From the Wires
Fitch Assigns Initial 'A+' IDR to Intel; Rates Proposed Offering 'A+'; Outlook Stable
By: Business Wire
Dec. 4, 2012 11:46 AM
Fitch Ratings has assigned an initial Issuer Default Rating (IDR) of 'A+' and short-term IDR of 'F1' to Intel Corporation. Fitch also assigned an 'A+' rating to the company's proposed offering of senior unsecured notes. Fitch expects that proceeds from the notes will be used for general corporate purposes including investments in capital expenditures, share repurchases and potential acquisitions.
As the leading provider of microprocessors for PCs and servers worldwide, Intel is one of the strongest credits in the technology space. The company's manufacturing technology advantage has resulted in a widening degree of differentiation from its competitors over the years. While new competition has emerged recently in ARM-based processors for tablets and smartphones, Fitch believes that the company's dominance of x86 based processors which are the most prevalent computing platform in the world will result in a relatively stable market opportunity for the foreseeable future.
The ratings and Outlook reflect the following considerations:
--Fitch expects the company to maintain a relatively conservative capital structure and balanced approach to shareholder friendly actions. Fitch expects leverage (total debt / EBITDA) to remain comfortably below 1x and for normalized free cash flow to adjusted debt to range near 35% or above 50% before dividends.
--Fitch expects share repurchases and the company's dividend to be financed by free cash flow. Fitch also expects Intel to continue to be acquisitive going forward, which could potentially be a source of additional modest debt financing.
--Fitch believes that Intel's new energy efficient processors targeted for tablets and smartphones will begin to establish the company's presence in that market. Intel's technology leadership in the semiconductor space is a significant competitive advantage and its focus on this emerging market opportunity should begin to produce returns over the next few years. Importantly, Fitch does not believe that Intel's ultimate success in this market is contingent on the success of Windows 8 or future Windows platforms. However, greater consumer adoption of Windows 8 devices should materially aid Intel over the next few years.
The short-term rating reflects the significant liquidity resources Intel has on balance sheet. The company had $3.5 billion of cash plus $7 billion in short-term investments including marketable debt securities as of Sept. 30, 2012, to support its $3 billion CP program. Intel has no revolving credit facility.
Intel's ratings and Outlook are supported by the following factors:
--Continued long-term secular growth in digitalization and computer adoption worldwide as well as greater penetration of microprocessors in areas outside of traditional computing.
--Broad geographic and business diversification: Although the majority of the company's revenue is derived from PC and server demand, these markets are driven by different secular growth trends which Fitch expects to contribute to longer-term stability.
--Intel is the dominant microprocessor vendor and maintains a clear and significant technology advantage, particularly in manufacturing, over its nearest competitors.
Credit concerns include:
--Intel is exposed to the highly cyclical demand for semiconductors which is typically exacerbated at the beginning of cyclical downturns due to channel inventory contraction.
--Intel has significant customer concentration with its two largest customers representing 19% and 15% of revenue in 2011.
--The business model has high fixed costs, principally in R&D, in addition to being highly capital intensive. Intel's high profit margins largely compensate for this risk although capital spending has in recent times ranged near 50% of EBITDA.
Liquidity as of Sept. 30, 2012 was solid with cash of $3.5 billion and a $3 billion commercial paper program which had no outstanding balance. Intel also had $2.5 billion of short-term investments, $4.5 billion in trading assets and $3.9 billion of marketable securities. Free cash flow of $3.8 billion over the latest 12 month period further supports liquidity.
Total debt as of Sept. 30, 2012 was $7.1 billion consisting principally of $1.5 billion in 1.95% senior unsecured notes due October 2016, $2 billion in 3.3% senior unsecured notes due October 2021, $1.5 billion in 4.8% senior unsecured notes due October 2041, $0.9 billion ($1.6 billion principal value) in 2.95% junior subordinated convertible debentures due July 2035, and $1.1 billion ($2 billion principal value) in 3.25% junior subordinated convertible debentures due July 2039.
Intel also owes $900 million to NVIDIA as part of a long-term patent cross licensing agreement in 2011, payable over six years. This amount is categorized under accrued liabilities.
Fitch has assigned the following ratings to Intel:
--Short-term IDR 'F1';
--$3 billion commercial paper program 'F1';
--Senior unsecured notes 'A+';
and --Junior subordinated convertible debentures 'A'.
The Rating Outlook is Stable.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
If Intel is successful in solidifying its market position in the market for smartphone and tablet processors while maintaining its high level of profitability, it is possible the ratings could be positively impacted.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--If Intel is not successful in expanding its market share in the tablet and smartphone market while consumer PC demand is further cannibalized by tablet adoption, it is possible the ratings could be negatively impacted.
--At the current rating level, Fitch would expect total debt / EBITDA to remain comfortably below 1x and for free cash flow before dividends to represent 50% of adjusted debt under normal conditions. If that free cash flow figure were to fall closer to 20%, a rating in the 'BBB' category could be more appropriate.
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