Moody's upgraded WDC to Baa3, whatever that means.
Here is the link: moodys.com
Rating Action: Moody's upgrades Western Digital to Baa3; outlook stable
Global Credit Research - 30 Jan 2018
New York, January 30, 2018 -- Moody's Investors Service (Moody's) upgraded Western Digital Corporation's ("WDC") senior unsecured debt rating to Baa3, from Ba2, and the rating for its senior secured credit facilities to Baa2, from Ba1. Moody's also assigned a Baa2 rating to WDC's proposed credit facilities comprising a $1.5 billion revolving facility and approximately $5 billion of term loan A, and a Baa3 rating to the proposed $2.3 billion of senior unsecured notes. The ratings have a stable outlook.
WDC plans to use the proceeds from incremental debt, including up to $1 billion of senior convertible notes (unrated), and cash on hand, to refinance the $1.9 billion of existing senior secured notes and $3.35 billion of senior unsecured notes, and pay accrued interest, premium and transaction fees. The proposed transactions will reduce gross debt by about $1 billion and result in meaningful interest cost savings. Moody's expects to withdraw the ratings for the existing senior revolving credit facility, term loan A and senior notes upon the repayment of debt at close of the financing transactions. Moody's has also withdrawn WDC's Ba1 Corporate Family Rating, Ba1-PD Probability of Default Rating and SGL-2 speculative grade liquidity rating.
RATINGS RATIONALE
The ratings upgrade reflects WDC's meaningful deleveraging since the SanDisk acquisition in May 2016 driven by cumulative debt reduction of over $6 billion, progress in integrating the SanDisk acquisition and operating profit margin expansion from cost synergies from the acquisitions of SanDisk and Hitachi Global Storage Technologies (HGST). Pro forma for the proposed transactions, WDC's total debt to EBITDA (Moody's adjusted, including unfunded pension liabilities) will be about 2.2x and Moody's estimates that WDC will generate annual free cash flow of about $2.5 billion to $3 billion over the next 12 to 18 months. The upgrade incorporates Moody's expectation that WDC's financial policies will remain consistent with its goal of reducing leverage to 1.5x (company's total debt to adjusted EBITDA basis) between 2019 to 2021. In December 2017, WDC and Toshiba Corporation extended their joint ventures through 2027 and 2029, which will guarantee the supply of NAND to WDC under the alliance over this period.
The inherent supply/demand and pricing volatility in WDC's businesses make it difficult to estimate operating performance over the next 12 to 18 months. WDC's gross profit margins (41.5% non-GAAP basis for the twelve months ended December 2017) have partly benefited from the strong NAND memory pricing in 2017. Moody's estimates that weakening NAND prices could erode WDC's gross profit margins, which could decline toward the higher end of management's long-term range of 33% to 38% over the next 12 to 18 months. In Moody's view, the downside risk to margin erosion is mitigated by WDC's remaining cost savings from the acquisitions of SanDisk and HGST, manufacturing productivity gains and the product mix shift toward next generation memory products. However, moderating EBITDA growth could limit further deleveraging.
The Baa3 senior unsecured rating is supported by WDC's substantial scale in the data storage markets with a broad portfolio of hard disk drives (HDD) and solid state drive (SSD)-based storage solutions. Although the company's business will exhibit short-term volatility, WDC's business profile benefits from solid demand for data storage products over the foreseeable future. These strengths, coupled with the company's stronger financial profile, mitigate its high business risks resulting from product substitution in its HDD business, expected supply/demand volatility and execution risks in managing product transitions. The rating additionally incorporates WDC's acquisitive history and willingness to increase leverage for strategic acquisitions.
WDC's senior secured credit facilities are rated Baa2 to reflect the first priority security interest in the assets of certain domestic subsidiaries and guarantees. The collateral and guarantees pledged to the lenders can be suspended under certain conditions, at which time Moody's could downgrade the rating for the credit facilities to Baa3, consistent with the rating for other senior unsecured debt.
WDC's ratings could be downgraded if operating profits and cash flow from operations experience a sustained and meaningful decline, or financial policies deviate from management's target of reducing leverage to 1.5x. The rating could be downgraded if WDC is unlikely to sustain leverage below 2.25x (Moody's adjusted) and free cash flow of at least 15% of adjusted debt. Moody's could upgrade WDC's ratings if the company establishes a track record of conservative financial policies and generates sustained growth in operating profits in the mid-single digit percentages. The rating could be upgraded if Moody's expects WDC will sustain total debt to EBITDA below 1.5x (Moody's adjusted) and free cash flow (after dividends and capital expenditures, including the JV investments) of 25% or higher.
Rating Actions
Moody's upgraded the following ratings:
Issuer - Western Digital Corporation
..Senior Secured Term Loan B due 2023 -- Baa2, from Ba1 (LGD3),
..Senior Secured Notes due 2023 -- Baa2, from Ba1 (LGD3), To be withdrawn
..Senior Secured Revolving Credit Facility due 2021 -- Baa2, from Ba1 (LGD3), To be withdrawn
..Senior Secured Term Loan A due 2021 -- Baa2, from Ba1 (LGD3), To be withdrawn
..Senior Unsecured Notes due 2024 -- Baa3, from Ba2 (LGD 6), To be withdrawn
The following ratings were assigned:
Issuer - Western Digital Corporation
..New Senior Secured Revolver due 2023 -- Baa2
..New Term Loan A due 2023 -- Baa2
..New Senior Unsecured Notes due 2026 -- Baa3
Moody's withdrew the following ratings:
Issuer - Western Digital Corporation
..Corporate Family Rating -- Ba1
..Probability of Default Rating -- Ba1-PD
..Speculative Grade Liquidity Rating -- SGL-2
Outlook Actions:
Issuer - Western Digital Corporation
..Outlook -- Stable
WDC is a leader in the design, manufacture and marketing of storage hardware and solutions used in systems ranging from personal computers and consumer electronics to data centers. |
