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Rating Action:

Moody's rates Marvell's new Senior Notes at Baa3; changes outlook to stable

05 Apr 2021

New York, April 05, 2021 -- Moody's Investors Service ("Moody's") revised Marvell Technology Group Ltd's ("Marvell") outlook to stable from negative and affirmed the Baa3 senior unsecured rating. Moody's also rated Marvell Technology, Inc.'s ("New Marvell") new senior unsecured notes ("New Marvell Senior Notes") at Baa3 and assigned a stable outlook.

Marvell plans to acquire Inphi for a per share price of $66.00 cash and 2.323 Marvell shares, or about $11 billion of total purchase price for Inphi's equity and convertible debt, including transaction fees. The acquisition will be funded with a combination of $3.75 billion of new debt financing from New Marvell and $7.3 billion of new equity issued by Marvell, which includes the new equity to refinance Inphi's convertible debt. Following closing, the Marvell shares will be exchanged for shares in New Marvell. Marvell has received all regulatory approvals to complete its acquisition of Inphi Corp. ("Inphi") in a cash and stock transaction. The acquisition is subject to a shareholder vote. The acquisition is expected to close in mid-April.

Assignments:

..Issuer: Marvell Technology, Inc.

. Senior Unsecured Notes, Assigned Baa3

Affirmations:

..Issuer: Marvell Technology Group Ltd.

.... Issuer Rating, Affirmed Baa3

. Senior Unsecured Notes, Affirmed Baa3

Outlook Actions:

..Issuer: Marvell Technology, Inc.

....Outlook, Assigned Stable

..Issuer: Marvell Technology Group Ltd.

....Outlook, Changed to Stable from Negative

RATINGS RATIONALE

The revision of the outlook to stable from negative is motivated by Moody's expectations for improving operating performance at both Marvell and Inphi driven by increasing diversified information technology spending in 2021 and 2022. The revision also reflects the certainty of both the acquisition structure, as regulatory approvals were granted without any material required changes to the integration plans, and the debt capital structure, which has a sizable proportion of prepayable bank debt.

The Baa3 senior unsecured rating incorporates the strategic benefits of the Inphi acquisition. Inphi will provide Marvell with a complementary portfolio serving the broad optical interconnect market. Inphi's interconnect products are used to provide interconnection within data centers (DC), between data centers (Data Center Interconnect, DCI), and over hundreds of kilometers (Metro and Long Haul Interconnect). With the ongoing transition of the data transmission technology from NRZ to PAM4 in Data Center and DCI and increasing use of coherent technology for Long Haul, Inphi's revenue base is growing rapidly. The acquisition will diversify Marvell's revenue base and enhance the company's overall scale.

The use of equity for over 60% of the purchase price is credit positive, since it limits the leveraging impact of the acquisition. The outsourced manufacturing model of Marvell and Inphi provides the combined company with consistent free cash flow (FCF) generation, though the cash dividend will remain, limiting FCF.

Still, despite the large equity component, the high purchase multiple results in a very leveraging acquisition at close, with proforma debt to EBITDA of about 6.4x (twelve months ended January 30, 2021, Moody's adjusted, excluding $125 million of anticipated cost synergies) or about 5.5x including anticipated synergies. Moreover, although the debt financing includes a large portion of prepayable bank debt, approximately half of the debt financing will be comprised of bonds, of 5 years or longer tenor. Thus, Moody's anticipates that a large portion of the deleveraging will be driven by anticipated EBITDA growth, which is dependent on both rapid revenue growth and a large expansion in profit margins reflecting operating leverage. The company's leverage, which Moody's expects will exceed 3x debt to EBITDA (Moody's adjusted) for some time following closing of the acquisition, is high given the cyclical end market demand and modest revenue scale relative to Marvell's large, diversified competitors, such as Broadcom Inc.

