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Related Issuers
Rating Action:

Moody's rates Sanmina's new senior unsecured notes B1; outlook positive

26 Apr 2011

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:

Assignments:

$500 Million Senior Unsecured Notes due 2019 -- B1 (LGD-4, 56%)

Ratings Affirmed:

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The following rating will be withdrawn upon redemption of the notes: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%)

RATINGS RATIONALE

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 leverage.

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).

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 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.

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 rates Sanmina's new senior unsecured notes B1; outlook positive
No Related Data.
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