|Fitch Downgrades Spansion Inc.'s IDR to 'CCC'; Outlook Negative|
Last update: 5:39 p.m. EST Dec. 12, 2008
SPSN 0.23, 0.00, 0.0%) :
--Issuer Default Rating (IDR) to 'CCC' from 'B-';
--$175 million senior secured revolving credit facility (RCF) due 2010 to 'CCC+/RR3' from 'B/RR3';
--$625 million senior secured floating rating notes due 2013 to 'CCC+/RR3' from 'B/RR3';
--$225 million of 11.25% senior unsecured notes due 2016 to 'CC/RR6' from 'CCC/RR6';
--$207 million of 2.25% convertible senior subordinated debentures due 2016 to 'CC/RR6' from 'CCC-/RR6'.
The Rating Outlook is Negative. Approximately $1.3 billion of debt securities are affected by Fitch's actions.
The downgrade and Negative Rating Outlook reflect Fitch's belief that there is a real possibility Spansion will default over the near-term, due to a combination of a challenging macroeconomic environment and the company's weak liquidity position. Fitch believes Spansion's survival over the next 12 months will depend upon a combination of better than expected demand and pricing environment, ability to renew the RCF in Japan, obtain a line of credit related to the ARS settlement, and asset sales.
Fitch expects double digit revenue decline for Spansion in 2009, driven by ongoing pricing pressures that will be exacerbated by meaningfully lower consumer spending on electronics over the near-term. In particular, Fitch expects mobile phone units and automotive electronics, end markets representing well over half of Spansion's unit shipments, to decline meaningfully in 2009. The resultant significantly lower gross profits will drive negative free cash flow in 2009, despite the company's aggressive cost cuts, including slashing discretionary capital spending.
This anticipated cash usage will erode Spansion's already weak liquidity, which as of Sept. 28, 2008 was supported by approximately $152 million of cash and cash equivalents and approximately $100 million of availability under various credit facilities. The company also has approximately $125 million of debt amortization and approximately $60 million due under capital leases through the end of 2009. Furthermore, as of Sept. 28, 2008, approximately $75 million was outstanding under the company's Spansion Japan revolving credit facility (RCF), expiring in December 2009. This facility comprises approximately $50 million of the aforementioned $100 million of the company's available credit, and the terms and conditions of the related credit agreement provide for annual renewal. In addition, Spansion has approximately $38.4 million available under the U.S. RCF. However, Fitch expects availability will be reduced by the facility's borrowing base roughly commensurate with anticipated sales declines.
Cash balances exclude approximately $107 million of auction rate securities (ARS) classified as marketable securities that Fitch considers illiquid at present. However, the ARS portfolio could provide additional liquidity, as the company has the opportunity to participate in a settlement with UBS providing for the repurchase of these securities beginning in June 2010. Spansion is in discussions with lenders regarding a line of credit against the anticipated settlement of up to 75% of market value of the ARS portfolio.
Fitch believes further negative rating actions could be driven by: faster than anticipated erosion of cash balances, driven by weaker than expected operating results; or the company's inability to bolster liquidity via refinancing the RCF in Japan, securing the ARS-related line of credit, or selling assets.
The ratings could be stabilized if: operating results meaningfully outperform Fitch's current expectations, resulting in at worst modest cumulative cash burn through at least the end of 2009; and the company successfully renews its RCF in Japan, obtains the ARS-related funding, and receives meaningful proceeds from asset sales.
Total debt as of Sept. 30, 2008 was approximately $1.6 billion and consisted primarily of: i) approximately $272 million outstanding under Spansion Japan's, a wholly-owned subsidiary of Spansion Inc., senior secured credit facility expiring Dec. 16, 2010; ii) approximately $55 million outstanding under Spansion Inc.'s $175 million senior secured RCF expiring Sept. 19, 2010, the availability of which has been reduced by a combination of a lower borrowing base and $35 million due to EBITDA levels falling below prescribed minimum levels; iii) approximately $75 million outstanding under Spansion Japan's senior secured RCF expiring Dec. 28, 2009; iv) approximately $625 million of floating rate senior secured notes due 2013; v) approximately $225 million of 11.25% senior unsecured notes due 2016; vi) $207 million of 2.25% exchangeable senior subordinated debentures due 2016; and vii) approximately $80 million of other debt, including capital leases.
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, although the difference between the two continues to shrink. Fitch's analysis assumes Spansion ability to draw against its bank credit facilities will remain constrained by covenants, reducing availability under its U.S. RCF by $35 million due to EBITDA falling below prescribed levels, as well as the current borrowing base. Fitch has reduced the discount to operating EBITDA (in estimating distressed operating EBITDA)to 0% from 25% due to Fitch's expectations that Spansion's profitability will decline meaningfully in the fourth quarter, resulting in an already distressed operating EBITDA amount of approximately $210 million for the full fiscal year of 2008.
Fitch believes $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, will recover 51%-70% in a reorganization scenario, resulting in a 'RR3' recovery rating. A waterfall analysis provides 0% 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'.
Expected this junk rating.