Fitch Ratings - Chicago - 03 Jun 2020: Fitch Ratings has assigned a 'BBB-' rating to Seagate HHD Cayman's (Seagate) senior notes offering. The senior notes are par passu with Seagate's existing senior unsecured obligations and is guaranteed on a fully and unconditional basis by parent, Seagate Technology Plc. Fitch expects Seagate will use net proceeds to repay existing indebtedness.
The ratings and Stable Outlook reflect Fitch's belief that Seagate's exposure to infrastructure end markets and adequate financial flexibility position the company for positive FCF and lower coronavirus pandemic-driven demand deterioration over the near term. Cloud and edge service provider spending on capacity drives should result in a richer sales mix and support profit margins even as enterprise, retail and surveillance markets remain weak and PC volume decreases following the completion of the Win10 refresh cycle. Capital spending should tick-up but slowing dividend growth will translate into positive near-term FCF, while headroom should enable Seagate to maintain total debt to operating EBITDA below Fitch's 2.5x negative rating sensitivity. Fitch expects the company to sustain the return of at least half of pre-dividend FCF to shareholders via dividends but that the company will moderate near-term stock buybacks due to reduced demand visibility.
KEY RATING DRIVERS
Coronavirus-Driven Demand Uncertainty: Fitch believes the impact of the coronavirus pandemic will limit demand visibility, despite Seagate and peers benefitting from an initial uptick in demand for capacity storage and PCs to add and upgrade infrastructure and mobility capabilities. Cloud service providers drove significant demand in the quarter ended April 3, 2020, in which Seagate posted revenue and profitability at the upper end of guidance. The company guided to modest revenue declines in the June 2020 quarter with wider than is typical standard deviation, reflecting substantially reduced demand visibility. Fitch's rating case assumes current demand strength (relative to companies with greater exposure to discretionary spending) is pulling forward demand, which portends lower bit demand growth in the back half of calendar 2020 through calendar 2021.
Data Proliferation Supports Growth: Fitch believes robust demand for storage across media types provides a path for positive organic revenue growth through 2025, although Fitch expects the impact of the coronavirus pandemic will weigh on revenue growth in both fiscal 2020 and 2021. IDC forecasts data creation growth of 27% from 33 zetabytes (ZB) in 2018 to 175ZB in 2025, mainly driven by artificial intelligence (AI) and 5G enabled applications across computing environments. Fitch expects the majority of data creation will be cool/cold storage on lower cost HDD-based capacity drives in the public cloud, driving the bulk of Seagate's revenue growth through the forecast period, with surveillance and gaming markets also contributing.
Constructive Supply Conditions: Fitch believes Seagate's market position, as one of two HDD providers (along with Western Digital Corp. [WD]) of roughly equal size and with nearly 100% share of the capacity drive market, supports constructive supply conditions that should enable profitable growth and solid FCF margins for rating through the mid-2020s. As a result, Seagate and WD are able to support average selling price (ASP) by avoiding meaningful excess HDD capacity and focusing investments on product and technology development, including the production of stable drives on energy-assisted technologies and eliminating stranded drive capacity from bandwidth constraints.
Still Significant Technology Risk: Fitch believes storage technology risk remains meaningful and that Seagate will spend $1 billion annually on product development to sustain the company's technology roadmap and cadence of product introductions. Technology risk includes Seagate's and WD's competitive development, introduction and optimization of drives with ever increasing aerial densities to offset HDD ASP erosion and maintain HDDs' total cost of ownership (TCO) advantage over SSDs. Energy-assist technologies promise a roughly five-year HDD roadmap to 24TB drives from today's drives, while the breakdown of Moore's Law will ultimately constrain SSDs-makers' ability to close the TCO gap.
Temporarily Weaker FCF: Fitch forecasts annual FCF will be below Fitch's $500 million negative rating sensitivity through fiscal 2020-2021 due to lower than previously expected revenue growth. Capital spending on capacity to support next generation products energy-assisted technology and slowly expand the SSD business will constrain cash flow in the nearer term. However, over the longer term, Fitch's expectation for strong mass capacity storage and richer profit margins will drive more consistently solid annual FCF.
Opportunistic Financial Policies: Fitch expects Seagate's financial policies to remain opportunistic, although prior to the coronavirus pandemic the company expected total debt to operating EBITDA to remain at or below 2x over the next couple of years. The company also has guided to returning the majority of its FCF to shareholders via dividends, which should constitute roughly two-thirds of pre-dividend FCF in fiscal 2020, and availability under the company's share repurchase authorization. Nonetheless, it does not anticipate significant dividend growth and that its share of pre-dividend FCF will normalize in fiscal 2021 as well as the moderating stock buybacks to maintain balance sheet cash near $1.5 billion, with total debt to EBITDA below Fitch's 2.5x negative rating sensitivity.
