S&P Lifts Outlook on MagnaChip (MX) to Stable; Ratings Affirmed

S&P Global Ratings today revised to stable from negative its outlook on its 'CCC+' long-term corporate credit rating on MagnaChip Semiconductor Corp. (NYSE: MX)(MagnaChip). At the same time, we affirmed our 'CCC+' long-term corporate credit and debt ratings on the company.

Our revision of the outlook on MagnaChip to stable mainly reflects our expectation that the company will modestly improve its profitability and operating cash flows over the next 12 months. This is mainly attributable to its ongoing cost reduction efforts, including discontinuation of unprofitable operations and growing demand for active matrix organic light emitting diodes (AMOLED) display drivers.

"We expect MagnaChip to grow its display solution revenues because of the increasing adoption of AMOLED technology for smartphones, wearable devices, and TVs, given its good relationship with a leading AMOLED panel maker," said S&P Global Ratings analyst Sangyun Han. "However, we believe the company's operating and financial performance will remain volatile over the next one to two years due to its relatively small scale and less competitive technological capabilities, particularly associated with its semiconductor foundry business."

In our base-case scenario, we expect MagnaChip will not face significant liquidity distress over the next 12 months mainly because of its cash holdings of US$73.5 million as of March 31, 2016, and modestly improving operating cash flows, which would be sufficient to cover its interest payments and capital expenditures in the near term.

We believe that the uncertainty pertaining to legal disputes in connection to restatement issues has somewhat reduced as the company is currently in the process of settling these litigations. The company plans to fund the settlement mainly through insurance proceeds of around US$29 million, which it has already received from the insurance company and booked as restricted cash on its balance sheet. However, we still see some legal uncertainties related to the restatement issues such as ongoing investigation from the SEC, the outcome of which could impair the company's financial position.

"The rating affirmation at 'CCC+' reflects our view that the company remains susceptible to nonpayments of interest and principal of its outstanding US$225 million debt due in 2021 because of its vulnerable profitability and cash flow, and its lack of access to capital markets," Mr. Han said.

We believe that only favorable market conditions can significantly improve Magnachip's profitability and help the company rebuild its access to capital markets and meet its long-term debt obligations. In our base case, we expect the company to generate marginal free operating cash flow over the next two years, despite its relatively low capital expenditures.

The stable outlook reflects our expectation that the company can sustain its cash levels over the next 12 months without significant pressures on its liquidity, primarily owing to its modestly improving operating cash flows.

We may lower the ratings if we see significantly increasing liquidity risk for the company with rapidly deteriorating cash level, possibly due to worse-than-anticipated operating performance.

We could raise the ratings if the company significantly improves its profitability and generates positive free operating cash flows, enabling the company to lower its debt-to-EBITDA ratio approaching to 5.0x on a sustainable basis, maintain a cash level of over US$100 million, and improve its access to capital markets.

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