Fitch Downgrades Global A&T's Ratings to 'CCC' from 'B-'
The downgrade reflects our expectations of GATE's continued FCF deficit and the ensuing liquidity stress and refinancing risk as its 2019 bond maturity draws near. Fitch believes GATE's liquidity will deteriorate further in the absence of a meaningful recovery in EBITDA or a successful sale of non-core assets.
KEY RATING DRIVERS
Negative FCF: Fitch estimates GATE's cash reserves will deplete by USD60m-90m each year, which is likely to place considerable stress on its liquidity position in 2H17. Our forecast assumes EBITDA of USD150m in 2016 will be insufficient to fund annual interest and finance lease payments (of around USD115m), taxes (USD10m) and capex (USD100m). This is despite the company's cost-reduction plan implemented in 1H16 to trim USD13m in expenses this year.
Limited Financial Flexibility: GATE's access to external financing is limited, leading to uncertainties regarding its ability to redeem the secured notes when they become due in February 2019. Management is considering options, which include selling non-core assets and moving USD40m-50m of cash from GATE's sister company, UTAC Manufacturing Services Limited, to boost liquidity.
There is limited visibility on the timing and extent of cash proceeds; Fitch has not included these sources of cash until any transactions are completed. We expect these options to ease liquidity pressure slightly, but substantial credit risk remains and may necessitate debt restructuring.
Weak Business Prospects: Fitch expects GATE's EBITDA to remain flat at around USD150m-155m in 2016-2017, due to a slow recovery in global demand for semiconductors and the increasing pressure of customers to shift integrated circuit (IC) packaging in-house. Gartner, Inc. revised its sales forecast for semiconductors, expecting a decline of 3.0%, compared with a previously forecast fall of 0.6%, due to weak demand for electronic equipment and high inventory levels; but it anticipates growth of 4.7% in 2017.
Ongoing Bond Dispute: We believe the company's ongoing dispute with holders of the first tranche of its first-lien bond is likely to remain unresolved in the medium term. GATE filed an appeal in June 2016 with the New York Supreme Court following the reinstatement of certain claims by the bondholders against the company in May 2016. A dispute resolution by payment of damages or through any court judgment that requires significant funds would increase the likelihood of default and lead to a downgrade, which may not be limited to one notch.
Fitch's key assumptions within the rating case for the issuer include:
- Revenue to stay flat in 2016-2017 then grow at low-single-digit percentages, reflecting the slow recovery in the semiconductor market.
- Operating EBITDA margin of 22%-23% in 2016-2018 (2015: 22.7%).
- Annual capex of USD90m-100m in 2016-2018.
- Annual cash taxes of around USD10m, and cash interest and finance lease payments of around USD115m.
- Cash payment of USD12m in aggregate over 2017-2019 as settlement for a litigation suit relating to technology license agreements.
- No asset sales or capital injection.
Negative: Future developments that may lead to negative rating action include weakening liquidity, such that default becomes probable (downgrade to CC), imminent or inevitable (downgrade to C).
Positive: Future developments that may lead to a positive rating action include an improved liquidity position.
Liquidity to Worsen: Fitch expects liquidity stress to increase in the next 12-24 months, based on a cash balance of USD136m at end-June 2016 and sustained negative FCF in the medium term. Continuing weak business prospects would place considerable pressure on GATE to meet its interest commitments starting 2H17. In addition, another USD12m of cash payment will become due in 2017-2019 as part of a litigation settlement. Access to external financing is limited; GATE only had USD12m of undrawn credit and banking facilities available for working capital purposes at end-June 2016.