December 1, 2016 / 5:05 AM / 9 months ago

Fitch Maintains ASE on Rating Watch Negative

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, December 01 (Fitch) Fitch Ratings has maintained the Rating Watch Negative (RWN) on Advanced Semiconductor Engineering, Inc.'s (ASE) 'BBB' Long-Term Foreign-Currency Issuer Default Rating (IDR), 'BBB' senior unsecured rating and 'A+(twn)' National Long-Term Rating. The agency has simultaneously maintained the RWN on the 'BBB' rating on Anstock II Limited's USD300m 2.125% senior unsecured guaranteed notes due 2017. Today's action follows the joint statement issued by ASE and Siliconware Precision Industries Co., Ltd. (SPIL) on 18 November 2016 that said the Taiwan Fair Trade Commission has approved the merger plan of ASE and SPIL. The two parties plan to establish a holding company to own 100% of the equity interests of both ASE and SPIL. Fitch placed ASE's ratings on RWN on 17 December 2015 following ASE's proposed cash acquisition of the SPIL shares that it did not own. Both companies' boards of directors adopted the resolution to approve the merger on 30 June 2016. The merger agreement, unless consummated, will expire by 31 December 2017. The merger is subject to "no-objection" consent from anti-trust authorities in China and US and needs approval from respective shareholders' of the two companies. If the proposed merger plan proceeds, ASE's ratings are likely to be based on the consolidated credit profile of the holding company, given the strong financial, operating and strategic linkages between the two entities. The Negative Watch reflects Fitch's belief that the holding company's consolidated credit metrics may be significantly worse than those of ASE. However, this will be offset by reduction in the business risk of the combined group due to stronger market share and opportunities to achieve cost and capex synergies. The Rating Watch will be resolved when the completion of the proposed transactions is certain and the capital structure, financial profile and policies of the combined group are clear. We may affirm the ratings at their current levels with Stable Outlook or downgrade the ratings, though this is likely to be limited to a single notch. KEY RATING DRIVERS Weaker Leverage: We estimate that, if the merger proceeds and is funded entirely by debt, the holding company's consolidated pro-forma FFO-adjusted leverage could exceed 3.0x in 2017 (estimated 2016: 2.3x-2.4x), compared to our downgrade rating guideline of 2.0x for ASE on a standalone basis. We expect it will take two to three years for the group to deleverage to below 2.5x, depending on recovery in the global semiconductor industry, achievement of cost and capex synergies and the dividend policy. The proposed deal will involve swapping each ASE share for 0.5 shares of the holding company and the holding company paying TWD51 in cash per SPIL share. The offer for SPIL shares that ASE does not own, including the shares resulting from the likely conversion of SPIL's USD400m outstanding convertible bonds, would cost TWD130bn (USD4bn) in cash, which may be funded partly by ASE's cash and new debt. Stronger Position: We recognise the business benefits of the deal to ASE, in terms of improvements in market share to about 29% in the outsourced semiconductor assembly and testing industry, and opportunities to achieve cost and capex synergies to cater for the growing "system-in-package" (SiP) business. The revenue synergies may, however, be offset by some revenue losses should some customers choose to diversify some business away from the combined group. Better Financial Performance: We estimate ASE's standalone 2016 EBITDA will be around TWD54bn-55bn, or 7%-8% higher than our earlier expectations thanks to a greater contribution from more profitable assembly and test products. We expect the less-profitable Electronic Manufacturing Services (EMS) segment's revenue to decline in 2016 by the mid-to-high teens percentage due to lower volumes from a wearable SiP project. KEY ASSUMPTIONS The merger is subject to regulatory and shareholders' approvals, but key Fitch forecast assumptions for the combined entity include: - Successful completion of the establishment and listing of the holding company in 2017 at the terms of the joint statement announced by both ASE and SPIL on 30 June 2016 - Semiconductor back-end market to grow by around 3%-5% in 2017 - Progressive achievement of cost and capex synergies over the medium term - Substantial cut in dividend payout in the first three years immediately after the completion of formation of the holding company RATING SENSITIVITIES Fitch plans to resolve the RWN once completion of the merger is practically certain and there is clarity on the combined group's future capital structure and financial policies, which may take longer than six months from now. The final ratings will depend on pro-forma leverage on completion of the transactions and on the degree of visibility and credibility of a sustainable deleveraging path using post-dividend free cash flow and potential new equity proceeds. We may affirm the ratings at their current level with Stable Outlook, if, following discussions with the company, we determine that lower business risk offsets the higher financial risk associated with weaker credit metrics. Positive rating action is currently not envisaged. If the merger does not proceed, Fitch would likely remove ASE's ratings from RWN and affirm its ratings. LIQUIDITY Adequate Liquidity: At end-September 2016, ASE's had unrestricted cash of TWD38bn and available undrawn committed facilities of TWD170bn, compared with short-term debt of TWD49bn and a potential cash requirement of TWD130bn relating to the proposed deal to form a holding company to consolidate the ownerships in ASE and SPIL. FULL LIST OF RATING ACTIONS Fitch has maintained the Negative Rating Watch on the following ratings: Advanced Semiconductor Engineering, Inc. - Long-Term Foreign Currency IDR of 'BBB' - National Long-Term Rating of 'A+(twn)' - Foreign-currency senior unsecured rating of 'BBB' Anstock II Limited - USD300m 2.125% senior unsecured guaranteed notes due 2017 of 'BBB' The notes are unconditionally and irrevocably guaranteed by ASE. Contact: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Kelvin Ho Director +85 2 2263 9940 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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