NEW YORK, May 01, 2014 (BUSINESS WIRE) — Fitch Ratings has affirmed the ratings on Seagate Technology plc (Seagate) and its subsidiary, Seagate HDD Cayman, at ‘BBB-‘, including the long-term Issuer Default Ratings (IDRs). The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.

The rating actions affect approximately $4 billion of total debt, including the company’s undrawn $500 million unsecured revolving credit facility (RCF).

KEY RATING DRIVERS

The Ratings and Outlook reflect:

–Continued expectations for relatively stable hard disk drive (HDD) pricing due to a highly consolidated industry structure, with the market leaders, Seagate and Western Digital Corp. (WDC), controlling approximately 84% of the market; solid long-term growth in heads and media, key components of an HDD, with Exabytes (EB) shipped exceeding areal density growth; and tightly managed capital expenditures across the supply chain that minimizes the risk of supply and demand imbalances.

–Positive profitability trends from a favorable mix shift towards higher capacity HDDs for cloud computing that utilize greater media and heads per drive, thereby absorbing a greater amount of fixed-cost investments than lower capacity PC drives.

–Solid liquidity and financial flexibility are supported by $2.3 billion in cash, the vast majority of which is readily accessible without adverse tax considerations, positive annual free cash flow (FCF), and an undrawn $500 million senior unsecured revolving credit facility due 2018.

–Strong credit protection metrics and management’s commitment to conservative financial policies;

–Broad product portfolio, significant scale in HDD industry and vertically integrated model, which reduces per-unit manufacturing costs and facilitates new product time to market, albeit resulting in a greater fixed cost base that exacerbates cyclical effects.

Fitch’s rating concerns consist of:

–Long-term threat of technology substitution from NAND flash-based solid state drives. However, Fitch believes the high relative cost of flash-based storage will continue to limit SSD storage capacity in PCs and tablets, thereby increasing demand for HDDs in external or cloud storage. Enterprises utilizing SSDs deploy a multi-tiered storage strategy whereby the vast majority of data is stored on HDDs and only data for high performance applications is stored on higher cost SSDs.

–Substantial historical volatility in earnings and free cash flow due to the cyclicality of HDD demand and significant fixed costs;

–Moderating, but still consistent declines in average selling prices for HDDs due to low HDD switching costs;

–Event risk associated with implementation of aggressive shareholder-friendly activities, primarily debt-financed share repurchases;

–Seagate’s ability to sustain a time to market advantage critical to achieving market share gains and maintaining overall profitability, given formidable competition from WDC.

RATING SENSITIVITIES

Positive:

–Future ratings upgrades are currently unlikely due to the long-term threat of technology substitution from SSD, where Seagate lacks a dominant product position relative to HDDs.

Negative:

–If the cost per gigabyte differential between enterprise HDD and SSD narrows significantly, resulting in greater than expected cannibalization of enterprise HDDs, and Seagate’s enterprise SSD products are uncompetitive;

–If Seagate’s enterprise market share materially erodes on a sustained basis due to more formidable competition from WDC;

–If the company pursues more aggressive financial policies, such as sizable debt-financed share repurchases.

–If Ultrabooks with SSD materially cannibalize the traditional notebook market, SSHs fail to achieve significant penetration in the Ultrabook market and growth in near-line enterprise and external HDDs is insufficient to offset the decline in EBs shipped to the notebook HDDs.

FCF (post dividends) was $1.3 billion in the latest 12 months (LTM) ended March 28, 2014, compared with $2.8 billion in the corresponding year ago period due to supply shortages from the Thailand flood that significantly inflated average selling prices (ASPs). Fitch forecasts at least $1.9 billion of FCF annually through fiscal 2016 ended June 29.

Financial covenants in the credit agreement consist of minimum fixed-charge coverage of 1.5x and maximum net leverage ratio of 1.5x. In addition, the facility requires minimum liquidity of $500 million.

Gross leverage (total debt/operating EBITDA) increased to 1.2x as of March 28, 2014 from 0.7x in the year-ago period, benefitting from elevated ASPs following the Thailand flood. ASPs have since receded, as Fitch expected, given the recovery in the HDD supply chain. Fitch anticipates Seagate’s leverage will remain at approximately 1x through 2016.

Interest coverage (operating EBITDA/gross interest expense) decreased to 14.4x in the LTM ended March 28, 2014 compared with 16.3x last year. Fitch anticipates interest coverage will remain above 15x through fiscal 2016.

Fitch estimates total debt, all of which was issued by Seagate HDD Cayman, is approximately $3.5 billion and consists of:

–$334 million of 6.8% senior notes due October 2016;

–$800 million of 3.75% senior notes due November 2018;

–$238 million of 7.75% senior notes due December 2018;

–$572 million of 6.875% senior notes due May 2020;

–$570 million of 7% senior notes due November 2021;

–$1 billion of 4.75% senior notes due June 2023;

Fitch affirms Seagate’s ratings as follows:

Seagate

–IDR at ‘BBB-‘;

–Senior unsecured revolving credit facility at ‘BBB-‘.

Seagate HDD Cayman

–IDR at ‘BBB-‘;

–Senior unsecured revolving credit facility at ‘BBB-‘;

–Senior unsecured debt at ‘BBB-‘.

Additional information is available at www.fitchratings.com .

Applicable Criteria and Related Research:

–‘Corporate Rating Methodology’ (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

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SOURCE: Fitch Ratings