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27 Jan 2009
Approximately $10.2 billion of rated debt affected
New York, January 27, 2009 -- Moody's Investors Service downgraded the corporate family (to Caa1)
and long-term debt ratings (senior secured to B1; senior notes
to Caa2; and senior subordinated notes to Caa3) of Freescale Semiconductor,
Inc. ("Freescale"). Simultaneously, Moody's
downgraded the speculative grade liquidity rating to SGL-3 from
SGL-1. The outlook remains negative.
The rating actions were prompted by prospects of continued materially
weaker sales in the global automotive sector, an end market where
Freescale has significant customer exposure, as well as reduced
earnings contribution from a likely separation or downsizing of its cellular
business. Combined with Moody's expectation that revenues will
remain depressed through 2009, Moody's believes that Freescale's
profitability will remain weak and free cash flow (FCF) will be negative,
placing additional stress on the company's liquidity. While the
company has adequate liquidity to service its funding needs over the next
12 months, Moody's is concerned that Freescale's highly
leveraged capital structure may prove unsustainable if profitability were
to deteriorate for an extended period, which could prompt the company
to explore a restructuring of some or all of its debt.
The following ratings were downgraded:
Corporate Family Rating (New) to Caa1 from B1
Probability of Default Rating to Caa1 from B1
$ 750 Million Senior Secured Revolving Credit Facility due 2012
to B1 (LGD-2, 17%) from Ba1 (LGD-2, 17%)
$3.50 Billion Senior Secured Term Loan B Facility due 2013
to B1 (LGD-2, 17%) from Ba1 (LGD-2, 17%)
$2.35 Billion Senior Unsecured Notes due 2014 to Caa2 (LGD-4,
65%) from B2 (LGD-4, 65%)
$ 500 Million Senior Unsecured Floating Rate Notes due 2014 to
Caa2 (LGD-4, 65%) from B2 (LGD-4, 65%)
$1.50 Billion Senior Unsecured Toggle Notes due 2014 to
Caa2 (LGD-4, 65%) from B2 (LGD-4, 65%)
$1.60 Billion Senior Subordinated Unsecured Notes due 2016
to Caa3 (LGD-6, 92%) from B3 (LGD-6,
Speculative Grade Liquidity Rating to SGL- 3 from SGL-1
In a credit opinion dated August 5, 2008, Moody's stated that
"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 FCF generation, Moody's adjusted
debt to EBITDA above 6.0x for an extended period and/or reduction
in liquidity". Since then, two negative factors have unfolded,
prompting the downgrades.
First, there is recent evidence that weakness in U.S.
automotive segment, which has been apparent for some time,
has spread to the European and Asian automakers resulting in a severe
global contraction in automotive sales volumes, which is expected
to negatively affect the company. Given that approximately 30%
of Freescale's revenues are exposed to automotive OEMs and suppliers,
the company is vulnerable to declining vehicle demand, which Moody's
expects to continue in 2009, resulting in lower operating profitability.
Second, the impact of the likely sale, restructuring and/or
transformation of the cellular chipset business on Freescale's earnings
and balance sheet is viewed as a negative rating driver. Though
Moody's believes the company will be better able to allocate R&D and
capital resources more effectively across its remaining core businesses,
a significantly downsized mobile business would result in diminished revenues
and EBITDA, a smaller asset base, temporarily higher fixed
cost absorption and additional expenses associated with discontinued or
reduced operations. Additionally, Moody's expects EBITDA
contribution from the remaining core businesses to remain weak over the
next year due to the deteriorating macro-economic environment.
Finally, to the extent the company is able to sell all or part of
its wireless business, it is likely that net sales proceeds would
not be great enough to materially reduce Freescale's $9.6
billion debt load (Moody's adjusted) given depressed asset values
in the current environment.
As a consequence of these issues, Moody's anticipates Freescale
will experience a steep decline in revenues, lower margins and negative
FCF in 2009, resulting in weaker credit protection measures and
Moody's adjusted debt to EBITDA well above 6.0x for an extended
The downgrade of the speculative grade liquidity rating to SGL-3
(reflecting adequate liquidity) is based on our expectations of materially
weaker internal cash generation and negative FCF over the next 12 months,
resulting in erosion in Freescale's cash balances. It also
considers the company's reduced availability under its $750
million revolver following a $460 million drawdown in late October
2008 and $184 million drawdown in January 2009. We note
that Freescale has $46 million of availability under its revolver
since the $60 million commitment from Lehman Commercial Paper,
Inc. is not expected to be honored following that entity's
filing for bankruptcy protection in early October 2008. Though
liquidity is supplemented by sizeable cash and short-term investments
totaling $1.4 billion as of December 2008 ($1.6
billion pro forma for the recent revolver draw), no debt maturities
over the next three years and no financial covenants, financial
flexibility has markedly diminished. Freescale recently elected
to exercise the PIK feature on the $1.5 billion toggle notes
for the June 15, 2009 interest payment. With internal cash
generation anticipated to remain weak, Moody's expects the
company to continue to use the PIK feature over the next year, saving
roughly $137 million of annual cash interest expense.
The negative rating outlook reflects expectations of continued margin
pressure and profitability weakness given the difficult end market and
The rating could experience additional downward pressure to the extent
demand for Freescale's embedded processors were to weaken further
and earnings were to fall short of expectations or liquidity experiences
additional restriction. The negative rating outlook could be stabilized
over time if Freescale demonstrates a sustained return to improved profitability
and positive FCF generation, plus de-leveraging through expanded
EBITDA or debt reduction without impairing its liquidity profile.
The last rating action was on December 6, 2007, when Moody's
lowered Freescale's CFR to B1 and maintained the negative outlook.
Freescale's ratings were assigned by evaluating factors we believe are
relevant to the credit profile of the issuer, such as: (i)
the business risk and competitive position of the company versus others
within the industry; (ii) the capital structure and financial risk
of the company; (iii) the projected performance of the company over
the near-to-intermediate term; and (iv) management's
track record and tolerance for risk. These attributes were compared
against other issuers both within and outside of Freescale's core industry
and Freescale's ratings are believed to be comparable to those of other
issuers of similar credit risk. 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 and EBITDA (Moody's adjusted) for the
twelve months ended September 30, 2008 were $5.8 billion
and $1.6 billion, respectively.
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's lowers Freescale's CFR to Caa1, term loan to B1; outlook negative
Alexandra S. Parker
Corporate Finance Group
Moody's Investors Service
No Related Data.
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