Moody's Lifts Outlook on NXP Semi's (NXPI) to Positive Amid Asset Divestiture Announcement

June 14, 2016 11:09 AM EDT

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Moody's Investors Service revised NXP B.V.'s (Nasdaq: NXPI) outlook to positive and affirmed NXP's ratings-- Ba1 Corporate Family Rating ("CFR"), Baa2 senior secured rating, Ba2 senior unsecured ratings, Ba1-PD Probability of Default Rating ("PDR"), and SGL-1 Speculative Grade Liquidity ("SGL").

On June 13, 2016, NXP announced an agreement to sell its Standard Products division (the "Divestiture"), NXP's discrete semiconductor business, to JianGuang Asset Management Company ("JAC Capital") for $2.75 billion, or about $2.3 billion of proceeds net of taxes. The Divestiture is expected to close in the first quarter of calendar 2017. Should NXP use a significant portion of the Divestiture net proceeds to repay senior secured debt, the senior unsecured rating could be upgraded.

RATINGS RATIONALE

The Ba1 CFR reflects NXP's leadership position in automotive semiconductors and consistent free cash flow ("FCF") generation due to NXP's fab-lite manufacturing model. The ratings are constrained by the significant execution risks involved in integrating NXP and Freescale due to the large operating scale of both companies. Moody's expects that NXP will direct a majority of FCF to reduce debt such that through the combination of debt reduction and EBITDA growth, debt to EBITDA (Moody's adjusted) will decline toward 2.5x during 2017.

The positive outlook reflects Moody's expectation that NXP will use a portion of the net proceeds of the Divestiture to repay debt and that the integration of Freescale will proceed smoothly over the next year. Moody's expects that FCF will remain strong in spite of near term revenue headwinds driven by a slowing global economy and the cash costs of the Freescale integration.

The rating could be upgraded if NXP successfully integrates Freescale and is making progress in capturing the anticipated $500 million of operating synergies. Moody's would expect NXP to sustain leverage of around 2.5x debt to EBITDA (Moody's adjusted) and to remain committed to a conservative financial policy.

The rating outlook could be changed to stable if NXP fails to receive regulatory approval to close the Divestiture or if regulatory approval includes materially negative closing conditions. The rating could be downgraded if the integration encounters significant operational disruptions or the business otherwise deteriorates or if NXP fails to reduce debt such that Moody's expects that debt to EBITDA (Moody's adjusted) will be maintained above 3.5x.

The Baa2 (LGD2) senior secured rating reflects the collateral, the guarantees from operating subsidiaries, and the significant cushion of unsecured liabilities. Freescale's Senior Secured Notes and NXP's senior secured debt share in each other's collateral and guarantees.

The Ba2 (LGD4) senior unsecured rating reflects the significant quantity of secured debt, which is structurally senior to the senior unsecured debt, and the guarantees from operating subsidiaries. The Ba2 (LGD6) rating of the cash convertible notes of NXP Semiconductors reflects both the absence of collateral and the absence of upstream guarantees from operating subsidiaries, which renders the cash convertible notes structurally subordinated to the debt of NXP. Although the cash convertible notes are expected to have lower recovery in a default scenario than the guaranteed unsecured notes, the expected recovery differential is not sufficient to lead to a notching differential.

The SGL-1 rating reflects the company's very strong liquidity profile, which is supported by strong FCF and a large cash balance which we expect will remain over $500 million (excluding the cash of NXP's joint venture with TSMC, which was $528 million at April 3, 2016).

Affirmations:

..Issuer: NXP B.V.

.... Corporate Family Rating , Ba1

.... Probability of Default Rating, Ba1-PD

.... Speculative Grade Liquidity Rating, SGL-1

.... Senior Secured Bank Credit Facility, affirmed at Baa2 (LGD2)

.... Senior Unsecured Regular Bond/Debentures, affirmed at Ba2 (LGD4)

..Issuer: NXP Semiconductors N.V.

....Senior Unsecured Conv./Exch. Bond/Debenture, Ba2 (LGD6)

..Issuer: Freescale Semiconductor, Inc.

....Senior Secured (6% Senior Secured Notes), affirmed at Baa2 (LGD2)

Outlook Actions:

..Issuer: NXP B.V.

....Outlook, Positive

..Issuer: NXP Semiconductors N.V.

....Outlook, Positive



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