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:
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
$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,
$ 764 Million (originally $1.6 Billion) 10.125%
Senior Subordinated Notes due 2016 to Caa2 (LGD-6, 93%)
from Caa3 (LGD-6, 93%)
$ 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,
$ 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%)
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
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.
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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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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.
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's raises Freescale's CFR to B3; outlook positive
250 Greenwich Street
New York, NY 10007