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TEXT-S&P affirms and withdraws ratings semiconductor designer Lantiq
December 21, 2012 / 12:20 PM / in 5 years

TEXT-S&P affirms and withdraws ratings semiconductor designer Lantiq

Dec 21 -

Overview

-- German semiconductor designer Lantiq Beteiligungs-GmbH & Co. KG and its lenders have recently signed an amendment to the credit agreement for its outstanding loans.

-- Furthermore, Lantiq’s owner, private equity company Golden Gate Capital, has supported the group with an additional $81 million in capital in the current quarter.

-- We are affirming our ‘CCC+’ long-term corporate credit rating and subsequently withdrawing the rating at the issuer’s request.

Rating Action

On Dec. 21, 2012, Standard & Poor’s Ratings Services affirmed its ‘CCC+’ long-term corporate credit rating on Germany-based semiconductor company Lantiq Beteiligungs-GmbH & Co. KG and the ‘B-’ issue rating on Lantiq’s term loan. We kept the recovery rating on this loan at ‘2’, indicating our expectation of substantial (70%-90%) recovery in the event of a payment default.

At the same time, we removed all the ratings from CreditWatch where they were placed with negative implications on Aug. 23, 2012.

We subsequently withdrew all ratings at the issuer’s request. At the time of the rating withdrawal, the outlook was stable.

Rationale

The rating affirmation reflected the positive impact on Lantiq’s liquidity of the recent amendment between Lantiq and its lenders to the credit agreement for its outstanding loans. Furthermore, to support negotiations with lenders and improve the group’s capital structure and liquidity, Lantiq’s owner, the private equity company Golden Gate Capital (GGC), has provided Lantiq with $81 million of additional capital in the current quarter. The capital injection was used for general corporate purposes and to reduce the group’s outstanding loan to $56 million from $111 million on Nov. 8, 2012.

These positive liquidity factors, however, are partly offset by our expectations of continued, albeit likely lower cash flow losses in the fiscal year 2013 (ending on Sept. 30), which if not contained over the next 12 to 18 months could impair the company’s balance sheet. In addition, we forecast moderately lower revenues in fiscal 2013 due to a currently challenging competitive and macroeconomic environment. This could at least partly offset the company’s cost-cutting efforts and higher gross margins from a better product mix.

Following the amendment of the credit agreement, Lantiq faces no debt amortization until the maturity of its $55 million term loan in November 2014. In addition, it only has to comply with one financial maintenance covenant, which requires it to maintain a minimum cash amount of $10 million. We forecast that Lantiq has ample headroom under this covenant over the next 12 months. As of June 30, 2012, the company reported cash balances of $22 million.

In the nine months to June 30, 2012, Lantiq reported a revenue decline of 23% year on year and pro forma EBITDA (as defined by the company) of only $12 million, down from $26 million year on year. This includes about $1.5 million pro forma EBITDA in the third quarter and we expect only a mild increase in EBITDA generation in the fourth quarter. In addition, in the nine months to June 30, 2012, Lantiq reported significant negative free operating cash flow (FOCF; cash flow from operations after capital expenditures) of about $33 million, primarily due to its weak operating margins and significant restructuring expenses and carve-out-related investments, which was only partly offset by a reduction of its net working capital.

At the time of the withdrawal, the ratings on Lantiq reflected our assessment of the group’s business risk profile as “vulnerable” and its financial risk profile as “highly leveraged”. Our assessment of the company’s management and governance was “fair”.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

-- Criteria For Assigning ‘CCC+', ‘CCC’, ‘CCC-', And ‘CC’ Ratings, Oct. 1, 2012

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action; Ratings Withdrawn

To To From

Lantiq Beteiligungs-GmbH & Co. KG

Corporate Credit Rating NR CCC+/Stable/-- CCC+/Watch Neg/--

Senior Secured NR B- B-/Watch Neg

Recovery Rating NR 2 2

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