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Rating Action:

Moody's upgrades Freescale's CFR to B2; outlook stable

09 Sep 2011

Approximately $7.0 billion of rated debt affected

New York, September 09, 2011 -- Moody's Investors Service upgraded the senior debt ratings of Freescale Semiconductor, Inc.'s ("Freescale") -- Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to B2 from B3, senior secured debt to Ba3 from B1, and the senior notes to Caa1 from Caa2. Moody's also upgraded the Speculative Grade Liquidity Rating to SGL-1 from SGL-2. In a related action, Moody's assigned a Ba3 rating to Freescale's $425 million 5-year senior secured revolver, and affirmed the Caa2 rating on the senior subordinated notes. The rating outlook is stable.

RATINGS RATIONALE

"The rating upgrades reflect our expectation of further reduction in Freescale's financial leverage and improving liquidity, building on nearly $1 billion of debt repayments from cash proceeds from Freescale's initial public offering (IPO) and some cash," noted Gregory Fraser, Senior Analyst at Moody's Investors Service.

We estimate that Freescale's total debt to EBITDA (Moody's adjusted) was approximately 5.8x (pro forma as of July 1, 2011), down from 7.1x (April 1, 2011) as a result of the debt repayments. Over the next 12-18 months, we expect Freescale will reduce leverage to the 4.5x-5x range via additional debt repayment and EBITDA expansion. Freescale used balance sheet cash plus total net proceeds of $838 million from the IPO to retire approximately $975 million of gross debt.

The rating revision to B2 also considers Freescale's continued improvement in factory utilization to near 80% from higher product volumes (principally in automotive and wireless infrastructure markets). With the operating leverage in Freescale's fixed manufacturing cost base, profit and cash flow improved, which we expect will continue over the near term. We anticipate Freescale will generate considerably higher free cash flow in the range of $100 to $200 million over the next twelve months compared to $20 million in 2010.

Combined with cost takeouts from past restructurings, we expect Freescale to experience improved resilience in the next cyclical downturn. Strong design win momentum has led to increased product volumes, which combined with a better pricing environment has resulted in expanded margins and higher EBITDA. The B2 CFR is supported by Freescale's strong market leadership positions and rich product portfolio characterized by technological breadth, as well as its increasingly "asset-lite" operating model that allows it to quickly reduce expenses and capex in response to weak market conditions.

These positives are tempered by the company's still high financial leverage, although expected to be consistent with other companies also rated at the B2 level, long lead time required to penetrate faster growth end markets, exposure to the highly volatile semiconductor industry and continued majority ownership by the private equity sponsor group. Although we do anticipate improving free cash flow, free cash flow to total debt is likely to be modest in the 3-5% range, limiting the company's ability to de-lever quickly.

The Speculative Grade Liquidity Rating was upgraded to SGL-1 reflecting Freescale's repayment of the entire $532 million of borrowings under the old revolving credit facility and availability of substantially all of its new $425 million revolver maturing 2016. Additional support is provided by our expectation that solid free cash flow generation will supplement Freescale's $805 million in cash balances. Going forward, we expect Freescale to maintain at least $600 million of cash.

The stable rating outlook reflects our expectation that Freescale will continue to experience good demand across its addressable end markets, exhibit solid operating profitability, generate higher levels of free cash flow and gradually de-lever.

Ratings could be upgraded if Freescale continues to: (i) experience solid product volume growth; and (ii) increase revenues via effective R&D investments and product development resulting in a favorable product mix with a higher margin profile. Ratings may also experience upward pressure if we expect lower financial leverage through EBITDA expansion or debt reduction resulting in sustained debt to EBITDA (Moody's adjusted) under 4.5x.

Ratings could be downgraded if demand for Freescale's embedded processors weakened and earnings fell short of expectations for an extended timeframe (i.e., we currently anticipate mid-single digit revenue growth and operating margins in the range of 15%-20%), or debt-funded acquisitions and/or aggressive financial policies resulted in leverage above 6x total debt to EBITDA (Moody's adjusted) for a sustained period. Deterioration in liquidity due to weak free cash flow generation or cash balances below $600 million could also result in a downgrade.

Assignments:

$ 425 Million Senior Secured Revolving Credit Facility due July 2016 -- Ba3 (LGD-3, 31%)

Rating Actions:

Corporate Family Rating to B2 from B3

Probability of Default Rating to B2 from B3

Speculative Grade Liquidity Rating to SGL-1 from SGL-2

$2.222 Billion (originally $2.265 Billion) Senior Secured Extended Maturity Term Loan due 2016 to Ba3 (LGD-3, 31%) from B1 (LGD-3, 30%)

$ 663 Million (originally $750 Million) 10.125% Senior Secured Notes due 2018 to Ba3 (LGD-3, 31%) from B1 (LGD-3, 30%)

$1.380 Billion 9.25% Senior Secured Notes due 2018 to Ba3 (LGD-3, 31%) from B1 (LGD-3, 30%)

$ 57 Million (originally $500 Million) Senior Unsecured Floating Rate Notes due 2014 to Caa1 (LGD-5, 81%) from Caa2 (LGD-5, 80%)

$ 298 Million (originally $2.35 Billion) 8.875% Senior Unsecured Notes due 2014 to Caa1 (LGD-5, 81%) from Caa2 (LGD-5, 80%)

$ 488 Million (originally $750 Million) 10.75% Senior Unsecured Notes due 2020 to Caa1 (LGD-5, 81%) from Caa2 (LGD-5, 80%)

$ 750 Million 8.05% Senior Unsecured Notes due 2020 to Caa1 (LGD-5, 81%) from Caa2 (LGD-5, 80%)

Ratings Affirmed:

$ 764 Million (originally $1.6 Billion) 10.125% Senior Subordinated Notes due 2016 -- Caa2, LGD assessment revised to (LGD-6, 100%) from (LGD-6, 93%)

Moody's subscribers can find additional information in the Freescale Credit Opinion published on www.moodys.com.

The methodologies used in this rating were Principle Methodology Global Semiconductor Industry published in November 2009, and Principal Methodology Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Austin, TX, Freescale Semiconductor, Inc. designs and manufactures embedded semiconductors for the automotive, networking, industrial and consumer markets. On June 1, 2011, Freescale issued 43.5 million common shares in its IPO and on June 9th issued an additional 5.6 million shares in a greenshoe. Revenues and EBITDA (Moody's adjusted) for the twelve months ended July 1, 2011 were $4.7 billion and $1.2 billion, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

New York
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Jankowitz
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Freescale's CFR to B2; outlook stable
No Related Data.
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