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Related Issuers
Rating Action:

Moody's rates Lumentum CFR at Ba3; new Senior Secured Term Loan B at Ba2; outlook stable

24 Jul 2018
NOTE: On August 2, 2018, the press release was corrected as follows: In the methodology paragraph of the Ratings Rationale section, the principal methodology was changed to Semiconductor Industry Methodology published in December 2015. Revised release follows.

New York, July 24, 2018 -- Moody's Investors Service ("Moody's") assigned first time ratings to the debt of the Lumentum Holdings, Inc. ("Lumentum")-- Corporate Family Rating ("CFR") of Ba3 and Probability of Default Rating ("PDR") of Ba3-PD, a Ba2 rating to the Senior Secured Term Loan B ("Term Loan"), and a Speculative Grade Liquidity ("SGL") rating of SGL-2. The rating outlook is stable.

Lumentum intends to use the proceeds of the Term Loan and balance sheet cash to acquire Oclaro ("Oclaro") for $5.60 cash and 0.0636 Lumentum shares per Oclaro share, or about $1.6 billion of equity value (excluding transaction expenses).

Assignments:

..Issuer: Lumentum Holdings, Inc.

.... Probability of Default Rating, Assigned Ba3-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

.... Corporate Family Rating, Assigned Ba3

....Senior Secured Bank Credit Facility, Assigned Ba2 (LGD3)

Outlook Actions:

..Issuer: Lumentum Holdings, Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

The Ba3 CFR reflects Lumentum's established niche market leadership position in Telecommunications Optical Components used in optical communications networks, and Moody's expectation for improving financial leverage. Debt to EBITDA of about 3.1x (latest twelve months ended March 31, 2018, proforma for Oclaro, Moody's adjusted excluding anticipated synergies) at the closing of the acquisition should decline toward the lower 2x level over the year following closing as synergies are captured. This level of closing leverage is modest relative to many similarly-rated issuers and reflects the large equity component of the Oclaro acquisition, with equity comprising about $638 million or about 40% of the $1.6 billion purchase price. Moreover, the acquisition of Oclaro diversifies Lumentum's revenue base in the optical communications space and increases scale, raising revenues to about $1.7 billion.

This level of leverage is prudent given the significant execution risks in integrating Oclaro, which will increase Lumentum's revenue base by nearly 50%. Lumentum's revenues are volatile due to short product life cycles, particularly in the Consumer & Industrial segment due to the large smartphone market exposure, the large customer concentration to the few optical networking equipment manufacturers, who are supplied by several other optical components firms in addition to Lumentum and Oclaro, and the large product concentration in 3D sensing chips for the smartphone market, which Moody's estimates accounts for about 20% of the $1.7 billion of proforma revenues. Revenues in individual segments are volatile due to end market demand, which is driven by data center infrastructure upgrade cycles, and the small number of product families. Free cash flow ("FCF") is also volatile due to the moderate capital intensity of both Lumentum and Oclaro, reflecting integrated manufacturing supplemented by contract manufacturing partners.

The Ba2 rating on the proposed Term Loan reflects the collateral, comprised of a first priority lien on the company's assets, and large cushion of unsecured liabilities, including the $450 million convertible notes. Lumentum's SGL-2 speculative grade liquidity ("SGL") rating reflects Lumentum's good liquidity profile. Although Lumentum does not maintain access to a revolving credit facility, Moody's expects annual FCF to be in excess of $175 million annually and at least $450 million of cash to be maintained on the balance sheet.

The stable rating outlook reflects Moody's expectation of mid to high single digit percentage revenue growth, the EBITDA margin improving towards the upper twenties percent level (Moody's adjusted), and FCF in excess of $175 million annually. The outlook also incorporates Moody's expectation that Lumentum will integrate Oclaro into its operations over the next year without material disruption to operations. Moody's expects that Lumentum will prioritize debt reduction and will capture operating expense synergies, such that debt to EBITDA (Moody's adjusted) will decline towards the low 2x level over the year following closing.

The ratings could be upgraded if (i) Lumentum successfully integrates Oclaro without material operational disruption (ii) revenue growth is sustained at least in the mid-single digits percent and is balanced across business segments (iii) product and customer diversification improves and (iv) anticipated cost synergies are captured such that the EBITDA margin (Moody's adjusted) is sustained above 20% and debt reduction is prioritized, with debt to EBITDA (Moody's adjusted) maintained below 2x.

The ratings could be downgraded if (i) revenues fail to increase by at least the low single-digits percent (ii) Lumentum experiences operational disruptions in its integration of Oclaro (iii). customer or product revenue concentration increases or (iv) Lumentum engages in shareholder-friendly actions while leverage exceeds 3x debt to EBITDA (Moody's adjusted).

The principal methodology used in these ratings was the Semiconductor Industry Methodology published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Lumentum Holdings, Inc., based in Milpitas, California, manufactures and sells optical semiconductor components used in optical networking communications equipment and industrial lasers used in precision manufacturing.

Oclaro, Inc., based in San Jose, California, manufactures and sells optical semiconductor chips used in optical networking communications equipment.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Terrence Dennehy
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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​
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