TEXT-S&P cuts STMicroelectronics to 'BBB'; outlook negative
(The following statement was released by the rating agency)
Dec 18 -
-- We expect Franco-Italian semiconductor manufacturer STMicroelectronics N.V. (ST) to report significantly weaker revenues, operating margins, and free cash flows in 2012 and 2013 than we previously expected.
-- We continue to view the company's business risk profile as "satisfactory" under our criteria.
-- We are lowering our long-term corporate credit rating on ST to 'BBB' from 'BBB+' and removing it from CreditWatch with negative implications.
-- The negative outlook reflects the possibility of a further downgrade if the exit from ST-Ericsson impairs ST's currently solid net financial cash position or if we foresee that the group will materially miss its operating margin target of 10%.
On Dec. 18, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Franco-Italian semiconductor manufacturer STMicroelectronics N.V. to 'BBB' from 'BBB+'. We removed the rating from CreditWatch, where it was placed with negative implications on Aug. 27, 2012. The outlook is negative. At the same time, we affirmed the 'A-2' short-term rating.
The downgrade primarily reflects our opinion that ST is likely to report significantly lower revenues, operating margins, and free cash flows in 2012 and 2013 than we previously expected. This follows a weakening of its operating results that started in the second half of 2011, which resulted in a slight downward revision of our business risk profile assessment. Nevertheless, we continue to assess ST's business risk profile as "satisfactory", as defined in our criteria. This is primarily because we expect a marked improvement in ST's reported operating margins in 2014 to high single digits as a result of the announced exit from its loss-making, 50%-owned but fully consolidated wireless joint venture (JV) ST-Ericsson in the third quarter of 2013.
In our base case, we expect that the group's sales and those of ST-Ericsson will decline by about 13% in 2012 year on year, following a 6% decline of group revenues and about flat revenues (excluding ST-Ericsson) in 2011. The revenue decline was primarily the result of further revenue declines at ST-Ericsson, lower revenues at ST's Digital segment, partly as a result of weaker demand from Nokia, as well as the weakening economic environment, particularly in Europe. In addition, we forecast the group's reported operating margin (after restructuring costs, but before the impairment of ST-Ericsson goodwill) to drop to negative 10% in 2012 from 0.5% in 2011 and 4.6% in 2010.
In 2013, we expect flat to low single-digit revenue growth for ST's fully owned businesses, primarily due to our expectations of a continued weak economic environment, which is only partly offset by solid demand prospects for ST's Analog, MEMS and Microcontrollers, and Power Discrete segments. In 2013, we expect the group's reported operating margin to remain mildly negative primarily due to continued, albeit declining losses at ST-Ericsson and further significant restructuring costs.
We expect about breakeven free operating cash flow (FOCF; defined as cash flow from operations after investments in tangible and intangible assets) in 2012 and modestly positive FOCF in 2013, compared with negative FOCF of about $0.5 billion in 2011. The FOCF improvement in 2012 is primarily due a sharp reduction of capital expenditures to about $0.5 billion from about $1.3 billion in 2011 and meaningful cash inflows from working capital. Our FOCF forecast includes a cash burn of about $0.8 billion and $0.4 billion at ST-Ericsson in 2012 and 2013, respectively, half of which we expect to be offset by cash contributions from ST-Ericsson's 50% owner Ericsson (Telefonaktiebolaget L.M.) (BBB+/Stable/A-2). As a result, we expect ST to report a solid and largely unchanged net financial cash position of about $1.2 billion at year-end 2012 compared with year-end 2011.
Our current business risk profile assessment is underpinned by our view of the group's leading positions across key segments of the semiconductor industry, supported by its long-term customer relationships and high proprietary content. These factors are tempered by strong cyclical variations in semiconductor demand and its weaker profitability than that of many peer companies. Our assessment of the group's management and governance is "fair", primarily due to the so far unsuccessful track record of achieving positive margins at ST-Ericsson.
The group's financial risk profile, which we regard as "modest" is primarily supported by ST's strong capitalization, conservative financial policy, and strong liquidity profile. In addition, we anticipate that ST's fully owned businesses will generate solid free cash flow over the industry cycle. These factors are somewhat moderated by the group's volatile credit measures during industry cycles, owing to its high operating leverage.
We regard ST's liquidity as "strong", as defined in our criteria, which supports the 'A-2' short-term rating.
As of Sept. 30, 2012, we expect the company's liquidity sources to exceed its uses by more than 1.5x in the 12 months from Sept. 30, 2012, and through 2013. In addition, the company has well-established and solid relationships with its banks, exercises very prudent financial risk management and proactive liquidity management, and has a solid standing in the credit markets, in our view.
We assume ST has about $2.6 billion of liquidity sources in the 12 months from Sept. 30, 2012, and in 2013 as a whole. These chiefly include:
-- Surplus cash of $0.6 billion. Liquidity is a key rating factor for semiconductor companies given the cyclicality of the industry and the inherent operating leverage caused by largely fixed research and development (R&D) expenses and meaningful capital-expenditure requirements, in our opinion. We therefore expect ST to maintain liquid assets and accessible committed and undrawn bank lines equal to at least 12 months of R&D expenses for the current rating. As of Sept. 30, 2012, ST reported consolidated cash and short-term investments of $1.9 billion.
-- $0.9 billion availability under committed credit facilities. As of Sept. 30, 2012, ST had undrawn credit facilities with core relationship banks totaling about $0.5 billion, which mature after Sept. 2013 and have no financial covenants. In addition, ST has an eight-year EUR350 million bilateral loan from the European Investment Bank that is currently undrawn.
-- Significant funds from operations and a cash contribution from Ericsson to offset 50% of the funding shortfalls at ST-Ericsson.
We estimate ST's liquidity uses at more than $1.4 billion in the 12 months from Sept. 30, 2012, and through 2013. These chiefly relate to:
-- Capital expenditures (including investments in intangible assets) of at least $0.6 billion.
-- Debt repayments of about $0.5 billion-$0.6 billion.
-- Meaningful annual shareholder dividends. ST currently pays a quarterly dividend of about $89 million. Nevertheless, we expect ST to continue to follow a financial policy that adjusts shareholder returns to its prospects for free cash flow generation.
The negative outlook reflects the possibility of a downgrade if the exit from ST-Ericsson materially impairs ST's currently solid net financial cash position or if we foresee that the group will materially miss its operating margin target (excluding restructuring costs) of 10%. Furthermore, pressure on the ratings could arise if the company's free cash flow became significantly negative or the adjusted gross debt-to-EBITDA ratio materially exceeded 2x on a three-year average basis.
We could revise the outlook to stable if we foresee that ST is able to maintain a net financial cash position of more than $1.0 billion following the exit from ST-Ericsson in 2013. At the same time, a strong trajectory of operating margin improvement at its fully owned businesses toward high-single-digit levels in 2014, and maintenance of an adjusted gross debt-to-EBITDA ratio below 2x on a three-year average basis could support a stabilization of the rating.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
Downgraded; CreditWatch/Outlook Action; Ratings Affirmed
Corporate Credit Rating BBB/Negative/A-2 BBB+/Watch Neg/A-2
STMicroelectronics Finance B.V.
Senior Unsecured* BBB BBB+/Watch Neg
*Guaranteed by STMicroelectronics N.V.