Fitch Affirms MMI International at 'BB-'; Outlook Stable

Mon Feb 3, 2014 10:48pm EST

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(The following statement was released by the rating agency) SINGAPORE/SYDNEY, February 03 (Fitch) Fitch has today affirmed MMI International Limited (MMI) and its parent - Precision Capital Private Limited's - (PCPL) Long-Term Foreign-Currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook is Stable. Simultaneously, Fitch has affirmed the Singapore-based company's senior secured rating at 'BB-', 8% senior secured USD300m notes due 2017, as well as the USD180m secured bank loan at 'BB-'. The notes and bank loan rank pari-passu and are fully guaranteed by PCPL and certain other subsidiaries of MMI based outside China. Key Rating Drivers Low Ratings Headroom: MMI's FY14 funds flow from operations (FFO)-adjusted leverage will deteriorate to around 3.5x-3.7x (June ending FY13: 3.1x), close to Fitch's negative guidance of 4.0x. FY14 EBITDA will decline to around USD125m-135m (FY13: USD139m) due to lower hard disk drive (HDD) shipment volumes amid slower demand from the personal computer (PC) industry - the HDD industry's largest market. Stagnant Revenue: FY14 revenue will stagnate to around USD700m on lower HDD quarterly volumes of around 135-140 million units (2011-13 average: 146 million) leading to subdued demand for components. However, Fitch expects MMI's leverage to improve over the medium term given its ability to generate around USD25m-30m in annual free cash flow (FCF). MMI has low annual capex requirements of around USD35m-40m and manageable interest and tax outflows totalling about USD50m a year. Limited Benefits from HDD Consolidation: HDD Industry consolidation in 2012 which reduced the number of HDD manufacturers to three - Seagate Technology PLC (Seagate, BBB-/Stable), Western Digital and Toshiba - from five, benefited HDD manufacturers more than their suppliers. While HDD manufacturers' EBITDA margins improved to 28% in 2013 (2011: 25%), suppliers, including MMI, had limited gains. A fall in HDD volumes resulted in overcapacity among suppliers and a decline in the average selling price of components. However, Fitch expects MMI to benefit from an imminent HDD suppliers' consolidation which would reduce competition and provide greater market share and pricing stability to MMI. Smaller financially distressed suppliers could go out of business or seek M&As for financial bailouts. Dependence on Seagate: MMI continues to derive the majority of its revenue (80% in 1QFY14) from Seagate posing a concentration risk. However, Fitch believes that a high inter-dependence between MMI and Seagate - with MMI being Seagate's largest supplier for three key HDD components mitigates this risk. MMI's ratings factor in moderate-to-high barriers to entry in the HDD component manufacturing industry. Acquisition risk: Fitch does not rule the possibility that MMI could acquire a small competitor to increase its market share. However, we do not expect large debt-funded acquisitions as we expect MMI to maintain its net debt/EBITDA below its target of 3.0x. Fitch notes that MMI has a historical track record of inorganic growth - it acquired three smaller component makers in 2011 and leveraged its balance sheet. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - FFO-adjusted leverage of above 4.0x (FY14: forecast 3.5x) on a sustained basis - FFO interest coverage below 3.0x (FY14: forecast 3.2x) 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: Fitch does not envisage a positive rating action in the next two years given the company's market position and relatively small size. 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: Including Short-Term Ratings and Parent and Subsidiary Linkage� dated 5 August 2013 are available at www.fitchratings.com. 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'. 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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