Fitch Downgrades Freescale Debt on Motorola/Infrastructure Worries

Fitch Ratings has revised the Rating Outlook on Freescale Semiconductor to Negative from Stable. Fitch's actions affect approximately $9.5 billion of total debt.

Fitch's belief that the delayed turnaround of Motorola's mobile devices business until 2009 (from the first half of 2008) will be accompanied by a limited number of new product introductions over the near-term, which is likely to lead to lower average selling prices and/or further market share erosion for Motorola, both of which are expected to pressure profitability for Freescale's cellular business; some event risk exists as well as Motorola has announced that it is exploring strategic alternatives for its mobile devices business;

Fitch also cited a meaningfully more cautious view on the wireless infrastructure market for 2008, driven by recent weaker than anticipated outlooks and reduced capital spending budgets across a number of key customers, as well as less enthusiastic demand prospects for WiMax; and

There is also uncertainty related to the company's strategic direction following the recent resignation of Michel Mayer, Freescale's Chief Executive Officer (CEO) since the company was spun-off from Motorola at the end of 2004.

While Fitch believes Freescale's product, customer, and end market diversification (in all segments but Cellular) will continue to limit significant volatility in the company's operating performance, the meaningfully weaker than previously anticipated operating environment in 2008 will thwart profitability expansion in each of its key businesses and further pressure the company's relatively weak credit protection measures over the near-term. For 2007, Fitch estimates leverage (total debt/operating EBITDA) was at nearly 7 times (x) (2.4x secured debt/operating EBITDA), interest coverage (operating EBITDA/gross interest expense) was less than 2x, and free cash flow/total debt was just over 1%. However, despite minimal debt amortization requirements over the intermediate-term, Freescale is expected to have more than $500 million of proceeds from the Motorola settlement and equipment sales available for debt reduction.

Fitch believes Freescale's liquidity was adequate as of Dec. 31, 2007 and supported by approximately $751 million of cash and cash equivalents, approximately half of which is located in the U.S., and an undrawn $750 million revolving bank credit facility expiring Dec. 1, 2012; Fitch anticipates annual free cash flow will be break even to $200 million annually over the next few years, modestly supporting liquidity. With no borrowings outstanding under the revolving bank credit facility, Freescale's only debt amortization until 2013 is 1% per annum under the term loan facility, or approximately $35 million per year.

Posted to the site on 13th February 2008