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24 Oct 2007
Moody's places Freescale's ratings under review for possible downgrade
Approximately $10.2 billion of rated debt affected
New York, October 24, 2007 -- Moody's Investors Service has placed the ratings of Freescale Semiconductor,
Inc. ("Freescale") under review for possible downgrade.
Moody's noted that the review was prompted by Freescale's
recent third quarter results, which continue to demonstrate weakness
in the company's wireless segment (roughly 32% of total revenues).
Wireless revenues were down 13.3% compared to the 2006 third
quarter although up 33% sequentially from the recent low point
in the 2007 second quarter. Operating performance weakness stems
principally from reduced wireless semiconductor shipments as a result
of lower cellular demand at its former parent and largest customer,
Motorola, which accounts for approximately 20 - 25%
of Freescale's revenues. The review also considers the noticeable
softening in Freescale's networking segment (approximately 22%
of revenues) which witnessed a 15% revenue drop compared to the
same period last year. Although capital spending in Asian markets
remains robust, North American wireline and wireless infrastructure
spending has remained subdued as the large communications equipment providers
have delayed purchases amid network consolidation and slowing broadband
subscriber growth. Finally, the review expresses concerns
about a continuation of Freescale's weakened credit profile and
reduced utilization levels should the company's addressable semiconductor
markets experience a protracted period of softening demand.
With Motorola's continued woes, Moody's believes Freescale
will be challenged to expand its wireless customer base in a timely manner
to alleviate reduced wireless semiconductor volumes given the long product
development cycle required before design win activity transitions to the
production phase. Additionally, the ongoing softness in the
Networking and Computing Systems segment is a credit negative as it does
not afford the company a strong ability to offset performance deterioration
in the Wireless and Mobile Solutions segment, especially since Transportation
and Standard Products segment growth has been flat to slightly down year
over year. The review will focus on the negative impact on Freescale's
profitability, cash flow generation and financial leverage as well
as steps the company is taking to improve revenue growth in key market
segments, alleviate operating performance weakness and enhance liquidity.
When the Ba3 corporate family rating was assigned in November 2006,
Moody's noted that it was predicated on the expectation that Freescale
would reduce leverage over the near-to-intermediate term
via rising EBITDA and strong levels of free cash flow generation.
Due to lower than expected operating cash flow, as of September
2007, the company's total debt to EBITDA metric has migrated
above 6.0x (Moody's adjusted), which is more indicative
of single-B rated peers. Although EBITDA levels have modestly
improved on a sequential basis since the first quarter shortfall,
Moody's does not expect operating cash flow to materially recover
in the fourth quarter or free cash flow generation to meaningfully effect
financial leverage reduction to previously expected levels.
The following ratings/assessments were placed under review for possible
downgrade:
Corporate Family Rating (New) -- Ba3
Probability of Default Rating -- Ba3
$ 750 Million Senior Secured Revolving Credit Facility due 2012
-- Baa3 (LGD-2, 16%)
$3.50 Billion Senior Secured Term Loan B Facility due 2013
-- Baa3 (LGD-2, 16%)
$2.85 Billion Senior Unsecured Notes due 2014 -- B1
(LGD-4, 63%)
$1.50 Billion Senior Unsecured Toggle Notes due 2014 --
B1 (LGD-4, 63%)
$1.60 Billion Senior Subordinated Unsecured Notes due 2016
-- B2 (LGD-6, 91%)
The Speculative Grade Liquidity Rating is SGL-1. The liquidity
rating will be reviewed upon conclusion of the review for possible downgrade.
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
30, 2007 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
No Related Data.
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