2009-10-23 20:57:04 -

Fitch Ratings has revised Seagate Technology's (Seagate) and subsidiaries Rating Outlook to Stable from Negative and affirmed the 'BB' Issuer Default Ratings (IDR) ratings.

Approximately $2.4 billion of total debt is affected by Fitch's action, including the company's $350 million secured revolving credit facility.

The revision in the Outlook to Stable from Negative reflects.

--Seagate's improved operational performance and industry pricing conditions: Significant profit margin expansion in the fiscal first quarter ended Oct. 2, 2009 despite a 27% unit decline in high margin mission-critical enterprise drives in the first nine months of calendar 2009 compared with the year-ago period. Gross margin increased to 24.5% for the quarter, representing a sequential and year-over-year increase of 600 and 700 basis points, respectively. The margin expansion

is attributable to Seagate's transition to more cost-effective high capacity drives for the desktop (500-gigabyte [GB] per disk) and notebook (250-GB) markets and relatively stable pricing environment as industry-wide capacity reductions in the past 12-18 months and better than expected unit demand restored industry supply and demand;

--Material improvement in credit protection measures due to strengthened profitability with operating profit more than doubling in the quarter ended Oct. 2, 2009 compared with the year-ago quarter and significant debt reduction of approximately $700 million in fiscal 2010. As a result, Fitch estimates leverage declined to 2.4 times (x) from 5.5x in the June quarter. Fitch believes leverage could decline to 1x-1.5x by the end of fiscal 2010 (June 30).

--Strengthening liquidity profile due to limited debt maturities remaining in fiscal 2010, consisting of approximately $100 million of convertible senior notes due April 2010, full availability of the company's $350 million credit facility that was previously fully drawn in fiscal 2009 to bolster its cash position prior to the implementation of cost reduction initiatives. Lastly, the company maintains a significant cash position of $1.6 billion, excluding $166 million of restricted cash, as of Oct. 2, 2009 despite meaningful debt reduction.

The ratings are supported by the following factors.

--Broad product portfolio and leading market share in the overall hard disk drive (HDD) industry;

--The company's scale and vertically integrated model, which reduces per unit manufacturing costs;

--Continued growth of digital rich media by consumers and enterprise storage requirements bode favorable for longer-term HDD unit demand.

Fitch's rating concerns consist of.

--Seagate's ability to sustain a time to market advantage critical to achieving market share gains and maintaining overall profitability, given formidable competition from Western Digital Corporation (WDC) and Hitachi Global Storage Technologies (Hitachi) in certain markets, most notably notebooks.

--Consistent declines in average selling prices for HDDs due to intense competition and low switching costs;

--Long-term threat of technology substitution from NAND flash-based solid state drives (SSD). Seagate shipped its initial SSD product for the industry standard server market in September;

--Long-term risk of unfavorable U.S. tax legislation that could materially increase tax liabilities for Seagate and other companies with significant domestic operations that are incorporated in offshore countries with low or no corporate income tax, such as Bermuda or the Cayman Islands, resulting in lower free cash flow.

Total liquidity as of Oct. 2, 2009 was nearly $2 billion, consisting of $1.6 billion of cash, the vast majority of which is readily accessible without adverse tax considerations, and $350 million of availability under an undrawn senior secured credit facility due in September 2011.

The facility is secured by a first priority lien on all of Seagate's tangible and intangible assets, including intellectual property, contracts and certain real-estate, stock of the borrower's (Seagate and Seagate HDD) direct and indirect U.S. subsidiaries and at least 66% of the stock of foreign subsidiaries. Under the terms of the amended and restated credit agreement dated April 3, 2009, financial covenants consist of minimum fixed charge coverage of 1.5x and maximum net leverage ratio of 1.8x for the second quarter of fiscal 2010 (Jan. 1) and 1.5x thereafter. In addition, the facility requires minimum liquidity of $600 million through Jan. 1, 2010, including any cash received from drawing upon the credit facility. Subsequent to Jan. 1, 2010, the minimum liquidity amount declines to $500 million, excluding any cash received from drawing upon the credit facility. Furthermore, liquidity is supported by a material rebound in free cash flow, which increased to $189 million in the quarter ended Oct. 2, 2009 compared with usage of $35 million in the year-ago quarter. Fitch expects free cash flow in fiscal year 2010 to be approximately $600 million - $800 million compared with $58 million in fiscal 2009.

Pro forma for the total debt reduction in fiscal 2010, Fitch estimates total debt is nearly $2.1 billion, consisting of.

--$560 million of 6.375% senior notes due October 2011 (Seagate HDD);

--$430 million of 10.00% senior secured second-priority notes due April 2014; (STI)

--$600 million of 6.8% senior notes due October 2016 (Seagate HDD);

--$326 million of 2.375% convertible senior notes due 2012 (Maxtor);

--$103 million of 6.8% convertible senior notes due 2010 (Maxtor); and

--$40 million of 5.75% subordinated debentures due 2012 (Maxtor).

The following ratings of Seagate Technology (Seagate, parent co.) and subsidiaries (wholly owned and debt unconditionally guaranteed by Seagate) are affirmed.

Seagate


--Issuer Default Rating (IDR) at 'BB';

--Secured credit facility at 'BBB-'.

Seagate Technology HDD Holdings (Seagate HDD)


--IDR at 'BB';

--Senior unsecured debt at 'BB';

--Secured credit facility at 'BBB-'.

Seagate Technology International (STI)


--Issuer Default Rating (IDR) at 'BB';

--Senior secured second-priority notes at 'BB+'.

On June 1, 2009, Maxtor and Seagate Technology (US) Holdings, Inc.

(STUS), both indirect wholly owned subsidiaries of Seagate, merged and, pursuant to second supplemental indentures, STUS succeeded to, and assumed all of the senior note and subordinate debenture obligations of Maxtor. Seagate fully and unconditionally guaranteed the obligations assumed by STUS. Subsequently, Fitch has established ratings for STUS as follows.

--IDR at 'BB';

--Senior unsecured debt affirmed at 'BB';

--Subordinated debentures upgraded to 'BB' from 'B+' as Seagate guarantees all STUS debt on an equal basis. Therefore, the debentures are no longer subordinated as of June 1, 2009.

The Rating Outlook is Stable.

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Fitch Ratings, New YorkJohn M. Witt, CFA, +1-212-908-0673Nick
P. Nilarp, CFA, +1-212-908-0649Media Relations:Cindy
Stoller, +1-212-908-0526 cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com