operating performance, including market share, revenue
growth, liquidity and cash flows.
Downward pressure would emerge if (1) an event of default is declared
and an acceleration of up to $1.1 billion in debt is triggered
or (2) the exchange transaction unwinds, creating significant near-term
default risk.
The principal methodology used in this rating was the Global Semiconductor
Industry Methodology published in December 2012. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
GATE is a leading provider of semiconductor assembly and test services
operating under the name UTAC with manufacturing facilities in Singapore,
Taiwan, Thailand and China. UTAC was privatized through a
leverage buy-out by a private equity group led by TPG Capital (47.7%)
and Affinity Equity Partners (47.7%) in October 2007.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Annalisa Di Chiara
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's downgrades Global A&T Electronics to Caa3; Outlook Negative
