Moody's Cuts MagnaChip (MX) to 'Caa2'; Outlook Negative

Moody's Investors Service has downgraded MagnaChip's (NYSE: MX) corporate family rating and the senior unsecured rating on its $225 million, 6.625% notes due 2021, to Caa2 from Caa1.

The ratings outlook remains negative.

RATINGS RATIONALE

"The rating action reflects increasing stress on MagnaChip's liquidity position, ongoing operational challenges, and continued risks from regulatory investigations and shareholder lawsuits," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

On 28 May, MagnaChip filed its financial statements for the fiscal year ended 31 December 2014 (FY2014) on Form 10K, and reported its earnings for 1Q 2015. It will file Form 10-Q for 1Q 2015 in the next two weeks, and will become current in its filings again starting with its 2Q 2015 results.

The filings, once completed, should also bring the company in compliance with the reporting requirements under its bond indenture.

However, the latest financials also show that MagnaChip's business continues to generate negative operating cash flow. The company's deteriorating liquidity position could put the company in an increasingly tight cash position in the next 12-18 months, absent new financing or a significant turnaround in its operations. The company has no backup banking facilities in place at this time.

MagnaChip's cash balance declined to $91 million at the end of 1Q 2015, having fallen by $51 million in 2014 and another $11 million in 1Q 2015. Its operating cash flow turned negative in 2014 to an outflow of $38 million, and another $9 million in 1Q 2015.

"We do not expect much improvement in operating cash flow over the next several quarters, as it will take time for MagnaChip to turn around its foundry business segment, and execute on its cost and portfolio optimization program," adds Tsuen, also Moody's Lead Analyst for MagnaChip.

At the same time, MagnaChip will need to continue to make interest payments ($16 million in 2014) on its outstanding bonds, fund its capital expenditures ($20 million in 2015, according to management), and likely pay down some of its accrued expenses (e.g., outside service fees of $11 million at end-2014).

The company is subject to class action shareholder lawsuits and is being investigated by the Securities and Exchange Commission based on the facts uncovered during the company's internal investigation which was reported to the SEC by the company.

The negative ratings outlook reflects the challenges the company needs to overcome to restore its operating and financial profile, including generating positive earnings and cash flows, as well as the successful remediation of the material weaknesses in its internal controls.

Given the negative outlook, an upgrade of the company's ratings is unlikely over the near term.

However, the outlook could revert to stable if the company:

(1) Successfully turns around its operations such that operating profit turns positive on a meaningful and sustained basis;

(2) Maintains an adequate liquidity profile;

(3) Demonstrates evidence of improved financial controls and practices; and

(4) Resolves the pending litigation with respect to the class action lawsuit, and if the SEC's investigation is resolved, with limited adverse impact on the company's operating performance, including revenue growth, liquidity and cash flows.

On the other hand, downward ratings pressure could emerge if the company:

(1) Encounters any significant delays or hurdles in fully remediating the material weaknesses in internal controls by the end of this year;

(2) Fails to turn around its operations, such that it continues to report operating losses; or

(3) Reports cash on hand below $50 million.

Moreover, any additional findings of material weaknesses related to internal controls, and/or an adverse outcome of the pending litigation or the SEC investigation, such that the company incurs significant cash outflows, will also be negative for the ratings.

The principal methodology used in these ratings was Global Semiconductor Industry Methodology published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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