[May 22, 2013]

Fitch Rates Freescale's $500MM Senior Secured Notes 'CCC+/RR3'

Fitch Ratings assigns a rating of 'CCC+/RR3' to Freescale (News - Alert) Semiconductor, Inc.'s (Freescale) private placement of $500 million 5% senior secured notes due 2021. A full list of the company's existing ratings follows at the end of this release. The Rating Outlook is Stable.

Freescale will use net proceeds to redeem $442 million of principal of outstanding 10.125% senior secured notes due 2018, in accordance with the indenture governing the 10.125% senior secured notes. The transaction will save approximately $20 million of annual interest expense.

The ratings and Outlook continue to reflect Freescale's weak free cash flow (FCF) and revenue growth. Cumulative free cash flow (FCF) since being taken private six years ago has been minimal after stripping out non-recurring cash flows. Additionally, Fitch estimates revenues (excluding cellular handset sales) have declined in the low single digits from pre-recession levels.

Fitch estimates FCF for the latest 12 months (LTM) ended March 29, 2013 was $57 million, after backing out non-recurring cash flows from business interruption and inventory insurance recoveries, as well as deferred intellectual property (IP) revenue. IP licensing is part of Freescale's revenue growth acceleration strategy but cash flows should be volatile and non-recurring.

Higher profitability from restructuring and healthier inventory levels should strengthen FCF. Freescale's manufacturing facility closures related to 2008-2009 restructuring initiatives will reduce costs by $120 million once fully realized. The company's 2012 focus product group reorganization will yield an additional $35 million to $40 million of annual cost savings.

Utilization rates should continue increasing from the high 70s in the first quarter of 2013 and, in conjunction with meaningful operating leverage, drive operating profit margin expansion. Distribution inventory remain within a normal 9-10 week range for the recently ended quarter after Freescale lowered factory loadings during 2012 to reduce excess inventory levels.

Fitch believes operating EBITDA will exceed 22% by 2014 versus a Fitch estimated 19.4% for 2012. This assumes low-single digit revenue growth over at least the next two years. Within this context, Fitch expects more than $100 million of annual FCF over the next few years.

Fitch's expectation for low single digit near-term organic revenue growth is driven by a cautious overall semiconductor demand environment. Revenues increased and book-to-bill remained greater than 1 time (x) for the first quarter of 2013, following six consecutive quarters of negative year-over-year revenue growth.

Automotive demand should be offset by cautious industrial demand. U.S. auto production increasing to 15 million units in 2013 from 14.5 million units in 2012 and increasing electronics content per vehicle will drive automotive strength. Demand in the U.S. is being tempered by weakness in Europe, while automotive unit growth in China, to which Freescale is less exposed, also will be positive.

Over the longer term, Fitch expects low-single digit mid-cycle revenue growth. Freescale's reorganization intends to accelerate revenue growth by shifting sales resources to faster growing China and India and increasing analog and sensors and radio frequency penetration in industrial, consumer and medical markets.

Credit protection measures should remain highly cyclical. Fitch estimates total leverage (total debt to operating EBITDA) for the LTM ended March 31, 2013 was approximately 8.5x, compared with 6.3x for the comparale year ago period. Interest coverage (operating EBITDA to gross interest expense) was approximately 1.5x for the recently ended LTM period, down from 1.9x a year ago.

RATINGS SENSITIVITIES

Debt reduction from free cash flow resulting in total leverage approaching 5.5x could result in positive rating actions. This will require the reversal of negative revenue growth trends.

Conversely, negative rating actions could occur if Freescale uses significant free cash flow over a multi-year period. Fitch believes this would be the result of a weakened competitive position, due to lost market share or product commoditization.

RATING DRIVERS

The ratings are supported by Freescale's:

--Leading share positions in microcontrollers and embedded processing markets, particularly automotive. These markets are characterized by longer product lifecycles;

--Increasing electronics penetration in automobiles and industrial and medical applications, as well as consumer electronics growth and solid long-term networking infrastructure investment requirements over the longer term;

--Low capital intensity from the company's 'asset-light' manufacturing strategy.

Ratings concerns center on Freescale's:

--Revenue growth challenges, given a combination of difficulty displacing incumbent embedded suppliers, macroeconomic headwinds, and structurally lower revenues from the wind down of the company's cellular business over the past several years;

--Limited ability to organically reduce debt, given minimal FCF in recent years;

--Significant debt levels and interest expense.

Fitch believes Freescale's liquidity was sufficient as of March 29, 2013 and consisted of: i) approximately $767 million of cash and equivalents, $179 million of which was held in the U.S.; and ii) approximately $408 million (net of $17 million of letters of credit) of remaining availability under the $425 million senior secured RCF due July 1, 2016.

Pro forma for the private placement and redemption, total debt was approximately $6.5 billion as of March 29, 2013 and consisted of:

--$350 million of senior secured term loans due 2016;

--$2.4 billion of senior secured term loans due 2020;

--$1.6 billion of senior secured notes due 2018;

--$500 million of senior secured notes due 2021;

--$155 million of senior unsecured notes due 2014;

--$1.2 billion of senior unsecured notes due 2020;

--$264 million of senior subordinated notes due 2016.

The $2.4 billion term loan maturing in 2020 could be accelerated should Freescale fails to meet a Sept. 2017 leverage test and reduce outstanding senior secured notes due 2018 to $500 million or less by Dec. 1, 2017.

The Recovery Ratings (RR) for Freescale reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's belief that Freescale's enterprise value, and hence recovery rates for its creditors, will be maximized as a going concern rather than liquidation scenario.

In deriving a distressed enterprise value, Fitch assumes post-reorganization operating EBITDA of $725 million. Fitch applies a 5x distressed EBITDA multiple to reach a reorganization enterprise value of approximately $3.6 billion.

As is standard with Fitch's recovery analysis, the revolver is assumed to be fully drawn and cash balances fully depleted to reflect a stress event. After reducing the amount available in reorganization for administrative claims by 10%, Fitch estimates the senior secured debt would recover 51% - 70%, equating to 'RR3' Recovery Ratings.

The senior unsecured and senior subordinated debt tranches would recover 0% - 10%, equating to 'RR6' Recovery Ratings and reflect Fitch's belief that minimal if any value would be available for unsecured noteholders.

Fitch currently rates Freescale as follows:

--IDR 'CCC';

--Senior secured bank revolving credit facility (RCF) at

'CCC+/RR3';

--Senior secured term loans 'CCC+/RR3';

--Senior secured notes 'CCC+/RR3';

--Senior unsecured notes 'CC/RR6';

--Senior subordinated notes 'CC/RR6'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation pr_id=791875

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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 SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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