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July 11 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Advanced Semiconductor Engineering, Inc.'s (ASE, BBB/Stable) proposed US dollar senior unsecured guaranteed notes an expected rating of 'BBB(EXP)'. The proposed notes will be issued by its wholly owned subsidiary, Anstock II Limited, and unconditionally and irrevocably guaranteed by ASE.
The final rating on the notes is contingent upon the receipt of final documents conforming to information already received. The notes are rated in line with ASE's senior unsecured rating of 'BBB' as they will represent direct, unconditional, unsecured and unsubordinated obligations of the company. The proceeds from the proposed senior unsecured notes will be used to fund ASE's special environmental projects.
KEY RATING DRIVERS
Leading Market Position: The ratings reflect ASE's leading and expanding global market share in outsourced semiconductor assembly and test (OSAT) services. According to Gartner, ASE's market share rose to 18.9% in 2013 (2012: 17.5%). ASE benefits from the positive growth outlook for semiconductor demand over the long term.
In addition, Fitch believes ASE's ability to efficiently build system-in-package (SiP) products by taking advantage of the miniaturisation trend in packaging represents a major new market opportunity for the company. Fitch expects ASE's growing SiP exposure to drive further market share gains in advanced packaging.
Strong Technology Leadership: The ratings also reflect ASE's strong technology leadership in copper wire based packaging technology and in-house expertise at the system production level. Vertical integration has strengthened ASE's cost structure and technology development while the synergies between its in-house packaging/testing, electronics manufacturing services and material businesses have helped ASE establish a good position in the SiP-related market. All these have translated into stronger revenue and profitability compared with the company's closest competitors.
Capital Intensive Operations: The ratings are constrained by the capital intensive nature of the OSAT industry. ASE completed the expansion of its copper wire-bonding capacity by end-2012, but it is increasing investment from 2014 to strengthen its ability, product portfolio and capacity for advanced packaging and SiP-related technologies. However, ASE is relatively well capitalised and has stronger cash flow from operations than its major rivals.
Slowing Deleveraging, Low Headroom: ASE's strong cash flow from operations should cover its capex needs. However, ASE is committed to higher cash dividend payments, which will constrain the company's deleveraging pace over the medium term. Fitch's ratings assume that the company's funds flow from operations (FFO)-adjusted leverage falls to 2.0x or less by December 2015. While this is achievable, the company has low headroom at its current ratings; performance below Fitch's base case may lead to a downgrade in the ratings.
Adequate Liquidity: Fitch believes that ASE's liquidity will remain satisfactory. Unrestricted cash of TWD44bn at end-March 2014 covered 110% of its debt due within one year. While there may be a temporary free cash flow (FCF) deficit in 2014 due to higher capex and increased cash dividend, Fitch expects ASE's FCF to be positive in 2015 and 2016, although the extent of FCF generation will be limited by its dividend policy. ASE is well supported by banks. Unused banking facilities totalled TWD111.2bn at end-2013.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- operating EBIT margin below 5% (2013: 10.0%),
- funds flow from operations (FFO) adjusted leverage above 2.0x (2013: 2.3x)
- negative FCF, all on a sustained basis.
Positive: Future developments that may individually or collectively lead to a positive rating action include:
- operating EBIT margin above 10%,
- FFO-adjusted leverage below 1.0x,
- pre-dividend FCF margin above 7% (2013: 5.2%), all on a sustained basis. However, Fitch is unlikely to consider an upgrade without a substantial increase in ASE's market share.