S&P Places MagnaChip (MX) on CreditWatch Negative; Sees Rise in Financial, Liquidity Risks

Standard & Poor's Ratings Services today placed its 'B+' long-term corporate credit and debt ratings on Korea-based analog and mixed-signal semiconductor manufacturer MagnaChip Semiconductor Corp. (MagnaChip)(NYSE: MX) on CreditWatch with negative implications.

"The CreditWatch placement reflects our view that financial and liquidity risks for MagnaChip could rise significantly if the company fails to complete its financial reporting and restatements by Jan. 30, 2015," said Hong Kong-based credit analyst JunHong Park. "The rating action also reflects a higher likelihood that the negative effect of the restatements on the company's business and financial conditions will be larger than we had previously expected."

On Nov. 12, 2014, MagnaChip announced that an audit committee had completed an internal review of the company's accounting practices and procedures and that its findings included incorrect revenue recognition, improper reserve accounting, and improper cost allocation. The company anticipated it would file its 2013 financial statements by Jan. 30, 2015.

We have revised down our base-case assumptions to reflect the potential for the restatements to have a higher impact than we expected because the announced findings indicate a wider scope of accounting errors than we had previously anticipated. Still, we see uncertainties in the potential for the restatements to substantially change our base-case assumptions about the company's revenue- and profitability-related ratios. Our revised base-case scenario also incorporates the company's plan to close its six-inch fabrication facility in Cheongju, Korea, in 2015, which we do not think will
materially affect the company's business risk profile.

Our base case continues to anticipate the restatements will have a limited negative effect on the company's liquidity at this stage, given that it had cash and equivalents of about $150 million as of the end of 2013 and no scheduled debt repayments by January 2015. Nonetheless, bondholders could choose to accelerate repayment of the bonds under the bond indenture if the company fails to deliver its financial statements by Feb. 13, 2015.

We continue to make a "weak" assessment of the company's business risk profile, reflecting volatility in the semiconductor industry, potential variability in the company's operating performance, and its relatively small scale. We view MagnaChip's financial risk profile as "significant," reflecting the company's moderate debt and potential variability in measures of its financial condition. In our base-case scenario, we estimate debt to EBITDA for MagnaChip after Standard & Poor's adjustments of about 2.5x-3.5x in 2014.

We aim to resolve the CreditWatch by February 2015 if the company completes its financial restatements as planned. We may lower the ratings one or more notches if we see an increasing likelihood of an acceleration in bond repayments, such as if the company does not complete its 2013 financial reporting and restatements by Jan. 30, 2015. We could also lower the ratings if the restatement significantly dents the company's finances or if its profitability and cash flows decline substantially as a result of a weakening competitive position. A ratio of debt to EBITDA exceeding 3.0x could indicate such a deterioration.

On the other hand, we may affirm the ratings if the restatement does not materially change the company's profitability and cash flow metrics, leading us to believe the company could maintain average profitability for its industry and debt to EBITDA below 3.0x on a sustainable basis.

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