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Rating Action: Moody's upgrades MagnaChip to B1; outlook stable
Global Credit Research - 26 Nov 2020
Hong Kong, November 26, 2020 -- Moody's Investors Service has upgraded MagnaChip Semiconductor Corporation's corporate family rating to B1 from B2.
The rating outlook is stable.
"The upgrade reflects our expectation that MagnaChip's display and power businesses will continue to drive the company's robust revenue growth and higher profitability in the next 2-3 years, and that the company will, after its recent sale of the Foundry Services Group business and Fab 4, maintain a solid financial profile with continued positive free cash flow generation," says Gloria Tsuen, a Moody's Vice President and Senior Credit Officer.
The B1 rating is supported by the good growth prospects for MagnaChip's core display and power businesses, improving profitability and healthy balance sheet with large liquidity buffer. The company also has a business model that does not require substantial capital spending, which will allow it to generate positive free cash flow (FCF).
At the same time, the rating is constrained by the company's small scale, high customer and business concentration, exposure to the volatile and competitive consumer electronics industry, and changes in end-customer demand.
MagnaChip is well positioned in the growing organic light-emitting diode (OLED) display driver market where it has a strong product lineup, while demand is increasing driven by 5G smartphones, OLED televisions and new applications such as automotives. The company has also upgraded its power product portfolio, focusing on higher-efficiency and higher-margin products.
Moody's expects MagnaChip's display and power revenue to grow 8%-10% annually in 2021-2022, after a mid-single digit decline in 2020. Moody's also expects the company's adjusted EBITDA margin to improve to 11%-12% over the next 1-2 years from around 9% in 2019 and 2020, mainly because of better product mix.
Despite a temporary increase in capital spending in 2020 and 2021 for one-time investments such as capacity expansion in Fab 3 and investments in IT systems, MagnaChip's robust operating cash flow will enable the company to continue to generate positive FCF.
The company completed the sale of its Foundry Services Group business and Fab 4 in September 2020 and received approximately $351 million in cash proceeds. It subsequently redeemed all of its $224 million senior unsecured notes due in July 2021. Given its currently large net cash position and ability to generate FCF, Moody's expects the company will maintain at least $100 million of net cash over the next 1-2 years, which will provide an adequate buffer against external shocks.
The rating also take into account MagnaChip's governance risk. While the company has limited disclosures of its financial policy and forward-looking guidance, this factor is mitigated by its strengthened balance sheet.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade in the rating is unlikely over the next 2-3 years given MagnaChip's small scale and high business and customer concentration.
Moody's could downgrade the rating if the company's (1) adjusted operating margin stays below 3%-5%; (2) adjusted debt/EBITDA remains above 3.0x; (3) cash on hand falls below $100 million; or (4) liquidity weakens.
The principal methodology used in this rating 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.
MagnaChip Semiconductor Corporation is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, Internet of Things, consumer, industrial and automotive applications.
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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
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.
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.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Gloria Tsuen, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Chris Park Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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