(The following statement was released by the rating agency)
NEW YORK, May 01 (Fitch) Fitch Ratings has upgraded the
following ratings on
Seagate Technology plc (Seagate) and its subsidiaries:
--Issuer Default Rating (IDR) to 'BBB-' from 'BB+'.
Seagate HDD Cayman
--IDR to 'BBB-' from 'BB+';
--Senior unsecured debt to 'BBB-' from 'BB+'.
Furthermore, Fitch has affirmed the credit facility rating for
Seagate and Seagate HDD Cayman, at 'BBB-' and withdrawn the IDR
second lien notes ratings for Seagate Technology International
(STI), since the
entity is now debt free.
The Rating Outlook is Stable.
Approximately $3 billion of total debt is affected by Fitch's
the company's undrawn $350 million unsecured revolving credit
KEY RATING DRIVERS
The Ratings Upgrades 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
Seagate and Western Digital Corp. (WDC), control 88% of the
market; strong HDD
growth in Exabytes (EB) shipped (30%-40% annually) in excess of
growth largely driven by the cloud and usage of Internet-enabled
increasing shipment linearity and tightly managed capital
the supply chain that minimizes the risk of supply and demand
The increasing linearity in HDD shipments reflects the declining
with PC demand due to strong growth in near-line enterprise HDD
storage for use
in cloud data centers. IDC estimates worldwide PC shipments
sequentially in the first quarter of 2013, yet the total
addressable market for
HDDs was nearly flat sequentially (-0.2%), according to WDC.
--Positive profitability implications from a favorable mix shift
capacity HDDs for cloud computing that require greater media and
drive, thereby absorbing a greater amount of fixed-cost
investments than lower
capacity PC drives. Seagate's average drive capacity increased
year-over-year to 823 gigabytes in the quarter ended Dec. 28,
acquiring Samsung's predominantly notebook HDD business.
--Seagate's solid liquidity and financial flexibility are
supported by $2
billion in cash, the vast majority of which is readily
adverse tax considerations, generally positive annual free cash
flow (FCF), and
an undrawn $350 million senior unsecured revolving credit
facility due 2015.
Fitch believes Seagate's FCF volatility will continue to
moderate due to a more
stable HDD pricing environment, lower demand volatility,
favorable product mix
shift and cautious approach to capital investments that increase
manufacturing capacity. Seagate has generated positive FCF for
years on a trailing 12-month basis.
STI's redemption of $315 million of its 10% senior secured
previously due in 2014 for existing cash on hand also
since it eliminates all long-term debt maturities until 2016,
when $600 million
of unsecured notes mature.
--Strong credit protection metrics and management's commitment
--Broad product portfolio and significant scale in HDD industry;
--The company's vertically integrated model, which reduces
manufacturing costs and facilitates new product time to market.
Fitch's rating concerns consist of:
--Long-term threat of technology substitution from NAND
including risk of consumers substituting traditional notebooks
with HDDs for
ultrabooks equipped with solid state disk (SSD) or media tablets
The high relative cost of flash-based storage compared with HDDs
limit the amount of storage capacity on PCs and tablets,
increasing demand for
data storage in the form of hybrid HDDs, cloud and external
storage, areas where
Seagate continues to be well positioned. Seagate's Pulsar 800GB
multilevel cell (MLC) SAS enterprise SSD currently retails for
$6,599, or $8.25
per GB, nearly 12x the cost per GB of a HDD.
Fitch expects PC demand to recover in the second half of
calendar 2013 due to
normal seasonality and a plethora of new convertible notebook
PCs that more
closely align with user requirements, including lower price
points enabled in
part by lower cost hybrid solid state drives, and improved
supported by Intel's upcoming, more efficient microprocessor,
--Substantial historical volatility in earnings and free cash
flow 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
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
competition from WDC.
--Future ratings upgrades are currently unlikely due to the
long-term threat of
technology substitution from SSD, where Seagate lacks a dominant
position relative to HDDs.
--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
competition from WDC;
--If the company pursues more aggressive financial policies,
such as sizable
debt-financed share repurchases.
--If Ultrabooks with SSD materially cannibalize the traditional
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 $3.1 billion in the latest 12
months (LTM) ended
Dec. 28, 2012 compared with $519 million in the corresponding
year ago period
due to supply shortages from the Thailand flood that
average selling prices (ASPs). Fitch forecasts at least $1.9
billion of FCF
annually through fiscal 2015 ended June 29.
Financial covenants in the credit agreement consist of a minimum
coverage of 1.5x and a maximum net leverage ratio of 1.5x. In
facility requires minimum liquidity of $500 million.
Leverage (total debt/operating EBITDA) decreased to 0.6x as of
Dec. 28, 2012
from 1.4x in the year-ago period, benefitting from elevated ASPs
Thailand flood. ASPs have since receded, as Fitch expected,
given the recovery
in the HDD supply chain. Nonetheless, Fitch anticipates
Seagate's leverage will
remain below 1x as $315 million of debt reduction offsets lower
with the immediate aftermath of the Thai flood.
Interest coverage (operating EBITDA/gross interest expense)
increased to 19.2x
in the LTM ended Dec. 28, 2012 compared with 8.1x last year.
interest coverage will remain above 17x through fiscal 2015.
Fitch estimates total debt, pro forma for the redemption of
STI's 10% senior
secured second-priority notes due previously in May 2014, is
billion and consists of:
--$600 million of 6.8% senior notes due October 2016 (Seagate
--$697 million of 7.75% senior notes due December 2018 (Seagate
--$600 million of 6.875% senior notes due May 2020 (Seagate
--$600 million of 7% senior notes due November 2021.
John M. Witt, CFA
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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