DERIVATION SUMMARY
Fitch believes Seagate and WD are both appropriately positioned at 'BBB-' from a business model perspective, although WD's currently lower rating (BB+/Stable) reflects elevated leverage metrics following its 2016 leveraged acquisition of SanDisk Corp. While WD's vertically integrated SSD business yields greater and faster growing revenue and expands WD's addressable market, it adds higher operating cyclicality and investment intensity. Seagate's revenue base is smaller and growth prospects are comparatively muted; however, operating results are less cyclical and FCF is within a lower but more predictable $500 million to $1 billion range. Seagate also does not face competitors, including Samsung (AA-/Stable), Intel Corp. (A+/Stable), with such significant financial flexibility. Fitch believes other 'BBB-' rated issues in Fitch's technology universe are more strongly positioned for the rating than Seagate, due to higher profit margins, faster average revenue growth and stronger FCF. However, each of these, including NXP Semiconductor N.V. (BBB-/Stable), Marvell Technology Group Ltd. (BBB-/Positive) and Micron Technology Inc. (BBB/Stable), also face more significant competitive intensity.
KEY ASSUMPTIONS
--Sequential revenue growth at the lower end of guidance in the June-2020 quarter, resulting in roughly break-even revenue for fiscal 2020, followed by flat to negative growth in fiscal 2021.
--Low single-digit revenue growth through the remainder of the forecast period, driven by strong data and bit demand growth.
--A richer sales mix support gross profit margins and flat operating expenses.
--Capital intensity remains in the 6%-8% long-term guidance from the company.
--Flat dividends through the forecast period with increases offset by share count reductions.
--Seagate refinances all upcoming maturities and uses cash in excess of $1.5 billion for share repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Public commitment to manage debt levels for total leverage sustained below 2x.
--Expectations for annual FCF margins consistently in the mid- to high-single digits while growing revenue, maintaining market share and expanding the SSD business, demonstrating the strength of Seagate's technology roadmap.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Expectations for annual FCF sustained below $500 million or FCF margins in the low-single digits from persistently weaker than expected revenue trends or profit margins, indicating poor execution on the technology or product roadmap.
--Expectations for total leverage sustained above 2.5x from debt issuance to support debt-funded shareholder returns persistently in excess of FCF.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch expects Seagate's liquidity will remain adequate and, as of April 3, 2020, consisted of: i) $1.6 billion of cash and cash equivalents and ii) $1.5 billion undrawn senior unsecured RCF expiring Feb. 20, 2024. Fitch's expectation for more than $500 million of annual FCF beyond the near term also supports liquidity.
DATE OF RELEVANT COMMITTEE
24 April 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATINGThe principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
ENTITY/DEBTRATING
Seagate HDD Cayman
senior unsecured
LTBBB- New Rating
The ratings and Stable Outlook reflect Fitch's belief that Seagate's exposure to infrastructure end markets and adequate financial flexibility position the company for positive FCF and lower coronavirus pandemic-driven demand deterioration over the near term. Cloud and edge service provider spending on capacity drives should result in a richer sales mix and support profit margins even as enterprise, retail and surveillance markets remain weak and PC volume decreases following the completion of the Win10 refresh cycle. Capital spending should tick-up but slowing dividend growth will translate into positive near-term FCF, while headroom should enable Seagate to maintain total debt to operating EBITDA below Fitch's 2.5x negative rating sensitivity. Fitch expects the company to sustain the return of at least half of pre-dividend FCF to shareholders via dividends but that the company will moderate near-term stock buybacks due to reduced demand visibility.
KEY RATING DRIVERS
Coronavirus-Driven Demand Uncertainty: Fitch believes the impact of the coronavirus pandemic will limit demand visibility, despite Seagate and peers benefitting from an initial uptick in demand for capacity storage and PCs to add and upgrade infrastructure and mobility capabilities. Cloud service providers drove significant demand in the quarter ended April 3, 2020, in which Seagate posted revenue and profitability at the upper end of guidance. The company guided to modest revenue declines in the June 2020 quarter with wider than is typical standard deviation, reflecting substantially reduced demand visibility. Fitch's rating case assumes current demand strength (relative to companies with greater exposure to discretionary spending) is pulling forward demand, which portends lower bit demand growth in the back half of calendar 2020 through calendar 2021.
Data Proliferation Supports Growth: Fitch believes robust demand for storage across media types provides a path for positive organic revenue growth through 2025, although Fitch expects the impact of the coronavirus pandemic will weigh on revenue growth in both fiscal 2020 and 2021. IDC forecasts data creation growth of 27% from 33 zetabytes (ZB) in 2018 to 175ZB in 2025, mainly driven by artificial intelligence (AI) and 5G enabled applications across computing environments. Fitch expects the majority of data creation will be cool/cold storage on lower cost HDD-based capacity drives in the public cloud, driving the bulk of Seagate's revenue growth through the forecast period, with surveillance and gaming markets also contributing.
