June 14, 2017 / 6:20 PM / 2 months ago

Fitch Rates Intel's $600MM 7-Year Senior Notes Offering 'A+'

(The following statement was released by the rating agency) CHICAGO, June 14 (Fitch) Fitch Ratings has assigned an 'A+' rating to Intel Corporation's (Intel) $600 million seven-year senior notes offering. Intel will use net proceeds for general corporate purposes, ahead of the company's pending acquisition of Mobileye N.V. (Mobileye). Intel just received U.S. regulatory approval for the acquisition and Fitch believes the transaction should close before the end of calendar year 2017. Pro forma for: i) the issuance, ii) $6.5 billion of senior notes issuance in May 2017, iii) repayment of $500 million of senior notes in May 2017 and iv) expected repayment of $3 billion of senior notes maturing Dec. 15, 2017, Fitch estimates total debt is just over $29 billion. A full list of current ratings follows at the end of this release. KEY RATING DRIVERS Leading Market Positions: Fitch expects Intel's very strong market positions in the data center and personal computers (PC) to provide significant revenue scale, with data center market growing in the mid-single digits offsetting mid-single-digit unit shipment declines in PCs. Technology Leadership: Intel's technology leadership, driven by significant cumulative investments in research and development (R&D) and capital spending will support growth and strong profitability through at least the intermediate term. Solid FCF & Financial Flexibility: Fitch expects Intel's annual FCF to remain robust, despite significant investment activity. Fitch estimates more than $3.5 billion annually through the forecast period with upside should Intel maintain operating EBITDA margins in the mid-40% range, versus the low-40% range in 2016. Nevertheless, cash flow will provide adequate capacity for organic investments, although the majority of FCF is outside the U.S. High Investment Intensity: Fitch expects R&D and capital spending to continue to represent 35%-40% of net revenues, driven by the continuation of Moore's Law and non-volatile memory (3D NAND and X-Point) technologies. At the same time, Intel has committed to limiting operating expenses as a percentage of revenue to 30% by 2020, versus 35.6% on a GAAP basis in 2016. Customer Concentration: Fitch expects customer concentration will remain significant, given the consolidated PC market. Intel's largest PC customers continued to represent approximately 40% of total sales in aggregate. Nonetheless, fast-growing acquisitions such as Mobileye, declining PC unit shipments, and Intel's increasing sale mix of data center and IoT customers should diversify Intel's sales mix over time. KEY ASSUMPTIONS --Flat Client Computing Group (CCG) revenue, driven by mid-single-digit unit declines offset by price increases from a strengthening PC mix and new product introductions; --Data Center Group (DCG) grows by mid-single digits in 2017 and low single digits thereafter with healthy spending from cloud and communications service providers offset by weaker enterprise spending; --IoT grows by high-single digits in 2017 and accelerates to the low-teens through the remainder of the forecast period; --Non-volatile memory remains uneven with solid growth for 2017 due to tight supply that should ease in 2018; --Low-single-digit growth for security and programmable through the forecast period; --Stable operating EBITDA margins due to a richer mix in CCG offset by lower operating income for DCG; --Operating EBITDA could exceed $27 billion for the year, resulting in total leverage (total debt/operating EBITDA) near 1x and FCF/debt of more than 15% exiting the year; --Capital spending remains volatile but in the mid-teens through the forecast period; --Intel closes Mobileye by the end of calendar 2017 and grows 25% per year with modestly accretive operating EBITDA margins; --$500 million of annual tuck-in acquisitions with no meaningful impact on financial results; --Intel refinances debt maturities and uses domestic cash left after dividends and acquisitions for share repurchases. RATING SENSITIVITIES Negative rating actions for Intel could result from the following: --Fitch's expectation for total leverage sustained above 1.5x from debt-financed shareholder returns amid weak operating performance, given that a meaningful portion of pre-dividend FCF is outside the U.S.; --Expectation for negative organic revenue growth from share losses in DCG and slower than anticipated IoT adoption compounding negative growth in PCs; --Fitch's expectation for normalized FCF/adjusted debt sustained below 10%, as a result of market pricing pressures from strengthened competitive offerings in DCG. Positive rating action is unlikely in the intermediate term but likely would require Fitch's expectations for the following: --Management's commitment to moderate shareholder returns to maintain total leverage at or below 1x; --Intel maintains significant share leadership and strong profitability in data center, despite intensifying competition from alternative architectures; --Significant disruption from Intel's X-point technology and steady and solid growth in IoT markets, resulting in further diversification of Intel's sales mix and profit pools. LIQUIDITY Liquidity was solid as of April 1, 2017 and consisted of: --$17.3 billion of cash and cash equivalents, short-term investments and trading assets, of which $14.2 billion was outside the U.S. and $2.2 billion was available for use in the U.S. without incurring incremental tax liabilities. The company plans to use offshore cash to fund the $15.3 billion acquisition of Mobileye N.V. (Mobileye), which is scheduled to close before the end of calendar 2017; --An up to $5 billion commercial paper (CP) program, of which $431 million was outstanding. Intel does not have a revolving credit facility to support its CP program but Fitch views the company's cash flow profile as providing ample support for the program, particularly given Fitch's expectations for only moderate use. Fitch's expectations for more than $3 billion of annual FCF also support liquidity. FULL LIST OF CURRENT RATINGS Intel Corporation --Long-Term Issuer Default Rating (IDR) 'A+'; --Short-Term IDR 'F1'; --CP program 'F1'; --Senior unsecured notes 'A+'; --Junior subordinated notes 'A'. Altera Corporation --Long-Term IDR 'A+'; --Senior Unsecured Debt 'A+'. The Rating Outlook is Stable. Contact: Primary Analyst Jason Pompeii Senior Director +1 312-368-3210 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Alen Lin Senior Director +1 312-368-5471 Committee Chairperson Megan Neuburger Managing Director +1 212-908-0501 Date of Relevant Rating Committee: March 14, 2017 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Summary of Financial Statement Adjustments - Fitch made no financial statement adjustments that depart materially from those contained in the published financial statements of Intel Corporation. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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