Fitch Rates Intel's $1B 4.9% 30-Yr Senior Notes Offering 'A '
The \\$1 billion 4.9% senior notes offering due Aug. 11, 2045 follows Intel's \\$7 billion senior notes offering on July 22, 2015. Intel will use net proceeds from the sale of the notes to fund a portion of the \\$16.7 billion acquisition of Altera Corp. (Altera), which is expected to close by the end of 2015.
These senior notes will rank pari pasu with Intel's senior unsecured debt and callable annually after two years. Intel may also redeem the senior notes in the event of certain changes in U.S. tax policies.
Holders of these senior notes may require Intel to redeem two series of senior notes from the aforementioned \\$7 billion senior notes sale totalling \\$4.25 billion in aggregate at 101% of principal plus accrued interest if the Altera acquisition does not close before Dec. 31, 2016.
KEY RATING DRIVERS
The ratings and Outlook reflect Fitch's belief that Intel's operating profile will remain strong and credit protection measures solid for the rating, despite incremental debt issuance to fund the Altera acquisition. Longer term, Altera should strengthen Intel's offerings in data center and internet of things (IoT) markets.
Altera is a leading provider of field programmable logic devices (PLD) with 39% share in the \\$5 billion PLD market. By combining Intel's processors and Altera's PLDs on a lower-cost and better-performing single die, Intel hopes to accelerate growth in data center and take share from application-specific solutions providers in rapidly growing IoT markets.
Altera adds nearly \\$2 billion of revenues with gross profit margins in the mid-60s, slightly higher than those of Intel, with meaningfully lower capital intensity as a fabless semiconductor marker. In addition, Intel and Altera's existing foundry relationship and design collaboration with Altera may reduce integration risk.
This senior notes issuance is the second step in Intel's plan to fund the acquisition with cash and incremental debt. Fitch estimates new debt will comprise the vast majority of the purchase price, since all but \\$2.7 billion of Intel's \\$13.9 billion of total cash at June 27, 2015 was located offshore. As a result, Fitch expects total leverage (total debt to operating EBITDA) could approach 1x versus 0.6x for the latest 12 months (LTM) ended June 27, 2015, pro forma for the senior notes offering.
With Fitch's expectations for more than \\$5 billion of annual free cash flow (FCF), domestic FCF over the next two to three quarters prior to the acquisition's close could reduce the amount of new debt to fund the purchase price. Fitch also expects the company will moderate share repurchases to maintain conservative total leverage.
The ratings are supported by:
--Intel microprocessor's dominance and clear and significant technology leadership, particularly in manufacturing. Intel's x86 processor architecture is also the premiere platform for data center/servers, providing the company a significant advantage in the enterprise and cloud-computing space.
--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.
--Continued long-term secular growth in digitalization and computer adoption worldwide as well as greater penetration of microprocessors in areas outside of traditional computing.
Rating concerns include:
--Intel's exposure to the cyclical demand for semiconductors which is typically exacerbated at the beginning of cyclical downturns due to channel inventory contraction.
--Significant and fixed investment intensity, including research and development (R&D) and capital spending. Intel's leading profit margins largely compensate for this risk although capital spending has at times approached 50% of operating EBITDA.
--Intel has significant customer concentration with its largest customers accounting for 40% of total revenues.
KEY ASSUMPTIONS
--Flattish organic revenue growth in fiscal 2015, driven by weaker than expected personal computer (PC) demand that will be offset by continued strength in data center server chips.
--Beyond the near term, organic revenue growth in the low- to mid-single digits, driven by solid data center-related demand and, to a lesser extent, Intel's strategy to combine both processers and PLDs on a single die.
--Consistent profitability through the forecast period, due to a more stable pricing environment and Intel's manufacturing cost leadership.
--Annual capital spending of \\$9 billion to \\$10 billion and more than \\$11 billion of annual R&D investments through the intermediate term to support the continuation of Moore's Law.
RATING SENSITIVITIES
--Fitch's expectation total leverage will remain above 1.25x, driven by a more aggressive share repurchases and/or greater acquisition activity to build Intel's mobility segment;
--Fitch's expectation for normalized FCF to adjusted debt approaching 20%, as a result of continued tablet cannibalization of PC sales, and lack of penetration into the mobile market.
Positive rating action is unlikely, given the cyclicality and volatility inherent in the semiconductor business, as well as the need for flexibility in managing technological changes and challenges. A positive rating action would likely require:
--Profitability improvement across mobility businesses in line with competitors, signifying improved competitiveness and increased market share within the space.
--An explicit commitment to a leverage ratio of 1x or below.
LIQUIDITY
Liquidity as of June 27, 2015 was solid and consisted of:
--\\$13.9 billion of cash and cash equivalents and short-term investments, of which \\$2.7 billion was located in the U.S.;
--\\$5 billion commercial paper (CP) program with no outstanding balance.
Fitch's expectation for more than \\$5 billion of annual FCF also supports liquidity. The company does not have a revolving credit facility to support its CP program but Fitch views Intel's strong liquidity as providing ample support for the program.
Total debt as of June 27, 2015 was \\$13.2 billion and primarily consisted of:
--\\$1.5 billion in 1.95% senior unsecured notes due October 2016;
--\\$3 billion in 1.35% senior unsecured notes due December 2017;
--\\$2 billion in 3.3% senior unsecured notes due October 2021;
--\\$1.5 billion in 2.7% senior unsecured notes due December 2022;
--\\$750 million in 4.0% senior unsecured notes due December 2032;
- \\$1.6 billion principal value in 2.95% junior subordinated debentures due December 2035;
--\\$2 billion principal value in 3.25% junior subordinated debentures due August 2039;
--\\$1.5 billion in 4.8% senior unsecured notes due October 2041;
--\\$924 million in 4.25% senior unsecured notes due December 2042.
FULL LIST OF RATINGS
Fitch currently rates Intel Corp. as follows:
--Issuer Default Rating (IDR) 'A+';
--Short-term IDR 'F1';
--\\$5 billion CP program 'F1';
--Senior unsecured notes 'A+';
--Junior subordinated notes 'A'.
The Rating Outlook is Stable.
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