Marvell's Baa3 senior unsecured rating also considers the company's consistent FCF due to the moderate product life cycles, which tends to reduce revenue volatility, and the fabless manufacturing model, which limits required capital expenditures. With the diversifying Inphi acquisition, Moody's anticipates that revenue volatility will improve and benefit from secular growth drivers in cloud data center spending and fifth generation (5G) telecommunications upgrades. Marvell also benefits from a strong market position in select market niches, such as hard disk drive (HDD) and solid state drive (SSD) controllers, fibre channel adapters, and with the acquisition of Inphi, optical interconnect chips. These leading positions contribute to high gross margins.

The stable outlook reflects Moody's expectation that leverage will decline toward 3.5x over the year following closing due to debt repayment and anticipated strong revenue and profit growth. However, this level of leverage weighs on the credit profile during the near term, since it is high for the Baa3 senior unsecured rating.

The New Marvell term loans (Term Loans) (unrated), New Marvell revolver (Revolver) (unrated), and New Marvell Senior Notes (collectively, "New Marvell Debt") will benefit from upstream guarantees from each of Marvell and Inphi so long as at least $100 million of debt remains at each of these entities. Once the debt declines below $100 million at Marvell, the guarantee from Marvell will be terminated. Likewise, the Inphi guarantee will be terminated once debt at Inphi declines below $100 million. This creates the potential for structural suborbination of the New Marvell Debt to as much as $200 million of debt in total at Marvell and Inphi. Still, this level of potential structural subordination is modest relative to the $4.75 billion of funded New Marvell Debt.

Moody's expects that New Marvell will maintain an excellent liquidity profile following the close of the acquisition, maintaining a cash balance in excess of $500 million. Moody's expects that following completion of the acquisition, the company will rely mostly on internally generated cash sources, reflecting the strong free cash flow generation of the combined Marvell and Iphi, which Moody's expects to exceed $500 million over the next year. New Marvell's new $750 million Revolver contains a maximum debt to EBITDA financial maintenance covenant.

New Marvell's credit profile reflects credit positive governance considerations. Although leverage is high due to the high acquisition multiple, the company has committed to curtail share repurchases and direct FCF to debt repayment until leverage is reduced to pre-acquisition levels. Additionally, the use of prepayable debt for nearly half of the debt financing mix balances the burden of deleveraging between planned debt repayment and EBITDA growth. Moody's expects EBITDA growth due to both the continuation of rapid revenue growth and the expansion of profit margins following closing. Moody's expects that New Marvell will maintain a conservative financial policy, limiting the use of leverage for shareholder returns.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating could be upgraded if:

• Marvell successfully integrates Inphi and achieves cost synergies such that the EBITDA margin (Moody's adjusted) is sustained above 30%

• Leverage is maintained at less than 2.5x debt to EBITDA (Moody's adjusted).

The rating could be downgraded if:

• If the integration of Inphi encounters material challenges such that revenues fail to grow at least at the mid-single digits percent level

• EBITDA margin (Moody's adjusted) is not on-course to improve toward the mid-20 percent level

• Debt to EBITDA (Moody's adjusted) is not on-track to decline within 24 months of closing.

• Marvell pursues a more aggressive financial policy, engaging in share repurchases while debt to EBITDA (Moody's adjusted) remains above 3x.

Marvell Technology Group Ltd, based in Hamilton, Bermuda, is a fabless semiconductor firm that produces controller chips and other components for hard disk drives and solid state drives, Ethernet switch and connectivity chips, communications processor chips, network processors and systems, and interface devices for storage area networks, including Fibre Channel and Ethernet adapters.

Inphi Corp., based in Sunnyvale, California, is a fabless analog and mixed signal semiconductor firm that produces digital signal processing chips, transimpedance amplifiers, and other components used in optical interconnect devices used in cloud data center, data center interconnect, and telecommunications long haul applications.

The principal methodology used in these ratings was Semiconductor Methodology published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1248106. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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, CFA
VP - Sr Credit Officer
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

Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
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

No Related Data.
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