OREANDA-NEWS. Fitch Ratings has placed the 'BB-' ratings on MMI International Ltd. (MMI) and its parent Precision Capital Private Limited (PCPL) on Rating Watch Negative. A complete list of ratings actions follows at the end of this release.

The Negative Watch reflects MMI's adoption of a more aggressive financial policy, which is likely to weaken its already stretched credit profile. The new capital structure includes a five-year USD520m syndicated bank loan and a USD60m revolving facility. MMI expects to fully redeem its existing USD384m debt on 27 March 2105 via the syndicated bank loan.

The Rating Watch will be resolved when there is further information on the company's capital structure and deleveraging strategy; we expect this before the end of April 2015.

KEY RATING DRIVERS
Higher Leverage: The rating action and the likely downgrade of the ratings reflect our expectation that the company may breach thresholds at which negative rating action would be considered for certain metrics. Our guidelines stand at 3.0x for funds flow from operations (FFO) interest coverage and 4.0x for FFO-adjusted leverage. We expect MMI's more aggressive capital structure to result in free cash flow deficits in the near term.

Slow Deleveraging: Fitch believes the deleveraging process will be slow in the absence of a sustainable material expansion in EBITDA. Assuming annual EBITDA of USD125m-130m in the next three years (FY14 ended 30 June 2014: USD118m), we expect gross leverage ratios to stay above 4.0x. Although MMI reported a stronger 2QFY15 on market share gains and new market penetration, we believe recovery in the global hard disk drive (HDD) shipments will remain gradual.

Seagate Dependence: MMI continues to face high customer concentration risk due to its heavy reliance on Seagate Technology Public Limited Company (BBB-/Stable), which contributes around 80% of its revenue. However, we believe the high interdependence between MMI and Seagate, with MMI being Seagate's largest supplier for three key HDD components, mitigates this risk. MMI's ratings factor in moderate-to-high barriers to entry into the HDD component manufacturing industry.

Risk From SSDs: Solid state drives (SSDs) represent a significant long-term threat to MMI's business if they become the standard medium for data storage. However, in the medium term, we expect that HDD sales volumes to be protected by the growth in the overall data storage market and a continuing substantial per-gigabyte price differential between SSDs and HDDs.

KEY ASSSUMPTIONS
Fitch's key assumptions within its rating case for the issuer include:
- Drawdown of USD520m to repay existing borrowings;
- Low-to-mid single digit growth in revenue;
- EBITDA margins of around 17% (FY14: 17%).

RATING SENSITIVITIES
Future developments that may individually or collectively lead to a negative rating action include:
- FFO-adjusted leverage of above 4.0x (FY14: 3.8x) on a sustained basis
- FFO interest coverage below 3.0x (FY14: 2.6x) on a sustained basis
- Demand for HDDs falling below expectations due to weaker global IT spending, a significant fall in cost per gigabyte differential between SSDs and HDDs, or if Seagate moves its production capacity towards SSDs

Positive rating actions are not expected in the medium term.

FULL LIST OF RATING ACTIONS

MMI International Limited
Long-Term Foreign-Currency IDR at 'BB-'; on Rating Watch Negative
Senior secured debt class rating at 'BB-'; on Rating Watch Negative
8% senior secured USD300m notes due 2017 at 'BB-'; on Rating Watch Negative
USD180m secured bank loan affirmed at 'BB-'; on Rating Watch Negative

Precision Capital Private Limited
Long-Term Foreign-Currency IDR at 'BB-'; on Rating Watch Negative