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Fitch Rates Intel's $2B 30-Year Senior Notes Offering 'A+'
December 6, 2017 / 8:12 PM / 5 days ago

Fitch Rates Intel's $2B 30-Year Senior Notes Offering 'A+'

(The following statement was released by the rating agency) CHICAGO, December 06 (Fitch) Fitch Ratings has assigned an 'A+' rating to Intel Corp.'s (Intel) $2 billion 3.734% senior notes maturing Dec. 8, 2047, which Intel expects to issue in connection with the first of two concurrent exchange offers intended to retire higher coupon senior notes. Pro forma for settlement of the exchange offers, Intel's total debt decreased by $344 million to approximately $31.3 billion as of Sept. 30, 2017. A full list of current ratings follows at the end of this release. In the first offer, Intel will use net proceeds from the senior notes issuance and $292 million of available cash to retire approximately $1.9 billion of higher couple senior notes that have been either validly tendered and not withdrawn as of expiration date or subject to notice of guaranteed delivery by expiration date. In the second offer, Intel will use approximately $518 million of available cash to retire approximately $435 million of higher coupon senior notes. Intel will use an additional approximately $36 million of available cash for accrued and unpaid interest in aggregate for both exchange offers. KEY RATING DRIVERS Leading Market Positions: Fitch expects Intel's strong market positions in data-centric businesses (estimated 30% market share) and personal computer (PC)-centric businesses (estimated 90% market share) provide significant revenue scale with positive double digit top line growth in data-centric businesses more than offsetting secular decline in PC-centric markets. Technology Leadership: Fitch believes Intel's significant cumulative investments in research and development (R&D) and manufacturing capabilities have resulted in technology leadership and support Fitch's expectations for top line growth and solid profitability through at least the intermediate term. At the same time, Fitch recognizes Intel's shift in focus to growth markets exposes the company to a greater number of competitors with a breadth of technologies and architectures, along with equally significant financial resources, in many cases. Solid Financial Flexibility: Fitch expects Intel's annual free cash flow (FCF) to remain robust in spite of significant investment requirements, although the majority of FCF is outside the U.S. Fitch estimates more than $3.5 billion of annual FCF through the forecast with upside should Intel achieve its operating profit margin targets in the mid-30s from lower spending offsetting expectations for lower gross profit margins over at least the intermediate term. FCF should provide adequate capacity for organic investments, while Fitch expects Intel will fund sizeable acquisitions, particularly domestic targets, with incremental debt. High Investment Intensity: Fitch expects R&D and capital spending will continue to represent 35%-40% of revenue, despite Intel's target of trimming other expenses to offset some gross profit erosion. Intel's strategic focus on technology leadership in data-centric markets, including data center, autonomous vehicles and internet of things (IoT), will require significant investments in processors and other areas such as non-volatile memory to differentiate product performance. Customer concentration: Fitch expects customer concentration will intensify over time as cloud service providers (CSP) consolidate information technology (IT) spending. Fitch believes new workloads will remain cloud-native and modernized workloads will continue shifting from on-premise to the cloud, on a net basis. As a result, enterprise IT spending will continue declining by low-single digits while CSPs continue aggressive capacity and capabilities expansion, driving greater customer concentration and, therefore, less even demand patterns. DERIVATION SUMMARY Fitch's rating and Outlook reflects Intel's meaningful intellectual property (IP) portfolio in software, design and manufacturing, leading market share positions, solid profit margins and cash flow resulting in sufficient financial flexibility to maintain high investment levels while conservatively managing its balance sheet. Intel's PC-centric markets (still 55% of core revenue and roughly 60% of operating income), in which the company faces competitors with weaker financial flexibility or competing architectures but limited market penetration, are in secular decline but yield solid cash flow to support Intel's strategic focus on data-centric markets. Intel has lower share in these markets and the company faces a greater number of competitors also with the scale and financial flexibility to maintain high investment rates, particularly within certain markets where technology standards are evolving. While Intel's credit profile currently is in-line with the rating, Fitch believes technology risk in data center, automotive and IoT markets will likely remain heightened for the foreseeable future and could result in outcomes ranging from greater diversification leading to a strengthened credit profile to a weakened credit profile from substantial adoption of competing technologies. KEY ASSUMPTIONS --Data Center Group (DCG) grows by mid-single digits through the forecast period, driven by strong demand from CSPs; --IoT grows by double digits through at least the forecast period from solid platform adoption as these markets evolve; --Flat to slightly down Client Computing Group (CCG) growth through the forecast period from continued unit declines offset by a richer PC mix; --Stable operating EBITDA margins due to operating expense reductions offsetting expectations for modest gross profit margin pressures; --Total leverage (total debt to operating EBITDA near 1x from operating EBITDA growth, versus a Fitch estimated 1.2x for the latest 12 months (LTM) ended Sept. 30, 2017 before and after the exchange offers; --Capital spending remains volatile but in the mid-teens through the forecast period; -- $500 million of annual tuck-in acquisitions with no meaningful impact on financial results; --Intel refinances debt maturities and uses domestic cash after dividends and acquisitions for share repurchases. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Negative Rating Action --Total leverage sustained above 1.5x, likely from intensified shareholder returns amid weaker than expected operating performance, given the majority of pre-dividend FCF is offshore. --Negative organic revenue growth from share losses in DCG or slower than anticipated IoT platform adoption. --Normalized FCF to adjusted debt sustained below 10%, likely driven by pricing pressures in data center markets from competing technologies or architectures or increased buying power of CSPs. Developments that May Collectively Lead to Positive Rating Action --Management's commitment to moderate shareholder returns to maintain total leverage below 1x. -Intel expands sustainable and profitable share leadership in data-centric markets, despite intensifying competition from alternate architectures. --Significant disruption by Intel's non-volatile memory and solid adoption of Intel's IoT platform, resulting in further diversification of Intel's sales mix and profit pools LIQUIDITY Solid liquidity. Liquidity was solid at Sept. 30, 2017 and consisted of: i) $17.5 billion of cash and cash equivalents, short-term investments and trading assets, of which $10 billion was outside the U.S. and ii) an up to $10 billion commercial paper (CP) program, none of which was outstanding at quarter end. Intel does not have a revolving credit facility to support its CP program, but Fitch views the company's cash flow profile as providing ample support for the program, particularly given Fitch's expectation for only moderate use. Fitch's expectations for more than $3.5 billion on average of annual FCF also support liquidity. FULL LIST OF CURRENT RATINGS Fitch currently rates Intel as follows: Intel Corp. --Long-Term Issuer Default Rating (IDR) 'A+'; --Short-Term IDR 'F1'; --CP program 'F1'; --Senior unsecured notes 'A+'; --Junior subordinated notes 'A'. Altera Corp. --Long-Term IDR 'A+'; --Senior unsecured debt 'A+'. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Alen Lin Senior Director +1-312-368-5471 Committee Chairperson Megan Neuberger Managing Director +1-212-908-0501 Date of Relevant Rating Committee: March 14, 2017 Summary of Financial Statement Adjustments: Fitch made no financial statement adjustments that depart materially from those contained in the published financial statements of Intel Corp. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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