TEXT-Fitch affirms Singapore's MMI at 'BB-';outlook stable
Feb 05 - Fitch Ratings has affirmed Singapore-based MMI International Limited (MMI) and its parent company, Precision Capital Private Limited (PCPL), at Long-Term Issuer Default Ratings (IDR) 'BB-'. The Outlook is Stable. Fitch has also affirmed MMI's 8% senior secured USD300 notes due 2017 at 'BB-'. The notes are fully guaranteed by PCPL and certain other subsidiaries of MMI based outside China.
MMI's ratings reflect its concentration risk, its acquisition strategy as well as its position as a major vendor of hard drive disks (HDD) for US-based Seagate Technology PLC (Seagate, 'BB+'/Positive) and moderate-to-high barriers of entry.
Seagate contributed 82% of MMI's revenue in the financial year ended June 2012. Fitch expects MMI's FY13 revenue and EBITDA to decline, along with its EBITDA margin (to 16%-17% from 19.5% in FY12), due to lower product prices as supply of HDD components normalises and returns to pre-Thailand flood levels. FY13 financial performance will also suffer from flat HDD shipment volume due to slower personal computer (PC) demand and on-going replacement of HDDs by solid state drive (SSDs), particularly in tablets and notebooks.
MMI has a track record of inorganic growth including the acquisition of three smaller component makers in FY11. Although Fitch does not rule out the risk of further debt-funded acquisitions, it expects the company to maintain its net debt/EBITDA target of 3.0x.
Positively, the consolidation of the HDD industry during 2012, which reduced the number of participants to three - Seagate, Western Digital and Toshiba - from five, should help limit aggressive price competition in HDD and eventually help MMI.
Fitch believes that MMI is likely to maintain its credit profile given its ability to generate solid free cash flows (FCF/revenue: 4%-5%), supported by its low capex requirements net of insurance claims (capex/revenue: 6%). During FY12, MMI's funds from operation (FFO)-adjusted leverage improved to 3.1x (FY11: 5.5x) due to higher product pricing on tighter supply conditions as a result of the Thailand floods.
What Could Trigger A Rating Action?
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- FFO-adjusted leverage of above 4x on a sustained basis
- FFO interest coverage below 3.0x (FY12: 6.4x) on a sustained basis
- Significant fall in cost per gigabyte differential between SSDs and HDDs, resulting in lower demand for HDDs, or if Seagate moves its production capacity towards SSDs
Fitch notes that the senior secured notes are structurally subordinated to the existing and future debt of certain MMI subsidiaries, particularly those based in China, which do not guarantee the notes. Such subsidiaries contributed 48% of MMI's consolidated revenue for FY12 but represented just 16% and 9% of MMI's assets and liabilities respectively. The rating of the notes may be downgraded if MMI raises structurally super-senior debt or if creditors' claims at non-guarantor subsidiaries rise to a level that threatens expected recovery on the notes.
Positive: Future developments that may, individually or collectively, lead to the outlook being revised to stable include:
- FFO-adjusted leverage below 3.0x on a sustained basis
- FFO interest coverage above 8.0x on a sustained basis
- Upgrade of Seagate's IDR to 'BBB-'