Following the completion of Spansion Inc.'s (Spansion)
initial public offering (IPO) and concurrent debt offerings, Fitch
Ratings has assigned the following ratings:
-- Issuer default rating (IDR) 'B-';
-- $250 million 11.25% senior unsecured notes due 2016 'B-/RR4';
-- $175 million 12.75% senior subordinated notes due 2016 'CCC+/RR5';
-- $175 million senior secured revolving credit facility due 2010 'BB-/RR1'.
The Rating Outlook is Negative.
The ratings and Outlook reflect Fitch's expectation that Spansion's free cash flow will be negative for the intermediate term due to necessary and significant capital spending plans; financial flexibility will be limited, despite an adequate pro forma liquidity position; and debt levels will remain high compared to competitors and likely increase over the intermediate term. The ratings also reflect Spansion's lack of diversification and size relative to its key competitors, which are better positioned to absorb ongoing flash memory market price volatility and fund capital expenditures; limited ability to withstand technology road map and manufacturing technology missteps; and comparatively mature growth rates for NOR type flash memory, Spansion's primary market historically.
Supporting the ratings are Spansion's adequate liquidity sources, established relationships with a diverse customer base including leading wireless handset and embedded products original equipment manufacturers (OEM), and leading market positions in the NOR flash memory market, which Fitch believes are more defensible due to increasing barriers to entry. Additionally, Fitch believes Spansion's proprietary technology (MirrorBit architecture) could expand the company's addressable market, command higher average selling prices (ASPs), and mitigate some expected operating performance volatility.
Fitch believes Spansion will burn significant cash over the next few years due to onerous but essential capital spending. Capital expenditures are expected to be $800 million to $950 million for fiscal year 2006 and Fitch believes they will likely remain at similar levels through 2008, primarily to fund the construction of Spansion's first and only 300 millimeter (mm) wafer fabrication facility and to upgrade existing capacity. Spansion burned approximately $250 million of cash from 2003 through its most recent quarter-ended Sept. 25, 2005. While Spansion could curtail or delay capital spending depending on market demand, Fitch believes meaningfully doing so would materially weaken its cost competitiveness over the intermediate term. Furthermore, Intel, Spansion's main competitor, has leveraged its cost advantage from an already substantial 300mm wafer manufacturing footprint to price NOR flash memory products aggressively, pressuring Spansion's recent operating performance.
Increased capital spending requirements should be partially offset by higher profitability over the intermediate term due to expectations for continued strong unit growth and higher gross margins, partly from the continued transition to MirrorBit. Unit growth is expected to remain strong over the next few years, driven by strong wireless handset demand, particularly for products with more memory intensive features, and flash memory's increased content in embedded products. At the same time, Fitch believes that increased adoption of products based upon Spansion's MirrorBit architecture, which represents a relatively small (20%-25%) but growing portion of total sales, should support higher and somewhat less volatile ASPs. Spansion historically addressed only the NOR flash memory market, which is expected to grow at approximately 3%-4% over the next few years. A substitute technology for certain data applications, NAND, is expected to have unit growth in the mid-double digits over the same time period, thereby increasing its share of the flash memory market. Fitch believes Spansion's MirrorBit architecture has made the company's NOR-based products more cost competitive against NAND and could increase Spansion's addressable market.
Fitch expects Spansion's negative free cash flow for the next few years will be funded with cash and additional debt, resulting in minimal opportunity to meaningful improve credit protection measures. For the past four quarters ending Sept. 25, 2005, credit protection measures have weakened due to lower profitability as total debt to operating EBITDA was 3.2 times (x), versus 1.4x at the end of 2004. For the same time periods, operating EBITDA to gross interest expense declined to 5.6x from 13.4x.
As of Sept. 25, 2005, and pro forma for the equity and debt offerings, liquidity was supported by cash and cash equivalents of approximately $1 billion and an undrawn $175 million senior secured revolving credit facility due September 2010. Pro forma total debt was approximately $1.2 billion, consisting primarily of $250 million 11.25% unsecured senior notes due 2016, $175 million 12.75% senior subordinated notes due 2016, and approximately $780 million of various secured credit facilities and capital leases. Spansion intends to use a portion of the approximately $380 million of net proceeds from the note offerings to repay indebtedness owed to Advanced Micro Devices, Inc. (rated 'B/Stable Outlook by Fitch).
