S&P Places NXP Semiconductors (NXPI) Ratings on CreditWatch Positive Amid Qualcomm Merger

October 28, 2016 11:09 AM EDT

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S&P Global Ratings placed its 'BBB-' long-term corporate credit ratings on NXP Semiconductors N.V. (Nasdaq: NXPI) and its subsidiary NXP B.V. on CreditWatch with positive implications.

We also put our issue ratings on debt issued by various NXP entities on CreditWatch positive.

The CreditWatch placement follows the announcement by leading global provider of wireless sector semiconductors and licensed technology Qualcomm Inc.'s that it had agreed to acquire NXP for $47 billion. The transaction will likely close in late 2017. The CreditWatch reflects the high likelihood that we could raise our long-term rating on NXP by several notches, up to the level of the rating on Qualcomm (A+/Watch Neg/A-1+) as a maximum.

In our view, the combined entity will have much larger scale, with annual pro forma revenues of more than $33 billion, compared with about $8.5 billion for NXP, and leading market share in several semiconductor segments, including mobile handsets and automotive. Additionally, it will have stronger profitability and a somewhat lower adjusted debt-to-EBITDA ratio than NXP on a stand-alone basis.

Our long-term rating on NXP reflects our view of the company's large leading market positions in some high-performance analog and mixed-signal semiconductor applications, broad geographic diversity of customers and operations, and consistent above-market-average annual revenue growth. It also incorporates the company's strong free operating cash flow generation of about $1.5 billion annually, which is offset by significant shareholder distributions and an adjusted debt-to-EBITDA ratio of about 3.0x at year-end 2016 and between 2.0x and 2.4x in 2017, following the disposal of the standard
products business.

We expect to resolve the CreditWatch listing on NXP after the acquisition's close, which we anticipate in late 2017.

We will likely raise our long-term rating on NXP by several notches if the transaction closes successfully. However, our final rating decision will depend on:

  • The rating level of NXP's new parent Qualcomm, pro forma the transaction's completion, which we currently expect to be 'A+' or 'A' at the lowest.
  • Our assessment of Qualcomm's and NXP's parent-subsidiary relationship, which could lead to, at a maximum, rating equalization. Factors we will look at include the operational and legal integration of NXP into Qualcomm, including the integration of the treasury function; and the presence of any financial guarantees from Qualcomm to NXP or other incentives for Qualcomm to support NXP, such as cross-default clauses. NXP's capital structure post-closing.

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