Constructive Supply Conditions: Fitch believes Seagate's market position, as one of two HDD providers (along with Western Digital Corp. [WD]) of roughly equal size and with nearly 100% share of the capacity drive market, supports constructive supply conditions that should enable profitable growth and solid FCF margins for rating through the mid-2020s. As a result, Seagate and WD are able to support average selling price (ASP) by avoiding meaningful excess HDD capacity and focusing investments on product and technology development, including the production of stable drives on energy-assisted technologies and eliminating stranded drive capacity from bandwidth constraints.
Still Significant Technology Risk: Fitch believes storage technology risk remains meaningful and that Seagate will spend $1 billion annually on product development to sustain the company's technology roadmap and cadence of product introductions. Technology risk includes Seagate's and WD's competitive development, introduction and optimization of drives with ever increasing aerial densities to offset HDD ASP erosion and maintain HDDs' total cost of ownership (TCO) advantage over SSDs. Energy-assist technologies promise a roughly five-year HDD roadmap to 24TB drives from today's drives, while the breakdown of Moore's Law will ultimately constrain SSDs-makers' ability to close the TCO gap.
Temporarily Weaker FCF: Fitch forecasts annual FCF will be below Fitch's $500 million negative rating sensitivity through fiscal 2020-2021 due to lower than previously expected revenue growth. Capital spending on capacity to support next generation products energy-assisted technology and slowly expand the SSD business will constrain cash flow in the nearer term. However, over the longer term, Fitch's expectation for strong mass capacity storage and richer profit margins will drive more consistently solid annual FCF.
Opportunistic Financial Policies: Fitch expects Seagate's financial policies to remain opportunistic, although prior to the coronavirus pandemic the company expected total debt to operating EBITDA to remain at or below 2x over the next couple of years. The company also has guided to returning the majority of its FCF to shareholders via dividends, which should constitute roughly two-thirds of pre-dividend FCF in fiscal 2020, and availability under the company's share repurchase authorization. Nonetheless, it does not anticipate significant dividend growth and that its share of pre-dividend FCF will normalize in fiscal 2021 as well as the moderating stock buybacks to maintain balance sheet cash near $1.5 billion, with total debt to EBITDA below Fitch's 2.5x negative rating sensitivity.
DERIVATION SUMMARY
Fitch believes Seagate and WD are both appropriately positioned at 'BBB-' from a business model perspective, although WD's currently lower rating (BB+/Stable) reflects elevated leverage metrics following its 2016 leveraged acquisition of SanDisk Corp. While WD's vertically integrated SSD business yields greater and faster growing revenue and expands WD's addressable market, it adds higher operating cyclicality and investment intensity. Seagate's revenue base is smaller and growth prospects are comparatively muted; however, operating results are less cyclical and FCF is within a lower but more predictable $500 million to $1 billion range. Seagate also does not face competitors, including Samsung (AA-/Stable), Intel Corp. (A+/Stable), with such significant financial flexibility. Fitch believes other 'BBB-' rated issues in Fitch's technology universe are more strongly positioned for the rating than Seagate, due to higher profit margins, faster average revenue growth and stronger FCF. However, each of these, including NXP Semiconductor N.V. (BBB-/Stable), Marvell Technology Group Ltd. (BBB-/Positive) and Micron Technology Inc. (BBB/Stable), also face more significant competitive intensity.
KEY ASSUMPTIONS
--Sequential revenue growth at the lower end of guidance in the June-2020 quarter, resulting in roughly break-even revenue for fiscal 2020, followed by flat to negative growth in fiscal 2021.
--Low single-digit revenue growth through the remainder of the forecast period, driven by strong data and bit demand growth.
--A richer sales mix support gross profit margins and flat operating expenses.
--Capital intensity remains in the 6%-8% long-term guidance from the company.
--Flat dividends through the forecast period with increases offset by share count reductions.
--Seagate refinances all upcoming maturities and uses cash in excess of $1.5 billion for share repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Public commitment to manage debt levels for total leverage sustained below 2x.
--Expectations for annual FCF margins consistently in the mid- to high-single digits while growing revenue, maintaining market share and expanding the SSD business, demonstrating the strength of Seagate's technology roadmap.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Expectations for annual FCF sustained below $500 million or FCF margins in the low-single digits from persistently weaker than expected revenue trends or profit margins, indicating poor execution on the technology or product roadmap.
--Expectations for total leverage sustained above 2.5x from debt issuance to support debt-funded shareholder returns persistently in excess of FCF.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch expects Seagate's liquidity will remain adequate and, as of April 3, 2020, consisted of: i) $1.6 billion of cash and cash equivalents and ii) $1.5 billion undrawn senior unsecured RCF expiring Feb. 20, 2024. Fitch's expectation for more than $500 million of annual FCF beyond the near term also supports liquidity.
DATE OF RELEVANT COMMITTEE
24 April 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATINGThe principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
ENTITY/DEBTRATING
Seagate HDD Cayman
senior unsecured
LTBBB- New Rating
评论
发表评论