Fitch Rates MMI's Proposed USD230m Bank Loan 'BB-(EXP)'

Wed Apr 17, 2013 11:06pm EDT

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(The following statement was released by the rating agency) SINGAPORE, April 17 (Fitch) Fitch Ratings has assigned MMI International Limited (MMI, BB-/Stable) a foreign-currency senior secured rating of 'BB-' and its proposed guaranteed senior secured USD230m term loan due 2020 an expected rating of 'BB-(EXP)'. The term loan is fully guaranteed by MMI's parent, Precision Capital Private Limited (PCPL), and certain other subsidiaries of MMI based outside China. The final rating of the proposed term loan is contingent upon the receipt of documents conforming to information already received. The proceeds from the proposed term loan will be used to refinance the existing senior secured term loan of the same amount. In common with MMI's USD300m 8% guaranteed senior secured 2017 notes, the proposed USD230m term loan is structurally subordinated to the existing and future liabilities of certain MMI subsidiaries, particularly those based in China, which do not guarantee the notes and term loan. 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 ratings of the notes and term loan may be downgraded if MMI issues structurally super-senior debt at the non-guarantor subsidiaries, or if creditors' claims on such subsidiaries rise to a level that threatens expected recovery on secured debt. The term loan document carries similar incurrence covenants to the notes. Key Rating Drivers Revenue to decline: Fitch expects MMI's FY13 (ending June) revenue to decline by mid-single digits. This is due to lower hard disk drive (HDD) shipment volumes on slower demand from the personal computer (PC) industry - largest market for HDDs. Weaker PC demand in the US and Europe is mainly due to fragile economic conditions, substitution of PCs by media tablets and a lower-than-expected uptake of Windows 8. During H1FY13, MMI's revenue declined 11% yoy to USD387m. Weaker profitability: MMI's FY13 operating EBITDAR margins could fall to 16%-17% (FY12: 19.5%) due to a likely decrease in average selling price (ASP), as the supply of HDD components returns to the levels prior to the Thai floods in October 2011. H1FY13 operating EBITDAR margin deteriorated to 18% in line with the agency's expectations. However, Fitch expects ASPs to stabilise in the medium term, benefitting from the HDD industry's consolidation in 2012, which reduced the number of HDD manufacturers to three from five. Net adjusted debt to fall: MMI's lease-adjusted net debt would come down in FY13 due to free cash flow (FCF) of USD30-40m (FCF/revenue: 4%-5%), supported by low capex requirements net of insurance claims (FY13 capex/revenue: 5%-6%). Liquidity will improve, following the finalisation of the proposed seven-year term loan, and average debt maturity will increase to 5.3 years from the existing 2.7 years. Dependence on Seagate: MMI has customer concentration risk as US-based Seagate Technology PLC (Seagate, BB+/Positive) contributed about 79% of its revenue in H1FY13. However, the risk is mitigated by high inter-dependence between MMI and Seagate, as MMI is Seagate's largest supplier for three key HDD components. MMI's ratings also benefit from moderate-to-high barriers to entry in the HDD component manufacturing industry. Acquisition risk: 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. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - FFO-adjusted leverage rising above 4x (FY12: 3.1x) on a sustained basis - FFO interest coverage falling below 3.0x (FY12: 6.4x) on a sustained basis - Significant fall in cost per gigabyte differential between solid state drives (SSDs) and HDDs, resulting in lower demand for HDDs, or if Seagate moves its production capacity towards SSDs Positive: Future developments that may, individually or collectively, lead to a positive rating action include: - FFO-adjusted leverage falling below 3.0x on a sustained basis - FFO interest coverage rising above 8.0x on a sustained basis - Upgrade of Seagate's IDR to 'BBB-' Contacts: Primary Analyst Nitin Soni Associate Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-03/04/05 Suntec Tower Four Singapore 038986 Secondary Analyst Nandini Vijayaraghavan Director +65 6796 7216 Committee Chairperson Steve Durose Senior Director + 61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON 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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