Rating Action: Moody rates ON Semiconductor's new unsecured notes at Ba2; affirms Ba1 CFR; outlook stable
Global Credit Research - 17 Aug 2020
NOTE: On August 24, 2020, the press release was corrected as follows: In the first sentence of the sixth paragraph of the Ratings Rationale section, the description of the Loan was changed to Senior Secured Term Loan. Revised release follows.
New York, August 17, 2020 -- Moody's Investors Service, ("Moody's") rated ON Semiconductor Corp.'s ("ON Semi") new Senior Unsecured Notes due 2028 ("New Notes") at Ba2; upgraded the speculative grade liquidity ("SGL") rating to SGL-1; and affirmed ON Semi's other ratings, including the Ba1 Corporate Family Rating ("CFR"). The outlook is stable.
ON Semi plans to use the net proceeds of the New Notes plus balance sheet cash to repay about $1 billion of the nearly $2 billion outstanding under the Senior Secured Revolving Credit Facility ("Revolver"). Proforma for the New Notes and the Revolver repayment, leverage should decline from about 4.8x adjusted debt to EBITDA (twelve months ended July 3, 2020) to about 4.3x.
Moody's expects that ON Semi will repay the 1% Convertible Senior Notes ("Convertibles"), which mature on December 1, 2020, with existing cash balances. Proforma for the repayment of the Convertibles, leverage would be reduced by an additional 0.6 turns to about 3.7x adjusted debt to EBITDA (twelve months ended July 3, 2020). Moody's projects that ON Semi will generate increasing EBITDA and free cash flow ("FCF") over the coming quarters as the automotive market recovers and will direct FCF toward debt reduction, driving leverage to below 3x over the next 12 to 18 months.
..Issuer: ON Semiconductor Corporation
....Senior Unsecured Regular Bond/Debenture, Assigned Ba2 (LGD5)
..Issuer: ON Semiconductor Corporation
.... Corporate Family Rating, Affirmed Ba1
.... Probability of Default Rating, Affirmed Ba1-PD
....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD3) from (LGD2)
..Issuer: ON Semiconductor Corporation
.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2
..Issuer: ON Semiconductor Corporation
....Outlook, Remains Stable
ON Semi's Ba1 CFR reflects the company's strong market position, with the second largest market share in the Power Discrete semiconductor segment behind industry leader Infineon. Moreover, Moody's expects that ON Semi's increasing exposure to relatively high growth, high margin analog end markets (automotive, industrial, mobility) will produce some modest further increases in the EBITDA margin over time. Nevertheless, with the global economic recession driven by the coronavirus outbreak, Moody's expects revenues and EBITDA to remain weak, though improving, over the near term with adjusted debt to EBITDA remaining above 3.5x for the remainder of 2020. This reflects ON Semi's exposure to the global automotive market, which Moody's estimates will record a 20% unit sales decline in 2020, and to the industrial markets, which is also highly-cyclical. ON Semi's rating profile is also constrained due to the significant exposure to the mobile phone market, which is subject to very short product life cycles, requiring ongoing research and development to obtain share in new customer platforms.
The stable outlook reflects Moody's expectation that revenues, EBITDA, and FCF will improve over the near term as ON Semi's end markets, particularly the automotive end market, recover from the coronavirus-related demand disruption. Moody's expects that ON Semi will use FCF and cash balances to make additional debt repayments over the near term. With the anticipated recovery in EBITDA and the debt repayments, Moody's expects that ON Semi will reduce leverage to below 3x adjusted debt to EBITDA over the next 12 to 18 months.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The credit profile reflects the impact on the company of the deterioration in credit quality the pandemic has triggered, given the company's exposure to the semiconductor supply chain. This has left the company vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
The rating is supported by governance considerations, specifically ON Semi's decision to forego share repurchases and direct FCF toward debt repayment. Moody's expects that ON Semi will continue to follow a conservative financial policy, refraining from debt funded shareholder returns.
The upgrade of the SGL rating to SGL-1 from SGL-2 reflects ON Semi's consistent FCF generation during the currently depressed business environment. Moody's expects that ON Semi will keep at least $750 million of cash following the $1 billion repayment on the Revolver and the repayment of the Convertibles and will generate FCF of at least $400 million over the next year. On March 24, 2020, ON Semi drew down the remaining $1.2 billion of available borrowing capacity on the $1.97 billion Revolver to build the cash balance. Moody's expects that ON Semi will reduce the Revolver balance further over the next 12 to 18 months, providing additional external liquidity.
The Baa3 rating on the Revolver and the Senior Secured Term Loan (collectively the "Credit Facilities") reflects the collateral, which includes a first priority lien on all assets, and benefits from a cushion of unsecured liabilities, including two tranches of convertible senior notes. The Ba2 rating on the New Notes reflects the absence of collateral and the effective subordination to the Credit Facilities, which benefits from collateral.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be upgraded if:
the EBITDA margin (Moody's adjusted) is sustained at least in the upper twenties percent
debt to EBITDA (Moody's adjusted) is sustained below 2x and
ON Semi maintains a very good liquidity profile
The rating could be downgraded if:
Moody's believes than ON Semi is losing market share or
EBITDA margin is less than 20% (Moody's adjusted) or
ON Semi engages in debt funded share repurchases or distributions, or highly-leveraging acquisitions, such that debt to EBITDA (Moody's adjusted) is sustained above 3x
ON Semiconductor Corp., based in Phoenix, Arizona, manufactures a broad array of discrete and integrated circuit analog, mixed-signal, and logic semiconductors and sensors, serving the automotive, industrial, mobile telephony, and consumer electronics markets.
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.
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.
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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.
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Terrence Dennehy, CFA VP - Senior Credit Officer 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 Stephen Sohn 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 /td>
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