Moody's Investors Service assigned a Ba3 rating to the $1 billion guaranteed senior secured credit facilities of Semiconductor Components Industries due to anticipated softening in the end-use markets of wireless communications and computers. The Phoenix, Ariz.-based company is the largest independent supplier of semiconductor components. "The problem with a lot of these semiconductor businesses is that visibility is not very clear starting out 2001. With softness over the last several months, a company whose revenues and cash flow has been growing throughout the first three quarters of 2000, may be peaking and we don't know that," said Howard Sitzer, analyst. The rating also factors in the risk associated with future acquisitions. The company recently acquired Cherry Semiconductor and keeps a watch for potential beneficial acquisitions, said a company spokesman. "They're not denying or precluding future acquisitions, so that would be a risk issue. It would be for any company," said Sitzer. "Any acquisition has integration issues that can be problematic. You've got to align your engineering teams, align your sales and marketing effort." He added that Cherry Semiconductor has done well since the acquisition.
Supporting the rating is the company's debt-to-cash flow ratio, which was reduced to 2.7 times from 4.1. "They redeemed $140 million of senior subordinated notes. They've paid down $228 million of PIK (payment in kind) preferred stock. They've also paid $130 million of outstanding bank borrowings down. All in all they've paid down almost $500 million in debt." Sitzer said . "Over the last four quarters they have met business objectives and had made improvement in their margins."
Sitzer explained that the semiconductor business was in the early stages of recovery in mid-1999 as the demand was increasing and average selling prices started to stabilize. "They were selling more components at average selling prices that were declining minimally, so the combination of those things resulted in higher revenues," he said.
A spokesman for the company says the rating is fair. "Given the recent results and the outlook we think it's fair. The rating is in line with our peers as well. Looking at similar-sized companies with the same amount of debt, it's consistent." J.P. Morgan Chase leads the newest $200 million deal, which is priced at LIBOR plus three.