Approximately $500 million of new debt rated
New York, September 22, 2010 -- Moody's Investors Service assigned a Caa2 rating to Freescale Semiconductor,
Inc.'s proposed $500 million issuance of senior unsecured
notes due 2020. The rating outlook is stable. Net proceeds
are expected to be used to repay a portion of the $2.0 billion
of aggregate senior unsecured debt maturing 2014 ($1.269
billion senior unsecured notes; $179 million senior unsecured
floating rate notes; and $537 million senior unsecured toggle
notes). The assigned ratings are subject to review of final documentation
and no material change in the terms and conditions of the transaction
as advised to Moody's. We expect to withdraw ratings on any
of the 2014 tranches that are retired in their entirety.
The following is a summary of today's rating actions and Moody's
current ratings for Freescale:
$500 Million Senior Unsecured Notes due 2020 -- Caa2
Corporate Family Rating (New) -- Caa1
Probability of Default Rating - Caa1
$ 587 Million (originally $750 Million) Senior Secured Revolving
Credit Facility due 2012 - B2 (LGD-3, 30%)
$2.251 Billion (originally $2.265 Billion)
Senior Secured Extended Maturity Term Loan due 2016 - B2 (LGD-3,
$ 750 Million 10.125% Senior Secured Notes due 2018
-- B2 (LGD-3, 30%)
$1.380 Billion 9.25% Senior Secured Notes
due 2018 -- B2 (LGD-3, 30%)
$1.269 Billion (originally $2.35 Billion)
8.875% Senior Unsecured Notes due 2014 - Caa2 (LGD-5,
$ 179 Million (originally $500 Million) Senior Unsecured
Floating Rate Notes due 2014 - Caa2 (LGD-5, 80%)
$ 537 Million (originally $1.5 Billion) 9.125%/9.875%
Senior Unsecured Toggle Notes due 2014 - Caa2 (LGD-5,
$ 764 Million (originally $1.6 Billion) 10.125%
Senior Subordinated Unsecured Notes due 2016 - Caa3 (LGD-6,
Speculative Grade Liquidity Rating - SGL- 3
Though interest expense will increase, Moody's views constructively
this latest refinancing and extension of Freescale's approximate
$7.7 billion of LBO debt. The current transaction
somewhat alleviates the concentration of debt maturing in 2014,
given Freescale's limited ability to de-lever from internal
sources. Following this refinancing, Freescale will have
roughly $1.5 billion of debt due in 2014, its second
closest maturity following the company's revolver ($532 million
outstanding) due in 2012. We view this transaction as a continuation
of Freescale's effort to proactively improve its capital structure
and create a more evenly distributed debt maturity profile. The
maturity extension also buys the company additional time to transform
new product categories into meaningful contributors of profitable growth.
In February, Freescale amended its credit agreement to extend the
maturity date to 2016 on $2.265 billion of term loan B facility
debt and issued $750 million of 10.125% senior secured
notes due 2018. Approximately $112 million was used to pay
down a portion of the revolver and $634 million was used to pay
down the non-extended portion of the term loan B facility due 2013.
In April, the company issued $1.38 billion of 9.25%
senior secured notes due 2018, which was used to retire the remaining
$472 million of the secured term loan B facility and the remaining
$917 million of the secured incremental term loan due 2014.
Freescale's Caa1 CFR continues to be constrained by the company's
substantial leverage and thin interest coverage, as well as our
expectation of very modest free cash flow (FCF) generation relative to
its large debt load. The CFR also reflects a significantly reduced
earnings contribution from the company's cellular segment,
offset by modest earnings from Freescale's recent entrée
into higher growth sub-segments within consumer and industrial
markets. Since Freescale is exposed to the inherently cyclical
and volatile semiconductor industry, we remain concerned that Freescale's
highly leveraged capital structure may prove unsustainable if cash flows
were to deteriorate for an extended period.
The rating is supported by our view that Freescale maintains strong market
leadership positions and a rich product portfolio characterized by technological
breadth; its somewhat favorable revenue diversification across products,
geographies and customers; its refocused R&D program to drive
future revenue growth in extended market segments; and its "asset-light"
model that enables it to reduce expenses and capex in response to weak
The stable rating outlook reflects our expectation that following the
severe downturn in profits and cash flow caused by the recession,
the company's operating performance will continue to improve as
a result of the recovery in the global demand environment and Freescale's
progress in eliminating $700 million of annualized costs (full
$800 million cost savings expected during 2010). The stable
outlook incorporates our belief that semiconductor end market demand will
demonstrate growth in 2010/11 and Freescale's revenue growth will
be in line with its addressable markets.
The rating could experience upward pressure if Freescale demonstrates
a sustained return to improved profitability and positive FCF generation,
plus de-leveraging to at least 7.0x through sustainable
expanded EBITDA or debt reduction without impairing its liquidity profile.
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 liquidity experiences contraction,
as evidenced by cash balances falling below $1 billion for an extended
Freescale's liquidity is adequate as reflected in its SGL-3
speculative grade liquidity rating. The liquidity assessment is
principally driven by the company's $1.1 billion of
cash balances given that, over the next four quarters, we
expect Freescale to generate very modest FCF relative to its large debt
load. Despite the absence of financial maintenance covenants,
financial flexibility remains diminished, in our opinion,
since the company has drawn $532 million under its revolver,
which has a committed capacity of $587 million.
Moody's subscribers can find additional information in the Freescale Credit
Opinion published on www.moodys.com.
The last rating action was on April 7, 2010 when Moody's assigned
a B2 rating to the company's $1.38 billion 9.25%
senior secured notes due 2018.
The principal methodologies used in rating Freescale Semiconductor Inc
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.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
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 July 2,
2010 were $3.97 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information,
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 assigning
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
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates Freescale's new senior unsecured notes Caa2
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