KLA-Tencor (KLAC) Ratings Downgraded to 'BBB' at S&P

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Milpitas, Calif.-based KLA-Tencor (Nasdaq: KLAC) to 'BBB' from 'BBB+'. The outlook is stable.

At the same time, we lowered our issue-level rating on the company's $750 million senior unsecured notes due 2018 to 'BBB' from 'BBB+'.

"The downgrade reflects KLA-Tencor's announced $4 billion shareholder return program, which will be partially financed with $2.5 billion of incremental debt, leading to debt leverage rising to 1.5x over the next two years," said Standard & Poor's credit analyst David Tsui.

Despite the higher debt leverage level, and the ongoing consolidation in the semiconductor capital equipment industry, we expect the company to maintain a financial policy that will meet its growth and shareholder return objectives while keeping adjusted leverage under 3x.

The rating on KLA-Tencor reflects our view of the company's leading position in the semiconductor metrology and inspection equipment industry, high barriers to entry, and long-term customer relationships. However, the company operates in an industry with significant inherent industry cyclicality and risks of technology obsolescence and significant customer concentration, partly offsetting those advantages. We revised our view of the company's financial risk profile to "intermediate" from "modest," reflecting pro forma debt leverage rising to 1.5x from a current net cash position as a result of the proposed partially debt-financed shareholder return program.

The stable outlook reflects our view that the company will be able to maintain its strong market position in the process control and yield management segments of the semiconductor capital equipment industry, while generating a FFO-to-debt ratio of above 30% and maintaining debt leverage below 3x.

We could lower our ratings on the company if a pronounced industry contraction hampers its business performance, leading to a reduction in EBITDA and cash flow generation such that adjusted leverage exceeds 3x on a sustained basis or the FFO-to-debt ratio drops below 30%. We could also lower our ratings on KLA-Tencor if it pursues a more aggressive financial policy, whether through debt-financed acquisitions or shareholder returns, leading to the same leverage and FFO-to-debt ratio thresholds.

An upgrade is unlikely in the intermediate term, given our expectation of modest deleveraging over the next two years and that the company will maintain the current scale and scope of its business.

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