TEXT - Fitch rates Flextronics International proposed notes
Feb 12 - Fitch Ratings has assigned a 'BBB-' rating to Flextronics International Ltd.'s (Flextronics) proposed offering of $1 billion in senior unsecured notes. Fitch expects the proceeds to be used to refinance most of Flextronics' $1.2 billion senior unsecured term loan maturing October 2014. KEY RATING DRIVERS: Rating strengths include the following: --Significant advantage in scale and scope of operations as the second largest provider of electronics manufacturing services in the world; --Favorable industry trends toward increased manufacturing outsourcing, particularly in the emerging industrial, medical, and clean tech space where Flextronics has a leading position; --Strategic positioning in increasingly complex EMS product offerings including product design, engineering, and product lifecycle management which enhance the value of EMS partnerships for customers; --High working capital nature of the business model which provides a source of liquidity in a market downturn. Ratings concerns include the following: --Recent execution missteps, as exemplified by Flextronics's exiting the PC ODM business and prolonged difficulty in creating sustained profitability in the components space, which highlight the vulnerability to execution risk inherent in the low margin business profile; --A highly competitive environment which pressures profitability across the industry; --Customer concentration risk with its top 10 customers accounting for approximately 55% of revenue in fiscal 2012 (end March 2012); --Exposure to the cyclicality of the IT industry and the broader macro economy through a high proportion of consumer and networking infrastructure business. Liquidity as of Dec. 31, 2012 was solid with $1.7 billion in cash and a fully available $1.5 billion senior unsecured revolving credit facility which expires in October 2016. Flextronics utilizes off balance sheet accounts receivable securitization facilities as well as accounts receivable sales agreements for additional liquidity purposes. Total debt as of Dec. 31, 2012 was $2.2 billion and consisted primarily of $1.7 billion in senior unsecured term loans, of which $1.2 billion is due 2014 with the remainder due 2016, and $376 million of unsecured Asian term loans, of which $176 million is due in September 2013 with the remainder due February 2014. Flextronics also has approximately $576 million outstanding under its accounts receivable securitization facilities and $182 million outstanding under various accounts receivable sales agreements. Fitch has affirmed Flextronics's ratings as follows: --Long-term IDR at 'BBB-'; --Senior unsecured debt at 'BBB-'. The Rating Outlook is Stable. RATING SENSITIVITY: Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Secular shifts or a large customer loss resulting in margin compression with limited visibility on the potential to return profit margins to historical levels. Positive: Upside movement in the ratings is limited given Flextronics's thin operating margin profile and capital intensive business model coupled with significant cyclical demand exposure. Greater diversification of the business into markets with significantly lower cyclicality could potentially create an opportunity for positive rating action.