Fitch Rates Seagate Technology's $400MM Sr Unsecured Notes 'BBB-'

lunes 11 de mayo de 2015 11:02 GYT
 

(The following statement was released by the rating agency) CHICAGO, May 11 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Seagate HDD Cayman's (Seagate HDD) $400 million senior unsecured notes offering. The notes will be guaranteed by Seagate Technology plc (Seagate), the parent company of Seagate HDD. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. Seagate will use net proceeds from the debt offering for general corporate purposes, including replenishing cash on hand used for the redemption of $474 million of 6.875% senior notes on May 7, 2015. The senior notes offering and redemption are consistent with Seagate's efforts to reduce its weighted average cost of debt and extend its debt maturity schedule. The ratings and Outlook reflect Fitch's expectations that Seagate's operating performance will remain solid for the rating, despite weak demand in Europe and for personal computers (PC). Fitch expects flat organic revenue growth through at least the near term and modest profit margin pressure. However, Fitch expects more than $800 million of normalized annual free cash flow (FCF) through the intermediate term and solid credit metrics. Beyond the near term, Fitch believes increasing data storage and cloud-based storage demand will drive positive market growth, although shifts from hard disk drives (HDD) and hybrid devices to more hyper-active flash-based solutions could constrain Seagate's share gains over the longer term. Nonetheless, Fitch anticipates operating EBITDA margins will remain in the mid-teens to low-20s through the intermediate term, given disciplined supply additions and expectations for a richer sales mix. Fitch expects industry consolidation will enable Seagate to maintain capital spending in the 4%-5% of revenues range, supporting a strengthened FCF profile. Fitch expects fiscal 2015 FCF of $1.4 billion, which includes $763 million of positive cash flow from a legal settlement with Western Digital Corp. (WDC) and $225 million payment related to a tax settlement with Chinese tax authorities. KEY RATING DRIVERS Fitch's expectation for a relatively stable HDD pricing environment going forward, despite weak PC unit demand, due to: --Continued strong growth in data driven by the cloud and internet-enabled mobile devices; --Consolidated industry structure with Seagate and WDC controlling roughly 85% of the HDD market; --Continued favorable HDD mix shift with higher capacity HDDs for cloud computing offsetting the decline in lower capacity drives for the PC industry; --Limited capacity growth as companies across the HDD supply chain, including Seagate, expand capacity cautiously within the context of macroeconomic uncertainty. --Seagate's solid liquidity and financial flexibility are supported by $2.6 billion of cash, the vast majority of which is readily accessible without adverse tax considerations, an undrawn $700 million senior secured revolving credit facility due Jan. 15, 2020, Fitch's expectations for $800 million to $1 billion of annual (FCF), and a staggered debt maturity schedule. Fitch believes Seagate's FCF will continue to benefit from: --A more stable HDD pricing environment; --Lower anticipated demand volatility as secular growth in data and cloud computing reduce the historically strong correlation between cyclical PC demand, HDD shipments and profitability; --Favorable product mix shift towards higher capacity, more profitable HDDs deployed in cloud computing. --Strong credit protection metrics and management's commitment to conservative financial policies commensurate with an investment-grade rating. --Broad product portfolio and significant scale in HDD industry. --The company's vertically integrated model, which reduces per-unit manufacturing costs and facilities time-to-market for new products. Fitch's rating concerns include: --Consistent declines in average selling prices for HDDs due to commoditization and low switching costs. --Long-term threat of technology substitution from NAND flash-based SSDs. Fitch believes HDDs will co-exist alongside SSDs and tape storage in a multi-tiered enterprise data storage environment. --Event risk associated with implementation of aggressive shareholder-friendly activities, primarily debt-financed share repurchases. --Seagate's ability to sustain a time-to-market advantage critical to achieving market share gains and maintaining overall profitability, given formidable competition from WDC. RATING SENSITIVITIES Future ratings upgrades are currently unlikely, given Fitch's expectations for continued PC market weakness and in the absence of increased diversification or sustainable technology-driven share gains. Negative rating actions could occur if: FCF remains below $250 million, likely from: --Substantial cost per GB difference between HDD and SSD unexpectedly narrows significantly, resulting in broader than expected cannibalization of HDD shipments; --Ultrabooks with SSD materially cannibalize the traditional notebook market and solid state hybrids (SSH) fail to achieve significant penetration in the ultrabook market; --Strong growth in ultrabooks with SSD is not offset by incremental growth in near-line enterprise HDDs for the cloud market, external HDDs or personal clouds as users seek supplemental storage capacity to offset smaller capacity SSDs; --Expectations for total leverage exceed 2.5x beyond the short term, driven by debt-financed share repurchases or acquisitions. Financial covenants in the credit agreement consist of minimum fixed-charge coverage of 1.5x and maximum net leverage ratio of 1.5x. In addition, the facility requires minimum liquidity of $500 million. Pro forma for the senior notes issuance and senior notes redemption, Fitch expects Seagate's leverage will remain below 1.5x through the intermediate term. Gross leverage (total debt/operating EBITDA) was a Fitch-estimated 1.4x as of March 31, 2015, flat from the prior year period. Interest coverage (operating EBITDA/gross interest expense) should remain above 10x and was a Fitch-estimated 13.3x for the latest 12 months (LTM) ended March 31, 2015. Pro forma for the senior notes issuance and senior notes redemption, all of which was issued by Seagate HDD Cayman, was $3.8 billion as of March 31, 2015 and consisted of: --$400 million of the proposed senior notes; --$800 million of 3.75% senior notes due November 2018; --$600 million of 7% senior notes due November 2021; --$1 billion of 4.75% senior notes due June 2023; --$1 billion of 4.75% senior notes due January 2025; --$500 million of 5.75% senior notes due December 2034. KEY ASSUMPTIONS --Flat near-term organic revenue growth due to weak demand in Europe and for PCs, offset by solid demand in enterprise from data center build-outs; --Modest profit margin contraction with operating EBITDA margin declining to 19% for fiscal 2015 and remaining in the high teens through the intermediate term; --Capital spending remains at 4%-5% of revenues, resulting in $800 million to $1 billion of normalized annual FCF; --Share repurchases roughly approximating annual FCF, in the absence of acquisitions supporting the company's strategy to continue investing in next generation storage technologies. Fitch affirms the following ratings: Seagate --Long-term IDR at 'BBB-'; --Senior unsecured RCF at 'BBB-'. HDD Cayman --Long-term IDR at 'BBB-'; --Senior unsecured RCF at 'BBB-'; --Senior unsecured debt at 'BBB-'. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc. 70 West Madison St Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Jack Kranefuss Senior Director +1-212-908-0791 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May 28, 2014). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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