ON Semiconductor recently issued $300 million in notes and reduced its bank borrowings from more than $1 billion to roughly $700 million in an effort to better compliment the cyclical nature of its business. The Phoenix-based semiconductor manufacturer chose to refinance a portion of its borrowings with notes because they are less sensitive to cyclical downturns, explained John Kurtzweil, cfo. "[The banks] provide a bridge to a more permanent capital structure," he added.
The pro-rata portion of ON Semiconductor's credit facility, which is led by J.P. Morgan, comprises a $125 million revolver and a $7.5 million "A" term loan. The institutional tranches include a $201.9 million "B" term loan, a $227.2 million "C" term loan and a $134.8 million "D" term loan. Pricing on all five tranches is set at LIBOR plus 5%.
In conjunction with the refinancing, the credit was amended so that ON Semiconductor would not have to comply with its minimum interest expense coverage ratio of two times and maximum leverage ratio of five times until after Dec. 31, 2003. Kurtzweil noted that the company was in compliance with the ratios, but it chose to pursue the waivers to ensure operational flexibility in the weak economic environment.
In the future, ON Semiconductor would like to take advantage of better economic times to refinance additional bank debt with longer-term capital and reduce interest expenses across the board, Kurtzweil said. The company aims to have a mix of one-third bank debt and two-thirds fixed-rate debt to ensure both stability and liquidity, he noted, adding that bank debt currently represents 52% of its debt structure.