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Rating Action:

Moody's downgrades MACOM's CFR to B2; changes outlook to stable

07 Aug 2018

New York, August 07, 2018 -- Moody's Investors Service ("Moody's") downgraded MACOM Technology Solutions Holdings, Inc.'s ("MACOM") Corporate Family Rating ("CFR") to B2 from Ba3, Probability of Default Rating ("PDR") to B2-PD from Ba3-PD, and senior secured credit facilities rating to B2 from Ba3. Moody's also downgraded the Speculative Grade Liquidity ("SGL") rating to SGL-3 from SGL-2. The rating outlook was changed to stable from negative.

The downgrade of the CFR by two notches reflects weaker than expected financial performance and Moody's expectation for EBITDA margins and financial leverage metrics to remain weak over the next 12 to 18 months. Moody's expects MACOM's recovery from both the slowdown of Chinese communications network infrastructure spending and the exit from the LR4 module market will remain slow, weighing on MACOM's revenues and margins in its Telecom segment, such that debt to EBITDA (Moody's adjusted) remains above 6x over the next year.

Downgrades:

..MACOM Technology Solutions Holdings, Inc.

.Corporate Family Rating, downgraded to B2 from Ba3

.Probability of Default Rating, downgraded to B2-PD from Ba3-PD

.Senior Secured Revolving Credit Facility, downgraded to B2 (LGD4) from Ba3 (LGD4)

.Senior Secured Term Loan B, downgraded to B2 (LGD4) from Ba3 (LGD4)

.Speculative Grade Liquidity rating, downgraded to SGL-3 from SGL-2

Outlook Actions:

..MACOM Technology Solutions Holdings, Inc.

.The outlook was changed to stable from negative

MACOM's credit profile is constrained as the company has not yet fully recovered from the revenue and cash flow decline following the slowdown in Chinese telecom carrier spending on optical network construction in calendar year 2017, the rapid decline in the LR4 optical interconnect module market as lower priced CWDM4 modules captured the market in late 2017 and early 2018, and MACOM's challenges in producing 25-gig lasers. Excess inventory in the distribution channel following the China telecom spending slowdown has largely been corrected, MACOM exited the LR4 business in May 2018, and MACOM has greatly improved the yields on the production of 25-gig lasers. Still, new growth drivers, including the ramp of spending by Chinese telecom carriers on 5G networks and the transition of data centers to the 100-gig standard, both of which should support rapid revenue growth, are not expected to materially impact MACOM until the end of the first calendar quarter of 2019.

Until then, Moody's believes that MACOM will consume cash at a rate of about $10 million per quarter. Moody's believes that MACOM has adequate liquidity, including cash and short term investments ($183 million at June 29, 2018) and up to $56 million of available borrowing capacity under its revolver, to support cash consumption until these demand drivers emerge and MACOM begins to generate materially positive FCF. The rating also reflects the customer concentration (Huawei Technologies accounted for 10% of FYE 2017 revenues) and the concentrated ownership structure, which may allow the company to follow a more aggressive financial policy over time.

The B2 CFR reflects MACOM's small scale as a niche player in the analog semiconductor market, which tends to have longer product life cycles than the overall semiconductor market, generally providing some stability to revenues. MACOM also benefits from valuable intellectual property, which helps the company to maintain gross margins generally in the upper forties to low fifties percent level (Moody's adjusted) over time.

The stable outlook reflects Moody's expectation that MACOM will return to revenue and EBITDA growth in the next few quarters. Moody's expects that through debt repayment and increasing FCF generation on EBITDA growth that FCF to debt (Moody's adjusted) will improve toward the mid-single digits percent level over the next 12 to 18 months.

Although unlikely in the near-term, the ratings could be upgraded if MACOM rapidly recovers with revenue growth sustained at least in the upper single digits percent with improving gross and EBITDA margins (Moody's adjusted). Moody's would expect for FCF to debt to be sustained at least in the upper single digits percent level (Moody's adjusted).

The ratings could be downgraded if the liquidity position becomes pressured. The ratings could also be downgraded if the EBITDA margin (Moody's adjusted) is not on course to rise toward the mid-teens percent level or if Moody's believes that FCF to debt (Moody's adjusted) will remain below the mid-single digits percent level.

The senior secured credit facilities' B2 rating, the same as the corporate family rating, reflects the collateral (lien on all assets and capital stock of domestic subsidiaries), MACOM's single-class debt structure, with senior secured debt accounting for the entire debt capital structure, and the limited cushion of unsecured liabilities.

The Speculative Grade Liquidity rating of SGL-3 reflects MACOM's adequate liquidity. This is based on Moody's expectation that MACOM will consume cash over the next two quarters and will generate less than $50 million of FCF over the next year. Although MACOM has an unused $160 million senior secured revolver, Moody's believes that MACOM currently would only be able to draw $56 million of the revolver, since Moody's believes that the total net leverage ratio (as defined in the credit agreement), which is tested when revolver usage exceeds 35%, would exceed the maximum permitted level given the currently depressed EBITDA. Still, Moody's expects that MACOM will maintain a balance of cash and short term marketable investments of at least $125 million.

MACOM Technology Solutions Holdings, Inc.("MACOM"), based in Lowell, Massachusetts, produces high performance analog communication semiconductor products across the radiofrequency spectrum, including integrated circuits, diodes, power amplifiers and transistors, that are used in various end-market applications, including cellular telephony backhaul, military and commercial RADAR, car navigation systems, and cable TV set-top boxes. MACOM utilizes a fab-lite manufacturing model, outsourcing a large portion of its semiconductor chip manufacturing, which limits capital expenditures.

The principal methodology used in this rating was Semiconductor Industry published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 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.

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.

Terrence Dennehy
Vice President - Senior Analyst
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.
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