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Rating Action:

Moody's upgrades snr unsecured ratings of NVIDIA to A2 following agreement to acquire Arm Ltd; outlook stable

14 Sep 2020

New York, September 14, 2020 -- Moody's Investors Service (Moody's) upgraded the senior unsecured rating of NVIDIA Corporation (NVIDIA) to A2 and short term rating to Prime-1 following the company's announcement that it has agreed to acquire Arm Limited (unrated) for approximately $40 billion from SoftBank Group Corp. (SBG) and the SoftBank Vision Fund. Subject to regulatory and other approvals, the transaction is expected to close by the end of calendar 2021. The rating outlook was change to stable from positive.

The upgrade reflects Moody's "expectations that NVIDIA will continue its strong operating performance and further diversify its revenue base while maintaining conservative financial policies and practices", said Moody's lead analyst, Richard Lane. Lane went on to say that "funding over half of the proposed acquisition with equity underscores the company's commitment to a strong credit profile. We view the acquisition as fundamentally sound because it would provide NVIDIA with a full technology stack needed to run data centers and enhance its artificial intelligence capabilities."

Issuer: NVIDIA Corporation

Ratings upgraded:

Senior Unsecured rating upgraded to A2 from A3

Short term rating for commercial paper upgraded to Prime-1 from Prime-2

Outlook Action:

Outlook changed to stable from positive

RATINGS RATIONALE

Under the terms of the transaction, which has been approved by the boards of directors of NVIDIA, SBG and Arm, NVIDIA will pay to SoftBank a total of $21.5 billion in NVIDIA common stock and $12 billion in cash, which includes $2 billion payable at signing. Moody's projects NVIDIA will have about $19 billion of cash at the end of calendar 2021. Additionally, SoftBank may receive up to $5 billion in cash or common stock under an earn-out construct, subject to satisfaction of specific financial performance targets by Arm.

Although expensive at over 20x estimated revenue, the acquisition makes very good strategic sense as it combines NVIDIA's strong and growing data center accelerated computing position and high speed interconnect technology (recent Mellanox acquisition) with Arm's central processing unit design capabilities and related IP licensing.

In addition to enhancing NVIDIA's growth opportunities in a variety of markets (data center, PC, smartphone, and emerging edge technologies), the combination will also help to diversify NVIDIA's revenue base. With the addition of our expectation of about $1.9 billion of revenue from ARM, Moody's projects NVIDIA's gaming-based revenue will decline to around 40% of total revenue, down from 59% in fiscal 2016.

NVIDIA's credit profile reflects its strong profitability, cash flow, and robust liquidity that are driven by the company's strong position in growing markets of visual computing, led by the gaming sector, along with the high performance data center, automotive and enterprise graphics. Based on the acceleration of data intensive computing coupled with NVIDIA's broadening range of related offerings, Moody's expects NVIDIA's strong financial performance will continue over the intermediate term despite the current challenges posed by COVID-19. After growing by nearly 50% in the year ending January 2021, Moody's projects revenue will grow by approximately 20% over the following two years (driven by its gaming and data center markets), while adjusted EBITDA margins move toward the mid-40% range, and free cash flow after dividends approximates $7 billion.

Moody's forecasts a continuation of very modest financial leverage as demonstrated by 1.2x adjusted gross debt to EBITDA (including a tax repatriation liability), and free cash flow to adjusted gross debt over 60% during fiscal January 2021. Capital allocation will remain very conservative, with dividends of about $395 million and a suspended share repurchase program, which will allow cash to build during the regulatory approval process to an estimated $19 billion by the end of calendar 2021. Management's conservative financial philosophy, including low leverage and the maintenance of very strong liquidity ($11 billion of cash and liquid investments at July 2020 relative to $7 billion of funded debt), supports the company's ability to contend with consistent investment requirements, periodic product or end market transitions, and acquisition opportunities.

NVIDIA also maintains access to a $575 million revolving credit facility that matures in 2021 and backstops a commercial paper program of the same size. There were no borrowings under the credit facility or commercial paper outstanding at July 2020 and Moody's does not expect borrowings over the next year. The facility allows for same day funding, does not require a re-representation as to no material adverse change, and contains one financial covenant under which there is ample cushion.

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

The ratings could be upgraded if NVIDIA can further solidify its leading market positions across end markets while continuing to grow and diversifying its revenue streams. Maintaining conservative financial policies, including gross adjusted debt to EBITDA below 2.0x and strong liquidity could also support a higher rating.

The ratings could be downgraded if NVIDIA sustains erosion of market share or competitive position that leads to lower profitability or cash flow. Departure from conservative financial practices that favor shareholders to the detriment of creditors, including gross adjusted debt to EBITDA sustained above 2.5x could pressure the rating downward.

The principal methodology used in these ratings was Semiconductor Industry published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130733. 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_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

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.

Richard J. Lane
Senior Vice President
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.
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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