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Fitch Affirms Seagate Technologies plc at 'BBB-'; Outlook Stable
[May 05, 2015]

Fitch Affirms Seagate Technologies plc at 'BBB-'; Outlook Stable


Fitch Ratings has affirmed the ratings for Seagate (News - Alert) Technology plc (Seagate) and its wholly-owned subsidiary, Seagate HDD Cayman (Seagate HDD), including the long-term Issuer Default Rating (IDR) at 'BBB-'.

The Rating Outlook is Stable. Fitch's actions affect $4.1 billion of debt, including the undrawn revolving credit facility (RCF) and pro forma for $474 million of 6.875% senior notes Seagate will redeem on May 7, 2015. A full list of ratings follows at the end of this release.

The ratings and outlook reflect Fitch's expectations that Seagate's operating performance will remain solid for the rating, despite weak demand in Europe and for personal computers (PC). Fitch expects flat organic revenue growth through at least the near-term and modest profit margin pressure. However, Fitch expects more than $800 million of normalized annual free cash flow (FCF) through the intermediate-term and solid credit metrics.

Beyond the near-term, Fitch believes increasing data storage and cloud based storage demand will drive positive market growth, although shifts from hard disk drives (HDD) and hybrid devices to more hyper-active flash based solutions could constrain Seagate's share gains over the longer-term. Nonetheless, Fitch anticipates operating EBITDA margins will remain in the mid-teens to low 20s through the intermediate-term, given disciplined supply additions and expectations for a richer sales mix.

Fitch expects industry consolidation will enable Seagate to maintain capital spending in 4%-5% of revenues range, supporting a strengthened FCF profile. Fitch expects fiscal 2015 FCF of $1.4 billion, which includes $763 million of positive cash flow from a legal settlement with Western Digital Corp. (News - Alert) (WDC) and $225 million payment related to a tax settlement with Chinese tax authorities.

KEY RATING DRIVERS

--Fitch's expectation for a relatively stable HDD pricing environment going forward, despite weak PC unit demand, due to: 1) continued strong growth in data driven by the cloud and internet-enabled mobile devices; 2) consolidated industry structure with Seagate and Western Digital Corp. (WDC) controlling roughly 85% of the HDD market; 3) Continued favorable HDD mix shift with higher capacity HDDs for cloud computing offsetting the decline in lower capacity drives for the PC industry; and 4) limited capacity growth as companies across the HDD supply chain, including Seagate, expand capacity cautiously within the context of macroeconomic uncertainty.

--Seagate's solid liquidity and financial flexibility are supported by $2.6 billion of cash, the vast majority of which is readily accessible without adverse tax considerations, an undrawn $700 million senior secured revolving credit facility due Jan. 15, 2020, Fitch's expectations for $800 million to $1 billion of annual (FCF) and a staggered debt maturity schedule.

Fitch believes Seagate's FCF will continue to be benefit from: 1) A more stable HDD pricing environment; 2) Lower anticipated demand volatility as secular growth in data and cloud computing reduce the historically strong correlation between cyclical PC demand, HDD shipments and profitability; 3) Favorable product mix shift towards higher capacity, more profitable HDDs deployed in cloud computing.

--Strong credit protection metrics and management's commitment to conservative financial policies commensurate with investment grade.

--Broad product portfolio and significant scale in HDD industry.

--The company's vertically integrated model, which reduces per-unit manufacturing costs and facilities tie to market for new products.



Fitch's rating concerns consist of:

--Consistent declines in average selling prices for HDDs due to commoditization and low switching costs;


--Long-term threat of technology substitution from NAND flash-based SSDs. Fitch believes HDDs will co-exist alongside SSDs and tape storage in a multi-tiered enterprise data storage environment.

--Event risk associated with implementation of aggressive shareholder friendly activities, primarily debt-financed share repurchases.

--Seagate's ability to sustain a time to market advantage critical to achieving market share gains and maintaining overall profitability, given formidable competition from Western Digital Corp. (WDC).

RATING SENSITIVITIES

Future ratings upgrades are currently unlikely, given Fitch's expectations for continued PC market weakness and in the absence of increased diversification or sustainable technology driven share gains.

Negative rating actions could occur if:

--Fitch expects FCF to remain below $250 million, likely from i) substantial cost per GB difference between HDD and SSD unexpectedly narrows significantly, resulting in broader than expected cannibalization of HDD shipments, ii) ultrabooks with SSD materially cannibalize the traditional notebook market and solid state hybrids (SSH) fail to achieve significant penetration in the Ultrabook market or iii) strong growth in ultrabooks with SSD is not offset by incremental growth in near-line enterprise HDDs for the cloud market, external HDDs or personal clouds as user seeks supplemental storage capacity to offset smaller capacity SSDs.

--Expectations for total leverage exceeding 2.5x beyond the short-term, driven by debt financed share repurchases or acquisitions.

Financial covenants in the credit agreement consist of minimum fixed-charge coverage of 1.5x and maximum net leverage ratio of 1.5x. In addition, the facility requires minimum liquidity of $500 million.

Fitch anticipates Seagate's leverage will remain below 1.5 times (x) through the intermediate-term. Gross leverage (total debt/operating EBITDA) was a Fitch estimated 1.4x as of March 31, 2015 flat from the prior year period. Interest coverage (operating EBITDA/gross interest expense) should remain above 10x and was a Fitch estimated 13.3x for the latest 12 months (LTM) ended March 31, 2015.

Total debt, all of which was issued by Seagate HDD Cayman, was $3.9 billion as of March 31, 2015 and consisted of:

--$800 million of 3.75% senior notes due November 2018;

--$474 million of 6.875% senior notes due May 2020, which the company will redeem on May 7, 2015;

--$600 million of 7% senior notes due November 2021;

--$1 billion of 4.75% senior notes due June 2023;

--$1 billion of 4.75% senior notes due January 2025;

--$500 million of 5.75% senior notes due December 2034.

KEY ASSUMPTIONS

--Flat near-term organic revenue growth due to weak demand in Europe and for PCs and offset by solid demand in enterprise from data center build-outs;

--Modest profit margin contraction with operating EBITDA margin declining to 19% for fiscal 2015 and remaining in the high teens through the intermediate-term;

--Capital spending remains at 4%-5% of revenues, resulting in $800 million to $1 billion of normalized annual FCF; and

--Share repurchases roughly approximating annual FCF, in the absence of acquisitions supporting the company's strategy to continue investing in next generation storage technologies.

Fitch affirms Seagate and its subsidiary as follows:

Seagate

--Long-term IDR at 'BBB-';

--Senior unsecured RCF at 'BBB-'.

HDD Cayman

--Long-term IDR at 'BBB-';

--Senior unsecured RCF at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984159

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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