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Rating Action:

Moody's raises Freescale's CFR to B3; outlook positive

28 Feb 2011

Approximately $7.7 billion of rated debt affected

New York, February 28, 2011 -- Moody's Investors Service upgraded the Corporate Family (CFR) and Probability of Default (PDR) Ratings of Freescale Semiconductor, Inc. ("Freescale") to B3 from Caa1, upgraded the senior secured debt rating to B1 from B2, upgraded the senior subordinated notes rating to Caa2 from Caa3 and upgraded the Speculative Grade Liquidity Rating to SGL-2 from SGL-3. The rating outlook was changed to positive from stable.

The following is a summary of today's rating actions:

Rating Actions:

Corporate Family Rating to B3 from Caa1

Probability of Default Rating to B3 from Caa1

Speculative Grade Liquidity Rating to SGL-2 from SGL-3

$ 590 Million (originally $750 Million) Senior Secured Revolving Credit Facility due 2012 to B1 (LGD-3, 30%) from B2 (LGD-3, 30%)

$2.237 Billion (originally $2.265 Billion) Senior Secured Extended Maturity Term Loan due 2016 to B1 (LGD-3, 30%) from B2 (LGD-3, 30%)

$ 750 Million 10.125% Senior Secured Notes due 2018 to B1 (LGD-3, 30%) from B2 (LGD-3, 30%)

$1.380 Billion 9.25% Senior Secured Notes due 2018 to B1 (LGD-3, 30%) from B2 (LGD-3, 30%)

$ 764 Million (originally $1.6 Billion) 10.125% Senior Subordinated Notes due 2016 to Caa2 (LGD-6, 93%) from Caa3 (LGD-6, 93%)

Current Ratings:

$ 57 Million (originally $500 Million) Senior Unsecured Floating Rate Notes due 2014 - Caa2 (LGD-5, 80%)

$ 255 Million (originally $1.5 Billion) 9.125%/9.875% Senior Unsecured Toggle Notes due 2014 - Caa2 (LGD-5, 80%)

$ 886 Million (originally $2.35 Billion) 8.875% Senior Unsecured Notes due 2014 - Caa2 (LGD-5, 80%)

$ 750 Million 10.75% Senior Unsecured Notes due 2020 -- Caa2 (LGD-5, 80%)

RATING RATIONALE

The upgrade of Freescale's CFR to B3 reflects the company's strong revenue growth and EBITDA expansion following the robust 2010 recovery in global demand for embedded processing semiconductors across the company's addressable end markets (i.e., automotive, industrial, networking and consumer). It also incorporates our expectation for continued improvement in Freescale's operating performance, financial leverage metrics and free cash flow (FCF) generation over the succeeding 12 months.

The rating revision takes into consideration the company's improvement in factory utilization as a result of increased product volumes, which resulted in greater operating leverage from Freescale's fixed manufacturing cost base. Combined with cost takeouts from the 2009 restructuring, strong design win momentum and a better pricing environment, this has led to expanded gross and operating margins, higher EBITDA and lower financial leverage of 7.7x total debt to EBITDA (Moody's adjusted) compared to 20x at the end of 2009.

The B3 rating is constrained by the company's substantial leverage and thin, albeit improving, interest coverage. Though we anticipate Freescale to generate considerably higher FCF in 2011 ($175-$250 million, which includes payments for purchase licenses) compared to 2010 ($20 million), as a percentage of adjusted debt, we expect FCF generation to be modest in the 3-5% range limiting the company's ability to de-lever from internal sources.

The upgrade of Freescale's Speculative Grade Liquidity Rating to SGL-2 reflects our expectation for meaningful improvement in FCF over the next 12 months combined with $1.0 billion of cash balances. Despite no financial covenants, the SGL rating is constrained by somewhat diminished financial flexibility given that Freescale has $532 million outstanding under its revolver, which has a committed capacity of $590 million.

The positive rating outlook reflects our expectation that Freescale will continue to deleverage through EBITDA expansion, though at a more moderate pace versus last year, supported by solid demand across the company's addressable end markets. The rating outlook also takes into account a potential meaningful deleveraging event via debt reduction from a likely $1.0 billion IPO, announced by the company in February.

The rating could experience upward pressure over the next 12-18 months if Freescale is able to: drive top-line revenue growth via effective R&D investments and product development targeted to a more favorable product mix; and de-lever through EBITDA expansion and improvement in its debt capital structure via debt reduction resulting in under 6.0x total debt to EBITDA (Moody's adjusted) on a sustained basis without impairing its liquidity profile. We note that to the extent an IPO is consummated and proceeds (depending on offering size) allocated to meaningfully reduce debt, the rating could experience upward pressure over a shorter timeframe.

The rating could experience downward pressure to the extent demand for Freescale's core embedded processors were to weaken and earnings were to fall short of expectations or the company's liquidity profile deteriorated, as evidenced by cash balances falling below $1 billion for an extended period.

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

The last rating action was on September 22, 2010 when Moody's assigned a Caa2 rating to the company's $750 million 10.75% senior unsecured notes due 2020.

The principal methodologies used in this rating were Global Semiconductor Industry published in November 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

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 December 31, 2010 were $4.4 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, and confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's raises Freescale's CFR to B3; outlook positive
No Related Data.
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