Fitch Rates Seagate HDD Cayman's Sr. Unsecured Notes 'BBB-'; Outlook Stable

Thu Oct 31, 2013 9:48am EDT

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(The following statement was released by the rating agency) NEW YORK, October 31 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Seagate HDD Cayman's (Seagate HDD) proposed issuance of senior unsecured notes due in 2018. The notes will be guaranteed by Seagate Technology plc (Seagate), the parent company of Seagate HDD. The Rating Outlook is Stable. KEY RATING DRIVERS The Ratings and Outlook reflect: --Expectations for relatively stable hard disk drive (HDD) pricing going forward due to a highly consolidated industry structure, as the top two companies, Seagate and Western Digital Corp. (WDC), control 88% of the market; strong HDD growth in Exabytes (EB) shipped in excess of areal density growth largely driven by the cloud and usage of Internet-enabled mobile devices; increasing shipment linearity and tightly managed capital expenditures across the supply chain that minimizes the risk of supply and demand imbalances. --Positive profitability implications from a favorable mix shift toward higher capacity HDDs for cloud computing that require greater media and heads per drive, thereby absorbing a greater amount of fixed-cost investments than lower capacity PC drives. Seagate's average drive capacity increased 18% year-over-year to 875 gigabytes in the quarter ended Sept. 30, 2013. --Seagate's solid liquidity and financial flexibility are supported by $900 million in cash pro forma for the repurchase of $1.5 billion of shares from Samsung Electronics Ltd. on Oct. 21, 2013, generally positive annual free cash flow (FCF), an undrawn $500 million senior unsecured revolving credit facility due 2018 and no material debt maturities until 2016. The vast majority of Seagate's cash is readily accessible without adverse tax considerations. Aside from the effects of last year's Thailand flood, Fitch believes Seagate's FCF volatility will remain low relative to historical standards due to a more stable HDD pricing environment, lower demand volatility, favorable product mix shift, and cautious approach to capital investments that increase HDD manufacturing capacity. Seagate has generated positive FCF for four consecutive years on a trailing 12-month basis. --Strong credit protection metrics and management's commitment to conservative financial policies; --Broad product portfolio and significant scale in HDD industry; --The company's vertically integrated model, which reduces per-unit manufacturing costs and facilitates new-product time to market. Fitch's rating concerns include: --Long-term threat of technology substitution from NAND flash-based solid state disks (SSDs), including risk of consumers substituting traditional notebooks with HDDs for ultrabooks equipped with SSDs or media tablets with flash-based storage; --Substantial historical volatility in earnings and FCF due to the cyclicality of HDD demand and significant fixed costs; --Moderating, but still consistent, declines in average selling prices for HDDs due to low switching costs; --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. RATING SENSITIVITIES Positive: --Future ratings upgrades are currently unlikely due to the long-term threat of technology substitution from SSDs, where Seagate lacks a dominant product position relative to HDDs. Negative: --If the cost per gigabyte differential between enterprise HDD and SSD narrows significantly, resulting in greater than expected cannibalization of enterprise HDDs, and Seagate's enterprise SSD products are uncompetitive; --If Seagate's enterprise market share materially erodes due to more formidable competition from WDC; --If the company pursues more aggressive financial policies, such as sizable debt-financed share repurchases; --If Ultrabooks with SSDs materially cannibalize the traditional notebook market, SSHs fail to achieve significant penetration in the Ultrabook market, and growth in near-line enterprise and external HDDs is insufficient to offset the decline in EBs shipped to the notebook HDDs. FCF (post dividends) was nearly $1.3 billion in the latest 12 months (LTM) ended Sept. 27, 2013 compared with $3.1 billion in the corresponding year ago period. The reduction in FCF reflects the anticipated decline in average selling prices (ASPs) as industry supply rebounded from last year's Thailand flood and a nearly 25% increase in dividend payments to $526 million in the LTM period. Financial covenants in the credit agreement consist of a minimum fixed-charge coverage of 1.5x and a maximum net leverage ratio of 1.5x. In addition, the facility requires minimum liquidity of $700 million. Seagate's credit metrics weakened in the LTM period but remain solid. Leverage (total debt/operating EBITDA) increased to 1x as of Sept. 27, 2013 from 0.6x in the year-ago period. Interest coverage (operating EBITDA/gross interest expense) decreased to 14.4x in the LTM ended Sept. 27, 2013 compared with 19.1x last year. Total debt as of Sept. 27, 2013, all of which was issued by Seagate HDD, was nearly $2.8 billion and consisted of: --$334 million of 6.8% senior notes due October 2016; --$238 million of 7.75% senior notes due December 2018; --$600 million of 6.875% senior notes due May 2020; --$600 million of 7% senior notes due November 2021; --$1 billion of 4.75% senior notes due June 2023. Fitch currently rates Seagate and its wholly owned subsidiary as follows: Seagate --Issuer Default Rating (IDR) 'BBB-'; --Senior unsecured credit facility 'BBB-'. Seagate HDD Cayman --IDR 'BBB-'; --Senior unsecured debt 'BBB-'; --Senior unsecured credit facility 'BBB-'. Contact: Primary Analyst John M. Witt, CFA Senior Director +1-212-908-0673 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jason Pompeii Senior Director +1-312-368-3210 Committee Chairperson Mark Oline Managing Director +1-312-368-2073 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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'. 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