December 12, 2012 / 6:25 PM / 5 years ago

TEXT - Fitch revises ASML Holding N.V. outlook to positive

Dec 12 - Fitch Ratings has revised the Outlook on Netherlands-based ASML Holding N.V.’s (ASML) Long-term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR and senior unsecured ratings at ‘BBB’. The Positive Outlook reflects Fitch’s view of the degree to which ASML has consolidated its position as one of the semiconductor capital equipment industry’s most important suppliers. This position has been both validated and strengthened by recent strategic events; namely a customer co-investment programme (CCIP) that has seen the semiconductor industry’s three most advanced manufacturers - Intel (‘A+'/Stable), Samsung (‘A+'/Stable) and TSMC - take a combined 23% ownership stake and commit to R&D funding aggregating EUR1.4bn over the next five years. This funding will specifically be used to share the risk of developing 450mm and extreme ultraviolet (EUV); production processes expected to underpin lithography (litho) developments for the next 10 years. Both are key to ensuring the continuation of “Moores Law,” the principle whereby chip capacity and the unit cost of production roughly doubles/halves respectively every 18 months. The customers participating in the CCIP are the industry’s largest and most advanced manufacturers, and the chip manufacturers most dependent on the advancement of these technologies, although the whole of the industry can expect to benefit from any acceleration in the delivery of these technologies that are enabled by their support of ASML’s R&D programmes. Fitch views the CCIP along with ASML’s subsequent acquisition of Cymer Inc. the industry’s leading light source provider, a component that is key to the advancement of EUV, as solidifying ASML’s market position - which, at an estimated 80%, was already extremely strong. The agency expects ASML to continue to maintain this position and potentially strengthen its position with leading edge customers, including those involved in the CCIP. The developments underline ASML’s strong technology leadership, while its market position looks increasingly unassailable. Lithography is now effectively a two player market; with Nikon Corporation not expecting to deliver commercial EUV before 2018. ASML have already delivered pre-production tools to its customers and expects EUV to become a reality in a production environment in 2014. The customer R&D funding should help the industry keep to this timetable and potentially accelerate the rate at which both EUV and 450mm production (the migration to 450mm wafer diameter production) enter mainstream production. RATING SENSITIVITY GUIDANCE Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Operating margins materially outside company targets: 13%-18% in downturn; 25%-30% at the peak of the up-cycle. Operating losses will be incurred in periods of extreme stress. - Gross cash consistently below EUR1.5bn - company’s stated commitment is to a strong cash balance. (Gross Cash of EUR2.3bn at 3Q12 pro forma for the company’s proposed synthetic share buyback). - Major loss of market share - revenue market share is currently estimated at around 80%. A decline to 55%, albeit still strong, would signify a rapid shift in market position and one that would likely reflect an on-going negative trend. Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Evidence that EUV technology as a mainstream production tool, is close to being delivered and that the delivery of volume EUV tools will not be dilutive to overall gross margins. Gross margin in 2012 is expected to be around 42% with Fitch modelling a 2 to 3 percentage point dilution in 2013 due to the dilutive effect of the EUV tools currently in the order book. Subject to prevailing conditions Fitch would expect this effect to have largely dissipated before upgrading the rating. - The successful integration of the Cymer acquisition would also be considered important before an upgrade is likely

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