Approximately $195 million of rated debt affected
New York, January 19, 2011 -- Moody's Investors Service upgraded Quantum Corporation's ("Quantum")
Corporate Family (CFR) and Probability of Default (PDR) ratings to B2
from B3 and revised the ratings on the senior secured debt obligations
to Ba3 from B1. The rating outlook is positive.
The following ratings were upgraded:
Corporate Family Rating to B2 from B3
Probability of Default Rating to B2 from B3
$50 Million Senior Secured Revolver due July 2012 to Ba3 (LGD-2,
26%) from B1 (LGD-3, 30%)
$145 Million (originally $400 Million) Senior Secured First
Lien Term Loan due July 2014 to Ba3 (LGD-2, 26%) from
B1 (LGD-3, 30%)
The upgrade of the CFR to B2 reflects Quantum's improved operating
performance, which stems from strong customer adoption and growth
of its higher margin branded disk-based systems and software products,
which we expect to continue in FY12. Over the past 15 months,
Quantum refreshed its entire product portfolio which has led to good execution
on time-to-market transition and delivery of new products
compared to its principal rivals in the deduplication segment of the data
storage market. Quantum has also generated more business through
independent value-added resellers as a result of new channel and
partnering opportunities that emerged following recent M&A activity
in the industry.
The rating revision also considers the company's continued focus
on debt reduction and capital structure improvement. Following
the July 2007 incurrence of the $400 million term loan facility,
which was used to repay borrowings associated with the 2006 ADIC acquisition,
Quantum has used its free cash flow (FCF) to retire $255 million
of this debt obligation. The company recently refinanced the higher
cost EMC loan (roughly $122 million outstanding as of September
2010) with lower coupon convertible notes ($135 million issuance),
which will result in lower interest expense. When combined with
our anticipation for expanded EBITDA over the next 12 -- 18 months,
we expect financial leverage (i.e., adjusted total
debt to EBITDA) to decline to at least 3.0x from 4.2x at
present, and adjusted EBIT to interest expense to increase above
2.0x from 1.1x.
Notwithstanding these positive rating factors, the B2 CFR also captures
offsetting attributes which include the cyclical and competitive data
storage market that Quantum operates in, which is subject to increasing
consolidation and significant pricing pressures; Quantum's
exposure to the mature and more commoditized tape automation storage segment;
and the company's reliance on large OEM customers that are also
competitors, albeit minimized as Quantum's branded business
Quantum maintains good liquidity supported by unrestricted cash balances
of $96 million plus $33 million of LTM FCF generation as
of September 30, 2010. Additionally, as of the recent
quarter approximately $49 million was available (net of letters
of credit outstanding) under its $50 million senior secured credit
facility expiring July 2012. Over the next twelve months,
Moody's expects Quantum to fund its operations from internal cash
sources, generate positive FCF in the range of $30 -
$60 million and remain in compliance with the maintenance covenants
in its bank credit facility.
The positive outlook reflects our expectation for continued improvement
in margins and operating cash flow as a result of a favorable mix shift
to branded products, strong customer adoption for its new DXi product
families and benefits from prior cost reduction initiatives, plus
continued application of FCF towards debt reduction leading to enhanced
credit protection measures.
Ratings could experience upward pressure to the extent Quantum were to
further increase scale, improve customer diversification,
and continue to exhibit strong organic growth in its branded (non-OEM)
higher margin disk-based storage products relative to its commoditized
products. Ratings could also migrate higher if the company were
to reduce financial leverage such that its ratio of Moody's adjusted total
debt to EBITDA declined to under 3.0x on a sustained basis.
Quantum's ratings or outlook could be downgraded if there was a reversal
in the company's positive operating and cash flow trends resulting
in deterioration in profitability, significantly weaker liquidity
and/or financial leverage above 4.5x Moody's adjusted total debt
to EBITDA on a sustained basis.
Moody's subscribers can find additional information in the Quantum
Credit Opinion published on www.moodys.com.
The last rating action was on July 6, 2009 when Moody's upgraded
Quantum's CFR to B3 with a positive outlook from Caa1.
The principal methodologies used in the rating were Global Technology
Hardware published in September 2010, and Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Headquartered in San Jose, California, Quantum, is a
leading global data storage company offering a broad portfolio of disk-based
deduplication/replication, tape and software products for backup,
disaster recovery and archiving under the Quantum brand name and the names
of various original equipment manufacturer (OEM) customers. Deduplication
reduces the amount of storage required for retaining enterprise data by
identifying redundant files as they are being stored. The company
offers its products and services on a direct basis as well as through
various channels via a broad network of IT distributors, value-added
resellers (VARs), OEMs and other suppliers. Total revenues
and EBITDA (Moody's adjusted) for the twelve months ended September
30, 2010 (LTM) were $677 million and $89 million,
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.
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.
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's raises Quantum's CFR to B2, senior secured debt to Ba3; outlook remains positive
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