Approximately $500 million of new debt rated
New York, April 26, 2011 -- Moody's Investors Service assigned a B1 rating to Sanmina-SCI Corporation's
("Sanmina") proposed $500 million 8-year senior
unsecured notes offering. The rating outlook is positive.
Net proceeds together with cash are expected to be used to retire the
6.75% senior subordinated notes due 2013 and to redeem a
portion of the 8.25% senior subordinated notes due 2016
via a tender offer. Moody's will withdraw the rating on the
2013 notes upon their full retirement. 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.
Given that proceeds from the new senior unsecured notes are expected to
meaningfully reduce the amount of subordinated obligations in the debt
capital structure, the existing unsecured 2014 notes and remaining
subordinated 2016 notes will likely experience a one-notch downgrade
upon closing of the contemplated transaction, including the successful
completion of the tender offer. The downgrades would result from
the sizable reduction of junior debt relative to the amount of senior
unsecured debt in the capital structure post closing, requiring
the senior unsecured creditor class to absorb a higher loss under Moody's
Loss Given Default Methodology.
The following is a summary of today's rating action and Moody's
current ratings for Sanmina:
$500 Million Senior Unsecured Notes due 2019 -- B1 (LGD-4,
Corporate Family Rating -- B1
Probability of Default Rating - B1
$257 Million (originally $300 Million) Senior Floating Rate
Notes due 2014 -- Ba3 (LGD-3, 41%)
$600 Million 8.25% Senior Subordinated Notes due
2016 - B2 (LGD-5, 75%)
Speculative Grade Liquidity Rating - SGL-2
The following rating will be withdrawn upon redemption of the notes:
$380 Million (originally $400 Million) 6.75%
Senior Subordinated Notes due 2013 - B2 (LGD-5, 75%)
Moody's views constructively this refinancing and extension of Sanmina's
approximate $1.2 billion of debt. "Although
not resulting in sizable interest cost savings, the transaction
noticeably improves Sanmina's maturity profile," says
Moody's Vice President Gregory Fraser. In addition to the
refinancing proceeds, Sanmina will use approximately $100
million of balance sheet cash to extinguish the 2013 notes and partially
prepay the 2016 notes. Upon closing of the transaction, near-term
debt maturities will be more manageable consisting of only $257
million senior floating rate notes due 2014.
According to Fraser, "Sanmina's B1 Corporate Family
Rating is supported by its Tier-1 status in the EMS industry with
a focus on non-consumer, high mix vertically-integrated
products and services." He also notes that support is derived
from a shift to higher margin proprietary products, improved operating
efficiencies as well as the company's strength in newer industry
segments such as medical, renewable energy and aerospace/defense.
At the same time, the B1 rating is constrained by the company's
smaller size, historical operating/free cash flow margin volatility
and moderately higher financial leverage compared to its larger more vertically-integrated
EMS peers. The rating also incorporates Sanmina's sizable
working capital requirements during periods of rising demand and strong
revenue growth, which result in episodes of negative free cash flow.
Sanmina's SGL-2 speculative grade liquidity rating indicates
good liquidity, supported by cash balances of roughly $550
million (pro forma upon closing the transaction), approximately
$185 million of availability under its $235 million asset-based
revolving facility and $18 million of availability under its two
Asia-based $85 million working capital facilities.
Moody's expects positive free cash flow generation of $50-100
million over the next 12 months as Sanmina implements working capital
improvements and revenue growth subsides from the pace in 2010.
The rating outlook remains positive notwithstanding the recent weakness
in earnings due to purchase order delays on defense contracts, the
labor strike in India and softness in the optical market. Moody's
views these hurdles as temporary and expects Sanmina to continue to demonstrate
operating performance improvement and generate positive free cash flow
over the next 6 - 9 months as a result of working capital initiatives
that were recently implemented.
Ratings could be upgraded if Sanmina: continues to maintain gross
and operating margins of at least 7.5% and 3.5%,
respectively; sustains total debt to EBITDA under 4.5x (Moody's
adjusted); successfully executes its working capital initiatives
to improve DSO and A/P days by at least 2 days on a sustained basis;
and demonstrates at least two to three consecutive quarters of positive
free cash flow generation without deterioration in margins and financial
The rating or outlook could be downgraded if Sanmina experienced:
substantial revenue erosion either due to secular decline of end markets
served or market share/customer losses due to execution problems,
increased competition, industry consolidation and/or operational
realignment; deterioration in profitability metrics (e.g.,
gross margins below 6.0% or operating margins below 2.5%
on a sustained basis); and/or sustained negative free cash flow generation
and/or reduced liquidity due to increasing working capital intensity,
rising capex or significantly expanded stock repurchases.
Moody's subscribers can find additional information in the Sanmina Credit
Opinion published on www.moodys.com.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last Credit Rating Action and the rating history.
The principal methodologies used in this rating were Global EMS and IT
Distribution Industries published in December 2008, 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.
With headquarters in San Jose, California and revenues of $6.5
billion for the twelve months ended April 2, 2011, Sanmina-SCI
Corporation is one of the world's largest electronics manufacturing
services (EMS) companies providing a full spectrum of integrated,
value-added solutions to original equipment manufacturers (OEMs).
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 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
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates Sanmina's new senior unsecured notes B1; outlook positive
250 Greenwich Street
New York, NY 10007