[May 05, 2015] |
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Fitch Affirms Seagate Technologies plc at 'BBB-'; Outlook Stable
Fitch Ratings has affirmed the ratings for Seagate (News - Alert) Technology plc
(Seagate) and its wholly-owned subsidiary, Seagate HDD Cayman (Seagate
HDD), including the long-term Issuer Default Rating (IDR) at 'BBB-'.
The Rating Outlook is Stable. Fitch's actions affect $4.1 billion of
debt, including the undrawn revolving credit facility (RCF) and pro
forma for $474 million of 6.875% senior notes Seagate will redeem on May
7, 2015. A full list of ratings follows at the end of this release.
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 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. (News - Alert) (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: 1) continued strong
growth in data driven by the cloud and internet-enabled mobile devices;
2) consolidated industry structure with Seagate and Western Digital
Corp. (WDC) controlling roughly 85% of the HDD market; 3) Continued
favorable HDD mix shift with higher capacity HDDs for cloud computing
offsetting the decline in lower capacity drives for the PC industry; and
4) 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 be benefit from: 1) A more
stable HDD pricing environment; 2) 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; 3) 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 investment grade.
--Broad product portfolio and significant scale in HDD industry.
--The company's vertically integrated model, which reduces per-unit
manufacturing costs and facilities tie to market for new products.
Fitch's rating concerns consist of:
--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 Western Digital Corp. (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:
--Fitch expects FCF to remain below $250 million, likely from i)
substantial cost per GB difference between HDD and SSD unexpectedly
narrows significantly, resulting in broader than expected
cannibalization of HDD shipments, ii) ultrabooks with SSD materially
cannibalize the traditional notebook market and solid state hybrids
(SSH) fail to achieve significant penetration in the Ultrabook market or
iii) 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 user seeks supplemental storage capacity to offset
smaller capacity SSDs.
--Expectations for total leverage exceeding 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.
Fitch anticipates Seagate's leverage will remain below 1.5 times (x)
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.
Total debt, all of which was issued by Seagate HDD Cayman, was $3.9
billion as of March 31, 2015 and consisted of:
--$800 million of 3.75% senior notes due November 2018;
--$474 million of 6.875% senior notes due May 2020, which the company
will redeem on May 7, 2015;
--$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 and 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; and
--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 Seagate and its subsidiary as follows:
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-'.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984159
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
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CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
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