S&P Downgrades ON Semiconductor (ON) to 'BB' Following Fairchild Semi Deal Closure

September 19, 2016 11:52 AM EDT

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S&P Global Ratings today said it lowered its corporate credit rating on ON Semiconductor Corp. (Nasdaq: ON) to 'BB' from 'BB+' and removed it from CreditWatch, where we had placed it with negative implications on Nov. 18, 2015. The outlook is stable.

At the same time, we lowered our issue-level rating on the company's $690 million senior unsecured convertible notes due 2020 to 'BB-' from 'BB+' and revised the recovery rating to '5' from '3'. The '5' recovery rating indicates our expectation for modest recovery (10% to 30%; lower half of the range) in the event of payment default.

We also lowered our issue-level rating on the company's subordinated convertible notes to 'B+' from 'BB-'. The '6' recovery rating to remains unchanged and it indicates our expectation for negligible recovery (0% to 10%) in the event of payment default.

In addition, we affirmed our 'BB' issue-level rating, with a '3' recovery rating, on the company's $2.2 billion secured term loan due 2023 and $600 million secured revolving credit facility due 2021. The '3' recovery rating indicates our expectation for meaningful recovery (50% to 70%; lower half of the range) in the event of payment default.

"The downgrade reflects our expectation that leverage will decrease to the 3x area in 2017 from the low-4x area pro forma for the acquisition (but excluding management's cost saving adjustments) and up from stand-alone leverage of 1.7x, as ON Semiconductor realizes cost savings and repays debt," said S&P Global Ratings credit analyst Christian Frank.

The rating also reflects the company's fragmented, competitive, and cyclical power management and discrete product segments, poor results from its System Solutions Group (SSG; formerly the acquired SANYO business), and operating track records at both companies that have lagged their addressable markets, in our view. It also reflects long-term growth opportunities for the company's imaging products and automotive end market, and near-term opportunities for products supporting Intel's Skylake power management framework for personal computers and wireless charging for mobile phones.

The stable outlook reflects our expectation for ON Semiconductor to deliver revenues consistent with pro forma levels, and that it will realize cost savings and use most of its free cash flow for debt repayment, resulting in meaningful leverage reduction by the end of 2017.

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