Fitch Report: 'Freescale's Ratings Unaffected By Potential Cellular Unit Sale'

FSL/B | Quote | Chart | News | PowerRating -- Fitch Ratings said in a report that Freescale Semiconductor announced plan to sell or joint venture (JV) its cellular business has no immediate impact on the company's debt ratings or Negative Rating Outlook, due primarily to the uncertainty surrounding the structure and timing of any potential transaction.

Fitch rates Freescale as follows:

--Issuer Default Rating (IDR) at 'B+';

--Senior secured bank revolving credit facility at 'BB+/RR1';

--Senior secured term loan at 'BB+/RR1';

--Senior unsecured notes at 'B/RR5';

--Senior subordinated notes at 'CCC+/RR6'.

Depending upon the amount of net proceeds received and the structure of any such transaction, Fitch also believes Freescale's successful divestiture or JV of its cellular business could have a neutral to positive affect on ratings.

Nonetheless, the current rating Outlook remains Negative and continues to incorporate Fitch's expectations for a meaningfully more challenged revenue growth and profitability expansion story through the intermediate-term and within the context of a decidedly weakened macroeconomic environment, as well as market share erosion and ongoing competitive difficulties for a number of key customers, including its largest cellular customer, Motorola. (rated 'BBB'/Negative Rating Watch by Fitch) and the big three U.S. auto makers, and weaker wireless infrastructure spending by U.S. carriers.

Given that Freescale, under the terms and conditions of its bank credit agreements and bond indentures, can use net proceeds from asset divestitures for debt reduction or reinvesting in the business, Fitch believes a divestiture could result in strengthened credit protection measures and more stable operating performance. Fitch believes that Freescale's consolidated profitability margins, as measured by operating EBITDA, would increase with the disposition of the comparatively lower-margin cellular business, based upon Fitch's estimates prior to the company discontinuing the disclosure of segment profitability in the fourth quarter of 2007. Fitch estimates EBITDA margins for the Wireless and Mobile Solutions Group (within which the Cellular business was formerly included) were meaningfully more volatile and anywhere from 33 percent-75 percent lower in any given quarter of 2006-2007 than those of Freescale's other main segments, Transportation & Standard Products and Networks & Computing Systems, at the time. Given Motorola's, which typically represent more than 90 percent of segment and 25 percent of consolidated sales (a portion of these sales are from Freescale's Networking segment), ongoing operating weakness over the past several quarters, Fitch believes profitability margins for the Cellular business are likely to have remained flat at best and possibly lower, despite the company's aggressive cost cutting actions. For the latest 12 months (LTM) ended June 27, Fitch estimates Freescale's total leverage (total debt to operating EBITDA) and interest coverage (operating EBITDA to gross interest expense) was 6.4 times (x) and 1.9x, respectively, at the low end of the current rating category.

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