(The following statement was released by the rating agency)
July 02 -
Summary analysis -- Global A&T Electronics Ltd. ------------------- 02-Jul-2012
CREDIT RATING: B/Positive/-- Country: Singapore
Primary SIC: Semiconductors
Mult. CUSIP6: 379390
Credit Rating History:
Local currency Foreign currency
25-Nov-2010 B/-- B/--
05-Aug-2009 B-/-- B-/--
19-Dec-2008 B/-- B/--
The corporate credit rating on Singapore-based outsourced semiconductor assembly and test services (OSAT) provider Global A&T Electronics Ltd. (GATE) reflects the “highly leveraged” financial risk profile, the cyclical nature of the OSAT business, and aggressive competition. Furthermore, rapidly evolving technology requires heavy capital expenditure. GATE’s stable EBITDA margin of about 27% and the potential growth of the OSAT industry temper these challenges.
GATE’s business risk profile is “weak,” in our view, and we expect it to remain unchanged. The company is the sixth-largest player globally in the cyclical and highly fragmented OSAT industry. The industry faces short product life cycles, continuing technological developments, and price erosion with aggressive competition. It also requires heavy capital expenditure at 15%-20% of revenue.
However, we expect the OSAT industry to continue to grow due to the increasing complexity of packaging and economies of scale. The growth in smartphones, tablets, and PCs also provides opportunities for the semiconductor industry. We believe revenue could increase faster than global GDP growth. GATE’s EBITDA margin was stable at 27%-28% in the past three years, supporting the business risk profile of the company.
We expect GATE’s ratio of debt to EBITDA to remain above 4.5x in 2012 and funds from operations (FFO) to debt at about 15% in 2012. In our view, GATE is likely to improve its financial risk profile to “aggressive” in 2013 by reducing its leverage and capital expenditure.
We expect GATE to show modest low single-digit revenue growth and EBITDA margin of about 27% in 2012. GATE also plans to restrict its cash capital expenditure in 2012 to about 14% of revenues, down from 18%-20% seen in the past. However, the ratio of debt to total capital is unlikely to improve significantly from about 70%, without an equity issuance. We believe the company might reduce its leverage by using its cash and internal accruals to repay the US$145 million outstanding on the revolving credit facility due in October 2013. This would result in the ratio of debt to EBITDA falling below 4.5x with the ratio of FFO to debt improving to about 18% in 2013.
In 2011, GATE’s revenue was 7% below our estimate due to a shift of U.S. customers to lower price packaging and weaker overall demand in the second half, stemming from lower customers’ inventory in the market. However, the company improved its EBITDA margin by almost 90 basis points above our expectation. Its capital expenditure was in line with our expectation at 20% of revenues. As a result, FFO to debt at 15% and debt to EBITDA at 4.8x were in line with our expectations. The financial performance for the first quarter of 2012, which is seasonally weaker, was in line with our expectations.
GATE’s liquidity is “adequate,” as defined in our criteria. We expect the company’s ratio of liquidity sources to uses to be well above 1.2x in the next 12-24 months. However, we believe GATE has little flexibility to increase debt due to limited headroom on its covenants. We expect the company to be able to meet its liquidity uses even if its EBITDA falls 15%-20%. Our liquidity assessment is based on the following factors and assumptions:
-- GATE’s liquidity sources include cash and cash equivalents of US$262.6 million as of March 31, 2012, and our FFO projection of about US$180 million.
-- Liquidity uses include US$6.7 million debt maturing in 2012 and estimated capital expenditure of US$140 million.
In our view, GATE would be able to maintain adequate liquidity even if it meets the US$145 million maturity in October 2013 from its own funds and internal accruals. We expect that GATE will need to refinance its large bullet maturity of US$577 million in October 2014.
The positive outlook reflects our expectation of stable operating performance and EBITDA margin. We also assume that the company will contain its capital expenditure.
We may raise the rating if GATE maintains its operating performance and strengthens its financial risk profile such that the debt-to-EBITDA ratio is consistently below 4.5x, which is likely if the company meets its 2013 debt maturities using its own funds.
We may revise the outlook back to stable if GATE refinances the entire maturities in 2013 and 2014 with debt, or if the operating performance deteriorates, resulting in debt to EBITDA above 4.5x on a sustained basis.
Related Criteria And Research
-- Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Credit FAQ: Knowing The Investors In A Company’s Debt And Equity, April 4, 2006