2008-10-08 03:36:02 -
- Fitch Ratings has affirmed the ratings of Seagate Technology (Seagate, parent co.) and its wholly owned subsidiaries, Seagate Technology HDD Holdings (Seagate HDD) and Maxtor Corporation (Maxtor), the debt of which is irrevocably fully and unconditionally guaranteed by Seagate, as follows:
Seagate
--Issuer Default Rating (IDR) at 'BBB-';
--Unsecured credit facility at 'BBB-'.
Seagate HDD
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Unsecured credit facility at 'BBB-'.
Maxtor
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Subordinated debentures at 'BB'.
Approximately $2.5 billion of total debt is affected by Fitch's action, including an undrawn $500 million revolving credit facility. The Rating Outlook is revised to Negative from Stable.
The Negative Outlook reflects Fitch's expectations for a greater-than-normal contraction of average selling prices (ASPs) and gross margin pressure, due to:
--The deteriorating worldwide information technology (IT) spending outlook for consumers and enterprises given the increasingly challenging macroeconomic environment. In addition to moderating HDD unit growth, Fitch believes the economic downturn increases the risk of a supply and demand imbalance in the HDD industry that has historically led to periods of significant ASP erosion.
--The high degree of product commonality expected across the HDD industry in calendar 2008, which has also historically led to periods of greater price erosion.
--Increasingly formidable competition from Western Digital Corporation (WDC) and Hitachi Global Storage Technologies (Hitachi) that Fitch believes could challenge Seagate's ability to achieve and maintain product leadership in certain markets.
The ratings are supported by the following factors:
--Broad product portfolio and leading market share in the overall HDD industry;
--Solid credit metrics and liquidity;
--Consistent operating profits despite industry challenges due to the company's scale and vertically integrated model;
--Continued solid HDD unit demand driven by consumer usage of digital rich media and growing enterprise storage requirements.
Fitch's rating concerns consist of:
--Potential for debt-financed shareholder repurchases or acquisitions, mitigated by an indebtedness covenant in Seagate's credit facility that restricts additional indebtedness to 10% of consolidated total assets, or approximately $1 billion, as of June 27, 2008, plus borrowings under the $500 million facility.
--Consistently declining ASPs for HDDs due to intense competition and low switching costs;
--Long-term threat of technology substitution from NAND flash-based solid state drives (SSD). Fitch believes broad market adoption of flash-based SSD requires further significant declines in the per gigabit cost, availability of storage capacities on par with HDDs and actual delivery of stated performance benefits, which have thus far disappointed early adopters of high-end notebooks with SSD.
--Potential gross margin pressure as Seagate's HDD unit mix for personal computers (PC) gradually shifts to lower-margin notebooks at the expense of desktops, where the company is the industry leader. Fitch believes notebook HDDs carry lower gross margins due to the greater number of competitors (six) than in the desktop market (four).
Total liquidity as of June 27, 2008 was approximately $1.5 billion, consisting of $1.1 billion of cash and $438 million of availability, net letters of credit, under an undrawn $500 million revolving line of credit. The facility matures in Sept. 2011 and requires Seagate to maintain minimum liquidity and fixed charge coverage of $500 million and 1.5 times (x), respectively, and maximum net leverage of 1.5x. Furthermore, liquidity is supported by annual free cash flow that averaged nearly $504 million from fiscal year 2006 to 2008. Fitch expects free cash flow in fiscal year 2009 to be pressured by unfavorable industry dynamics, Seagate-specific execution issues in the mobility market and cash restructuring payments.
Seagate's interest coverage (operating EBITDA/ interest expense) increased to approximately 19x in the latest 12 months ended June 27, 2008 from 14x in the year-ago period due to a four percentage point improvement in EBITDA margin and nearly 12% revenue growth. Leverage (debt/operating EBITDA) improved to 0.8x as of June 27, 2008 from 1.2x in the prior year due strong EBITDA growth and flat debt balances. However, Fitch believes credit protection measures are likely to deteriorate in fiscal year 2009 due to profitability pressures.
As of June 27, 2008, Seagate's total debt was approximately $2 billion, consisting of:
--$300 million of floating rate senior notes due Oct. 2009;
--$136 million of 6.8% convertible senior notes due 2010;
--$600 million of 6.375% senior notes due Oct. 2011;
--$326 million of 2.375% convertible senior notes due 2012;
--$45 million of 5.75% subordinated debentures due 2012;
--$600 million of 6.8% senior notes due Oct. 2016; and
--$30 million drawn from a Bank of China credit line.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings, New York
John M. Witt, CFA, 212-908-0673
Nick P. Nilarp, CFA, 212-908-0649
Cindy Stoller, 212-908-0526 (Media Relations)
