OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BBB-/RR1' to Western Digital Corporation's (Western Digital) $3 billion seven-year Senior Secured Term Loan B-1. The company's Long-Term Issuer Default Rating (IDR) is currently 'BB+', and the Rating Outlook is Stable. A full list of current ratings follows at the end of this release.

Western Digital amended the April 29, 2016 Existing Loan Agreement to establish New Senior Secured Term B-1 Loans, the proceeds from which will be used to refinance outstanding principal amounts under the Senior Secured U. S. Term B Loans, reducing annual interest expense. Western Digital expects amounts outstanding under the Senior Secured U. S. Term B Loans will be $3 billion, pro forma for a $750 million voluntary prepayment expected to be consummated contemporaneous with the Amendment's Effective Date.

Terms of the Amended Loan Agreement are substantially the same as those of the Existing Loan Agreement. All obligations of Western Digital under the Amended Loan Agreement are unconditionally guaranteed on a senior basis by each of the company's wholly-owned domestic Restricted Subsidiaries. Borrowings under the Amended Loan Agreement are secured by a perfected first-priority security interest in substantially all the Borrowers' and Guarantors' tangible and intangible assets, including 65% of the voting stock of first tier foreign subsidiaries.

KEY RATING DRIVERS

--Diversified Storage Portfolio: Fitch believes the SanDisk acquisition, closed May 12, 2016, diversifies Western Digital's technology portfolio. The combination positions Western Digital for next generation storage platforms optimizing hard disk drives (HDDs), NAND flash-based solid state drives (SSD) and software, while mitigating nearer-term SSD cannibalization of HDDs.

--Increased Scale: The SanDisk acquisition increases Western Digital's scale and supports higher investment intensity, driven by rapid industry evolution around cloud driven data growth and new storage architectures, including 3D NAND, and larger competitors. Should operating cash flows at Western Digital's joint venture (JV) with Toshiba Corporation (Toshiba) or equipment leases be insufficient to keep pace with 3D NAND development intensify, Western Digital and Toshiba Corporation may jointly decide to contribute capital to the JV.

--Margin Expansion Roadmap: Fitch expects cost synergies from the SanDisk acquisition and integration of Hitachi Global Storage Technologies (Hitachi) will drive profit margin expansion. Fitch believes Western Digital is on track to achieve cost synergies, including $474 million of run-rate cost synergies exiting calendar 2016 and $800 million exiting calendar 2017 related to Hitachi. Given Western Digital's high fixed cost model, lower fixed costs should drive operating EBITDA margin expansion to the mid-20s from the low 20s on a pre-synergy basis.

--Commitment to Debt Reduction: Fitch expects rapid debt reduction from free cash flow (FCF) and tax efficient use of offshore cash, made possible in connection with a restructuring that is expected to relocate SanDisk's domestic intellectual property (IP) offshore, will result in the Company achieving its 1.5x total leverage (total debt to operating EBITDA) target in the intermediate-term. Fitch expects annual FCF of $1.5 billion to $2 billion beyond the near term, during which Fitch believes the vast majority of cash restructuring costs will largely offset recurring FCF. Until Western Digital achieves the 1.5x total leverage target, Fitch expects the company will limit share repurchases to offsetting dilution.

--Significant Technology Risk: Fitch believes Western Digital is subject to significant technology risk from the storage industry's rapid evolution and emergence of new storage architectures. Western Digital's strategy of layering optimized software onto hybrid HDDs/SSDs for next generation platform solutions shifts the company's focus to hyper-scale and traditional data center markets but also intensifies technology risk related to a wider array of competitors with alternative technologies.

--3D NAND Roadmap: Fitch believes Western Digital could structurally trail competitors in 3D NAND-based products and solutions through the intermediate term, potentially adversely impacting operating results and reducing FCF for debt reduction. Western Digital plans to ship meaningful volumes of its next generation 3D NAND technology, BiCS3, in the first half of calendar 2017, while Samsung, Micron and Intel currently are shipping 3D NAND. Western Digital is accelerating fab conversion to 3D from 2D NAND to increase the mix of 3D NAND to approximately 40% of total wafer capacity by the end of 2017, in line with the industry.

