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Rating Action: Moody's changes outlook to positive for STMicroelectronics N.V., affirms Baa3 rating
Global Credit Research - 04 Dec 2020
Frankfurt am Main, December 04, 2020 -- Moody's Investors Service ("Moody's") has today affirmed STMicroelectronics N.V. (ST)'s long term issuer rating at Baa3. At the same time Moody's changed the outlook to positive from stable.
The outlook change to positive from stable reflects its solid operating performance since 2017 against difficulties in some of the company's end-markets which were hit by the coronavirus pandemic. ST benefits consistently from the increasing digitization with higher product content per device across segments, which could support a lower volatility of operating performance going forward. We believe that ST will continue to show solid revenue growth while maintaining its profitability and capital structure.
ST'S Baa3 issuer rating is supported by (1) its solid revenue growth since 2017, which has well developed until Q119 (on top of the normal seasonality), when revenues and margins temporarily declined as expected due the challenging macro environment. In the first nine months in 2020 ST was able to return to revenue growth against the backdrop of the coronavirus pandemic that primarily impacted the automotive business while its other segments grew by double-digit rates; (2) the company´s ability to maintain EBITDA margins above 20% despite the industry-inherent pricing pressure; (3) its increased resilience against the downturn of single industries, due to a well-diversified product portfolio; (4) its prudent financial policies, evidenced by a gross leverage below 2.0x expected in 2020 and a high cash balance of above $2 billion.
ST's Baa3 rating also takes into account (1) structural pricing pressure, predominantly for ST's standard products, which should be increasingly mitigated by new products such as 3D sensing and silicon carbide; (2) end-market exposure (largely to automotive industry and industrials) remains cyclical but less volatile as well as some concentration risk in the customer base with the largest customer representing around 20% of revenues; (3) ST's current outsourcing capacity of just about 20% of production value which is limiting the company's flexibility and free cash flow generation relative to its competitors. ST targets to increase its outsourcing capacity towards 30%.
RATIONALE FOR THE POSITIVE OUTLOOK
We expect ST to continue to grow revenues in the low-single digits in the next 12-18 months while maintaining a Moody's adjusted EBITDA-margin well above 20%. Additionally, we see the possibility of reducing Moody's adjusted gross debt/EBITDA in case the outstanding 2022 tranche B of the convertible bond issued in 2017 is early redeemed at the first call option date in July 2021 which will improve leverage to 1.4x. A continuation of the positive performance trend could support further positive rating pressure.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
FACTORS THAT COULD LEAD TO AN UPGRADE
Positive rating pressure could arise if:
- Moody's adjusted gross debt/EBITDA declines sustainably below 1.5x
- Moody's adjusted EBITDA-margin approaches 25%
- Moody's adjusted FCF/debt is maintained above 15%
FACTORS THAT COULD LEAD TO A DOWNGRADE
Negative rating pressure could arise if:
- Moody's adjusted gross debt/EBITDA increases above 2.5x
- Moody's adjusted EBITDA-margin approaches 15%
- Moody's adjusted FCF/debt below 10%
- In case of a deterioration of the company's liquidity or large debt-funded acquisitions
ST's liquidity is strong and is supported by approximately $3.5 billion of cash and equivalents and marketable securities expected in 2020. In addition, ST has access to $1.2 billion of unutilized and committed medium-term facilities. We assume funds from operations (FFO) in the next 12-18 months to come in at approximately $2 billion. ST has high capital expenditures and we expect dividends around $200-$250 million and only moderate working capital swings in the next 12-18 months. Furthermore, ST has a share buy-back program of up to $750 million to be executed within a 3 year period, which was announced in November 2018 of which E382 million has been utilized so far.
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.
STMicroelectronics N.V., incorporated in the Netherlands with its principal executive office in Geneva, Switzerland, is a global independent semiconductor company that designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices. In fiscal year 2019 ST generated revenues of $9.6 billion. The company operates through three core product groups: (1) Automotive and Discrete Group (ADG); (2) Analog, MEMS & Sensors Group (AMS); and (3) Microcontrollers & Digital ICs Group (MDG). The French government (indirectly through Bpifrance) and the Italian Ministry of the Economy and Finance each control approximately 13.7% of the issued share capital of STMicroelectronics N.V. through STMicroelectronics Holding N.V.
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.
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.
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.
Dirk Goedde Asst Vice President - Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Christian Hendker, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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