Fitch Affirms Spansion's IDR at 'B-'; Outlook Remains Negative
CHICAGO, Feb 26, 2008 (BUSINESS WIRE) -- Fitch Ratings has affirmed Spansion Inc.'s (Spansion) (Nasdaq: SPSN) Issuer Default Rating (IDR) at 'B-' while downgrading the following issue-level ratings due to lower recovery prospects:
--$175 million senior secured revolving credit facility due 2010 to 'B/RR3' from 'B+/RR2';
--$625 million senior secured floating rating notes due 2013 to 'B/RR3' from 'B+/RR2';
--$225 million of 11.25% senior unsecured notes due 2016 to 'CCC/RR6' from 'CCC+/RR5'; and
--$207 million of 2.25% convertible senior subordinated debentures due 2016 to 'CCC-/RR6' from 'CCC/RR6'.
The Rating Outlook remains Negative. Approximately $1.2 billion of debt is affected.
The Negative Outlook mainly reflects Fitch's expectations that:
-the company's financial flexibility and liquidity position will remain relatively weak;
-Spansion's free cash flow will be negative again in 2008, despite the anticipation of significantly lower capital spending, further pressuring the company's liquidity position or resulting in higher debt levels; and
-ongoing industry-wide excess capacity, which continues to pressure average selling prices in all but the highest bit-density products and should constrain the company's ability to meaningfully expand gross margins and, therefore, achieve operating profitability over the near-term.
Ratings concerns mainly center on:
- substantial ongoing capital spending and research and development (R&D) requirements, which should exceed 30% of sales in 2008, (at the higher end for the industry), while recognizing that Spansion's capital spending has been accelerated to support solid unit growth prospects and gain a sustainable cost leadership position;
- Spansion's current lack of diversification beyond NOR flash memory markets (although emerging products are expected to address certain NAND and DRAM markets), which Fitch believes limits the company's tolerance for shortfalls in the commercial success of its technology roadmap or delays in transitioning to ever smaller circuitry nodes. Fitch notes that Spansion's key competitors have stronger financial flexibility, enabling them to withstand a challenging operating environment over the intermediate-term.
The ratings are supported by Fitch's expectations that:
- Spansion will continue to outgrow the NOR flash memory market over the next few years, driven by ongoing industry consolidation, including an opportunity to become a second source supplier for customers of Intel Corp. and STMicroelectronics N.V., which are forming a NOR flash memory joint venture (JV) currently expected to close March 28, 2008;
- beyond the near-term, Spansion's significant recent investments in leading edge manufacturing technology and ongoing transition to smaller circuit geometries, as well as development of foundry partnerships, should enable the company to achieves sustainable operating profitability through a normalized cycle;
- Spansion's technology roadmap, including its MirrorBit and ORNAND architectures, will expand the company's addressable market beyond NOR flash memory, potentially strengthening Spansion's longer-term unit growth and profitability prospects.
The Recovery Ratings (RR) and notching reflect Fitch's expectation that Spansion's enterprise value, and hence recovery rates for its creditors, will be maximized as a going concern rather than as in liquidation under a distressed scenario. The lower recovery ratings incorporate Spansion's meaningful decline in operating EBITDA and increased debt levels over the past several quarters, as well as a greater proportion of secured debt within the capital structure. Fitch's analysis assumes Spansion is not restricted by covenants or borrowing bases to fully draw down on its existing bank credit facilities.
Given the erosion of Spansion's profitability to nearly distressed levels over the past several quarters, Fitch has reduced the discount to operating EBITDA (in estimating distressed operating EBITDA) for 2007 to 25% from the previous discount of 55%. Fitch believes of $800 million of rated senior secured debt, including $625 million of senior secured floating rate notes and a fully drawn $175 million U.S. revolving bank credit facility, would recover 51%-70% in a reorganization scenario, resulting in a 'RR3' recovery rating. A waterfall analysis provides 0%-10% recovery for the approximately $225 million of rated senior unsecured debt and $207 million of senior subordinated notes, both resulting in a recovery rating of 'RR6'.
As of Dec. 31, 2007, Fitch believes Spansion's liquidity was weak but sufficient to meet Fitch's anticipated near-term short-fall in free cash flow and supported by: approximately $416 million of cash and cash equivalents and ii) approximately $236 million in total availability under various existing credit facilities (subject to certain borrowing base limitations), including Spansion's undrawn $175 million senior secured U.S. revolving credit facility expiring 2010. A portion of Spansion's additional availability is related to credit facilities at the company's wholly-owned subsidiary, Spansion Japan.
Total debt as of Dec. 31, 2007 was $1.4 billion and consisted primarily of: i) approximately $260 million outstanding under a JPY 48.8 billion (approximately $400 million as of Dec. 31, 2007) Spansion Japan's, a wholly-owned subsidiary of Spansion Inc., senior secured credit facility expiring 2012; ii) approximately $625 million of floating rate senior secured notes due 2013; iii) approximately $225 million of 11.25% senior unsecured notes due 2016; iv) $207 million of 2.25% exchangeable senior subordinated debentures due 2016; and iv) approximately $80 million of other debt, including capital leases.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
SOURCE: Fitch Ratings
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