--Revenue Pressures and Volatility: Fitch expects Western Digital will face near - to intermediate-term revenue pressures and that increased exposure to datacenter spending should amplify volatility. Fitch expects the continuation of negative PC unit growth and increased SSD cannibalization of HDDs in PCs and performance enterprise. Fitch expects SanDisk's removable retail business will continue being pressured by the increased use of cloud based storage and the decreased use of single function electronic devices, such as cameras. Meanwhile, a sales mix shift to datacenters should improve visibility but also add top line volatility from capex cycles. Beyond the next two years, Fitch anticipates low - to mid-single digit organic revenue growth from market growth in datacenters and enterprise markets.

--High Leverage Reduces Flexibility: Leverage was a Fitch estimated just over 4x for fiscal 2016, excluding expected cost synergies but pro forma for the repayment of the Bridge Loan and refinancing and $750 million Term Loan B repayment. Including cost synergies, Fitch estimates leverage closer to 3.5x. Fitch believes reducing leverage is imperative for Western Digital, as investments in innovation, including potential IP-driven acquisitions, are critical to long-term success given rapid technology evolution.

KEY ASSUMPTIONS

--Low-single digit organic revenue growth in 2017 and mid-single revenue growth in 2018, driven by client SSD unit growth, moderating PC unit declines, and significant data growth driving enterprise SSD and nearline HDD unit growth;

--Significant synergies related to Western Digital's integration of Hitachi and SanDisk driving meaningful profit margin expansion, despite pressures in the removable retail business and core NAND markets such as smartphones;

--Repatriation of foreign cash for debt prepayment;

--No increases to the dividend or share repurchases beyond anti-dilution until the company achieves its target leverage of 1.5x.

RATING SENSITIVITIES

The ratings may be downgraded if Fitch expects:

--Sustained negative revenue growth, likely from i) slower than anticipated growth within enterprise that is insufficient to offset the secular decline in PCs and the removable storage market, or ii) market share losses to competing technologies, including 3D NAND; or

--Slower than expected debt reduction resulting in total leverage sustained above 3x.

Positive rating actions would require Fitch's expectations for:

--Consistently positive mid-cycle organic revenue growth from successful implementation of the company's strategy, including increased penetration in enterprise growth markets by leveraging its technology stack; and

--Western Digital to reach 1.5x total leverage from significant voluntary debt reduction.

LIQUIDITY

Fitch believes Western Digital's liquidity was adequate as of July 1, 2016 and consisted of:

--$8.2 billion of cash, cash equivalents and short-term investments, $1.3 billion of which located in the U. S. and $3 billion of which was used to repay the $3 billion Bridge Loan;

--An undrawn and fully available $1 billion Senior Secured Revolving Credit Facility expiring April 29, 2021.

Fitch's expectations for $1.5 billion to $2 billion of annual FCF beyond the near term also support liquidity. In the near-term, Fitch believes cash restructuring costs will largely offset recurring FCF.

Pro forma for incurring the $3 billion of Term Loan B-1 and repayment of $3.75 billion of Term Loan B and Bridge Loan after the recent quarter end, total debt was $13.2 billion at July 1, 2016 and consisted primarily of:

--$4.125 billion Senior Secured Term Loan A expiring April 29, 2021;

--$3 billion Senior Secured Term Loan B expiring April 29, 2023;

--Euro 885 million Senior Secured Term Loan B expiring April 29, 2023;

--$1.875 billion of 7.375% Senior Secured Notes due April 1, 2023; and

--$3.35 billion of 10.5% Senior Unsecured Notes due April 1, 2024.

FULL LIST OF CURRENT RATINGS

Western Digital Corporation

--Long-Term IDR 'BB+';

--Senior Secured RCF 'BBB-/RR1';

--Senior Secured Term Loan A 'BBB-/RR1';

--Senior Secured Term Loan B 'BBB-/RR1';

--Senior Secured Notes 'BBB-/RR1';

--Senior Unsecured Notes 'BB+/RR4'.