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Related Issuers
Rating Action:

Moody's raises Quantum's CFR to B2, senior secured debt to Ba3; outlook remains positive

19 Jan 2011

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%)

RATINGS RATIONALE

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 expands.

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, respectively.

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
Andris G. Kalnins
Senior Vice President
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 Quantum's CFR to B2, senior secured debt to Ba3; outlook remains positive
No Related Data.
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