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. The ratings above have been initiated by Fitch as a service to investors.
-- Issuer default rating (IDR) 'B-';
-- $250 million 11.25% senior unsecured notes due 2016 'B-/RR4';
-- $175 million 12.75% senior subordinated notes due 2016 'CCC+/RR5';
-- $175 million senior secured revolving credit facility due 2010 'BB-/RR1'.
The Rating Outlook is Negative.
The ratings and Outlook reflect Fitch's expectation that Spansion's free cash flow will be negative for the intermediate term due to necessary and significant capital spending plans; financial flexibility will be limited, despite an adequate pro forma liquidity position; and debt levels will remain high compared to competitors and likely increase over the intermediate term. The ratings also reflect Spansion's lack of diversification and size relative to its key competitors, which are better positioned to absorb ongoing flash memory market price volatility and fund capital expenditures; limited ability to withstand technology road map and manufacturing technology missteps; and comparatively mature growth rates for NOR type flash memory, Spansion's primary market historically.
Supporting the ratings are Spansion's adequate liquidity sources, established relationships with a diverse customer base including leading wireless handset and embedded products original equipment manufacturers (OEM), and leading market positions in the NOR flash memory market, which Fitch believes are more defensible due to increasing barriers to entry. Additionally, Fitch believes Spansion's proprietary technology (MirrorBit architecture) could expand the company's addressable market, command higher average selling prices (ASPs), and mitigate some expected operating performance volatility.
Fitch believes Spansion will burn significant cash over the next few years due to onerous but essential capital spending. Capital expenditures are expected to be $800 million to $950 million for fiscal year 2006 and Fitch believes they will likely remain at similar levels through 2008, primarily to fund the construction of Spansion's first and only 300 millimeter (mm) wafer fabrication facility and to upgrade existing capacity. Spansion burned approximately $250 million of cash from 2003 through its most recent quarter-ended Sept. 25, 2005. While Spansion could curtail or delay capital spending depending on market demand, Fitch believes meaningfully doing so would materially weaken its cost competitiveness over the intermediate term. Furthermore, Intel, Spansion's main competitor, has leveraged its cost advantage from an already substantial 300mm wafer manufacturing footprint to price NOR flash memory products aggressively, pressuring Spansion's recent operating performance.
Increased capital spending requirements should be partially offset by higher profitability over the intermediate term due to expectations for continued strong unit growth and higher gross margins, partly from the continued transition to MirrorBit. Unit growth is expected to remain strong over the next few years, driven by strong wireless handset demand, particularly for products with more memory intensive features, and flash memory's increased content in embedded products. At the same time, Fitch believes that increased adoption of products based upon Spansion's MirrorBit architecture, which represents a relatively small (20%-25%) but growing portion of total sales, should support higher and somewhat less volatile ASPs. Spansion historically addressed only the NOR flash memory market, which is expected to grow at approximately 3%-4% over the next few years. A substitute technology for certain data applications, NAND, is expected to have unit growth in the mid-double digits over the same time period, thereby increasing its share of the flash memory market. Fitch believes Spansion's MirrorBit architecture has made the company's NOR-based products more cost competitive against NAND and could increase Spansion's addressable market.
Fitch expects Spansion's negative free cash flow for the next few years will be funded with cash and additional debt, resulting in minimal opportunity to meaningful improve credit protection measures. For the past four quarters ending Sept. 25, 2005, credit protection measures have weakened due to lower profitability as total debt to operating EBITDA was 3.2 times (x), versus 1.4x at the end of 2004. For the same time periods, operating EBITDA to gross interest expense declined to 5.6x from 13.4x.
As of Sept. 25, 2005, and pro forma for the equity and debt offerings, liquidity was supported by cash and cash equivalents of approximately $1 billion and an undrawn $175 million senior secured revolving credit facility due September 2010. Pro forma total debt was approximately $1.2 billion, consisting primarily of $250 million 11.25% unsecured senior notes due 2016, $175 million 12.75% senior subordinated notes due 2016, and approximately $780 million of various secured credit facilities and capital leases. Spansion intends to use a portion of the approximately $380 million of net proceeds from the note offerings to repay indebtedness owed to Advanced Micro Devices, Inc. (rated 'B/Stable Outlook by Fitch).
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. The ratings above have been initiated by Fitch as a service to investors.