Reuters: Financial Services and Real Estate: TEXT-S&P summary: MagnaChip Semiconductor Corp.

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TEXT-S&P summary: MagnaChip Semiconductor Corp. Apr 30th 2012, 08:31 Mon Apr 30, 2012 4:31am EDT Standard & Poor's views MagnaChip's business risk profile as weak, reflecting variability in its operating performance. The company faces intense competition and a fragmented market, and the highly cyclical conditions of the semiconductor industry inevitably affect MagnaChip's operating performance. Also, the company's customer network is somewhat concentrated, with its 10 largest customers generating about 60% of total sales. However, the company's good relationships with major customers such as LG Display Co. Ltd. (not rated) and Samsung Electronics Co. Ltd. (A/Stable/A-1) somewhat mitigate the risks. Despite facing a challenging business environment in 2011, the company demonstrated stable operating performance, based on solid growth in its power solutions and display solutions businesses. We expect strong relationships with major customers to help the company maintain stable profitability for the next one to two years. We view MagnaChip's position in the global semiconductor foundry market as relatively weak. MagnaChip has about 1% of the market, which is dominated by four producers who between them control about 80% of sales worldwide. However, the company has improved its position in power solutions and display solutions market with steady revenue growth. Despite having strong credit quality for its category, MagnaChip's financial risk profile is aggressive, in our assessment, mainly reflecting variability in key measures of financial performance--due largely to volatility in the industry. The company has improved its financial risk profile significantly since emerging from Chapter 11 reorganization in November 2009. Debt to EBITDA for MagnaChip fell to 1.8x in 2011, from 18.4x in 2008, thanks to a significant reduction in debt. We expect positive free operating cash flow and a gradual improvement in operating performance to lead to a ratio of debt to EBITDA of below 2.0x on a sustainable basis over the next one to two years. Also, we expect the company to make less than $60 million in annual capital expenditures over the next 12 months, thus maintaining its prudent investment policy. On April 13, 2012, MagnaChip announced a secondary offering of shares belonging to major shareholder Avenue Capital Group, a U.S.-based investment firm. In our view, this deal should have little financial effect on MagnaChip because most proceeds will flow to Avenue Capital Group. The timing and final structure of the deal is still uncertain, but a new ownership structure has the potential to produce a change in the company's financial policies. Liquidity We view MagnaChip's liquidity as adequate. The company had US$162 million in cash and equivalents as of Dec. 31, 2011, and it had no debt due to mature until 2018. Our assessment of MagnaChip's liquidity incorporates the following expectations and assumptions about the next 12 months: -- The company's sources of liquidity will exceed 2.0x uses; -- Net sources will remain positive even if EBITDA declines more than 15%; and -- Although the company operates in volatile industries, its large cash holdings and limited capital expenditures should enable it to maintain its adequate liquidity. Outlook The stable outlook on the long-term ratings on MagnaChip reflects our expectation that the company's generation of free cash flow will enable it to maintain its current financial risk profile for the next year. We may raise the ratings if we see a substantial improvement in the company's competitive position and operating performance and if the company sustains prudent financial policies under its new shareholding structure. Conversely, we may lower the ratings if debt to EBITDA deteriorates significantly--to in excess of 4.0x--likely due to an industry downturn that significantly erodes profitability. Significantly more aggressive financial policies under a new ownership structure could also put pressure on the ratings. Link this Share this Digg this Email Reprints

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