Moody's Upgrades Seagate (STX) to 'Baa3'

Moody's Investors Service upgraded Seagate HDD Cayman's ("Seagate")(Nasdaq: STX) senior unsecured debt ratings to Baa3 from Ba1. Moody's also withdrew Seagate Technology HDD Holdings' Corporate Family Rating (CFR) of Ba1, Ba1-PD Probability of Default Rating (PDR) and SGL-1 Speculative Grade Liquidity Ratings. As part of the rating action, Moody's assigned a Baa3 rating to the company's new senior unsecured note placement. The rating outlook is stable.

The upgrade reflects Moody's views that the company will continue to protect its solid position in the hard disk drive ("HDD") industry, will grow its revenue and profitability amid the storage technology evolution, and will maintain conservative financial policies with a disciplined debt capital profile that supports an investment grade rating.

"Seagate's recent track record of conservative financial policies, including a publicly-stated 1.5 times debt/EBITDA target, supports the Baa3 rating considering its strong market position in supplying HDDs to its customers, with new revenue growth opportunities around emerging storage solutions," stated Gerald Granovsky, Moody's analyst.

RATINGS RATIONALE

Seagate is now one of two leading providers within the HDD industry in what has become largely a duopoly after substantial industry consolidation over the last decade. Consequently, Moody's does not anticipate the return of the sales and cash flow volatility that characterized a previously highly fragmented industry. Given the high operating leverage, Moody's expects Seagate to continue generating solid profit and free cash flow over the next couple of years and to maintain strong credit metrics.

Moody's recognizes the long term risk presented to Seagate's legacy HDD business line, in light of the threat of potential product obsolescence and substitution from emerging solid state drive (SSD) deployments, particularly in high performance data center storage environments. The rating agency expects a proportionately higher dollar spend on SSD relative to the total storage capacity and units shipped, due to SSD's greater speed, power and footprint efficiency in the lucrative enterprise and data center markets. However, based on the anticipated growth of digital content that will need to be stored, Moody's believes there will be relatively stable demand for HDD technology over the foreseeable future, as there likely will not be enough raw SSD capacity generated to meet all the expected storage demand.

Moody's believes Seagate will allocate its generated cash among product development and innovation and to return the balance of its available cash to shareholders in the form of dividends and stock buy backs. The company has declared its intent to maintain a debt to EBITDA leverage target of 1.5 times or below, which was publicly articulated in early 2013. Moody's also believes that the risk of outsized acquisition activity and share buy backs has declined, given the company's disciplined financial practices over the past three years. In addition, Moody's notes that Seagate has engaged in prudent M&A activity, in light of the high multiples paid by peers to enhance SSD capability.

Seagate benefits from very strong liquidity with over $2 billion in cash at October 3, 2014.

The stable outlook reflects Moody's expectation that Seagate will generate low single digit organic revenue growth and consistent annual free cash flow of at least $1.0 billion through calendar 2016. Moody's also expects that management will remain committed to its stated 1.5 times debt to EBITDA leverage target.

Moody's could upgrade Seagate's ratings if the company maintains its solid position in the HDD industry, delivers strong revenue and cash flow growth from a more diversified business profile, and generates free cash flow to debt in the 30% range on a sustained basis. The company could also be considered for upgrade if it maintains adjusted operating margins of above 14% and demonstrates continual commitment to a conservative financial policy.

Seagate's rating could be downgraded if the company experiences a loss of technological leadership or if the HDD industry's unit shipments suffer a greater than expected contraction. Material revenue and EBITDA declines could result in negative credit implications. Additionally, Moody's could downgrade the rating if Seagate engages in aggressive financial policies.

Summary of Rating Actions:

Seagate HDD Cayman - Senior Unsecured Debt Upgraded to Baa3 from Ba1 (LGD3)

Seagate HDD Cayman - New Senior Unsecured Notes assigned Baa3

Seagate Technology HDD Holdings - Senior Unsecured Debt Upgraded to Baa3 from Ba1 (LGD3)

Ratings withdrawn:

Seagate Technology HDD Holdings

Ba1 Corporate Family Rating

Ba1-PD Probability of Default Rating

SGL-1 Speculative Grade Liquidity Rating

The rating outlook is stable.

The principal methodology used in these ratings was Global Technology Hardware published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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