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Micron's (MU) New Senior Secured Term Loan B Rated 'Baa2' by Moody's; Other Ratings Affirmed

April 11, 2016 11:39 AM EDT

Moody's Investors Service ("Moody's") rated Micron Technology Inc.'s (Nasdaq: MU) new Senior Secured Term Loan B at Baa2 and affirmed Micron's other ratings, including the Ba2 Corporate Family Rating ("CFR"), the Ba2-PD Probability of Default Rating ("PDR"), the Ba3 Senior Unsecured rating, and the SGL-2 Speculative Grade Liquidity ("SGL") rating. The outlook is stable.

Moody's expects that proceeds of up to $1.5 billion, comprised of the new Senior Secured Term Loan B and an anticipated subsequent offering of senior secured notes, will be used to bolster liquidity. Micron's liquidity is an important driver of the rating, as Moody's expects DRAM market conditions will remain depressed over the next year, and Moody's expects that Micron's resulting weak profitability over the next 12 to 18 months and large capital expenditures will result in cash consumption over this period.

Micron's Ba2 corporate family rating (CFR) reflects Micron's strong market position in the memory business, low financial leverage, and large cash and marketable investments balances, which we expect to exceed $3 billion over time. Due to the new senior secured debt offerings, and the anticipated debt issuance to fund the proposed acquisition of Inotera Memories, Inc ("Inotera"), we expect debt to increase moderately, though Moody's expects that debt to EBITDA will only increase to the mid to upper 2x level (Moody's adjusted, proforma for Inotera), which is low relative to many other Ba rated issuers. Still, this level of leverage is appropriate for the rating, since leverage metrics can increase considerably during a cyclical downturn in the memory market or a heavy capital program. Currently there is weakness in the PC-DRAM market and we expect Micron's capital spending will remain elevated as the company converts NAND production to three dimensional structures ("3D-NAND"). Although we expect the DRAM market to remain weak over the near term, we believe that Micron's large pool of liquid assets will sustain the company through this weak phase of the industry cycle. Moreover, we recognize the flexibility that Micron exhibited during the last industry downturn (2008-2009) to temporarily defer capital expenditures, limiting the negative free cash flow and thus preserving cash should the downturn deepen.

The Baa2 rating of the Senior Secured Term Loan B, which is three notches above the CFR, reflects the collateral package, which includes the material US assets of Micron and pledge of foreign stock, and the very large cushion of unsecured liabilities behind the senior secured debt. The Ba3 Senior Unsecured rating, which is one notch below the CFR, reflects the structural subordination to Micron's secured liabilities. The Speculative Grade Liquidity ("SGL") rating of SGL-2, reflects Micron's good liquidity, based mostly on its significant cash and marketable securities position, which provides Micron the ability to maintain capital expenditures during industry downturns when profitability is weak, as is the case currently due to depressed market conditions in DRAM.

The stable outlook reflects Moody's expectation that Micron will consume cash over the near term due to weak profitability, reflecting depressed market conditions in DRAM, and high capital expenditures to fund the transition to 3D NAND production. Moreover, the increase in debt, including the new senior secured debt (Senior Secured Term Loan B and senior secured notes) and the incremental debt to fund the acquisition of Inotera, will increase debt to EBITDA into the mid to upper 2x level (Moody's adjusted, proforma for Inotera).

Given the weak profitability we expect over the near term as the DRAM market progresses through the low phase of the industry cycle, a rating upgrade is unlikely over the next year. Over the intermediate term, the rating could be upgraded as Micron both increases gross profit margin, indicating greater market pricing power, and shows evidence of improved operational efficiency, such that we expect that operating margins (Moody's adjusted) will be sustained above the low digit teens percent through the cycle. We would expect these improvements to occur within a market environment of continued stable market pricing and core growth in demand for DRAM and NAND. Maintenance of very strong liquidity, through access to cash and generally positive free cash flow, and for Micron to maintain a financial policy balancing the interests of creditors and shareholders would also be important considerations for any possible upgrade.

The ratings could be downgraded if Micron does not execute successfully on its transition to mass production of 3D NAND or if free cash flow becomes more negative. The ratings could also come under pressure if DRAM market conditions do not show signs of improvement over the next year, with supply more closely tracking demand. If we expect leverage will not decline toward 2.0x EBITDA (Moody's adjusted) over the next 18 months, or Micron engages in shareholder-friendly actions, the rating could be downgraded.

Rating Assignments:

..Issuer: Micron Technology Inc.

... Senior Secured Term Loan, Baa2, LGD1

Affirmations:

..Issuer: Micron Technology Inc.

.... Corporate Family Rating (Local Currency), Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

.... Senior Unsecured Regular Bond/Debenture, Affirmed Ba3, LGD5

Outlook Actions:

..Issuer: Micron Technology Inc.

....Outlook, Stable



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