OREANDA-NEWS. Fitch Ratings has affirmed Singapore-based Global A&T Electronics Ltd.'s (GATE) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) of 'B-'. The Outlook has been revised to Negative from Stable.

The Outlook has been revised to Negative because Fitch forecasts that GATE's liquidity will deteriorate during 2015-16 due to lower cash generation and continuing high interest costs. Its 2016 liquidity ratio (ratio of cash + EBITDA to interest + tax + maintenance capex) could fall below 2.0x - the threshold below which Fitch would take a negative rating action.

We expect the cash balance of USD214m at end-June 2015 to deplete by USD50m-60m each year as EBITDA could decline to USD150m (2014: USD183m), which would be insufficient to fund its estimates for annual interest payments (USD112.5m), taxes (USD10m) and capex (USD100m). GATE's 2015 capex/revenue will be around 15% before trending down to 12% in 2016 as it invests to ensure its equipment is able to meet customers' requirements.

KEY RATING DRIVERS

Limited Access to Capital: We believe that GATE cannot draw down on its USD125m revolving credit facility, due to a breach in a debt service incurrence covenant in its secured bond documents. GATE's management is considering options to move cash from its sister company UTAC Manufacturing Services Holdings Pte, monetise its Singapore facility and sell non-core assets to boost liquidity. However, Fitch's rating case will not include these sources of cash until any transactions are substantially completed. GATE's only debt is secured notes of USD1.13bn due in 2019.

Slowing OSAT Industry: We believe that GATE's 2015 revenue and EBITDA could fall by 10% and 20% respectively, amid a cyclical industry downturn. The integrated circuit (IC) outsourced semiconductor assembly and test (OSAT) industry's 2015-16 revenue will decline due to slowing smartphone and tablet demand growth and declining PC sales. OSAT companies are more exposed to changes in end-device demand as integrated device manufacturers and foundries that use OSAT services also have in-house facilities and they tend to disproportionately cut outsourcing during slowdowns.

Bond Dispute to Continue: We believe that the company's on-going dispute with a group of holders of the first tranche of its first-lien bond is likely to remain unresolved in the medium term. The New York Supreme Court decision to reject the bondholders' petition in July 2015 provided temporary relief to the company. However, the bondholders' appeal of the court's decision will continue to expose the company to legal risk. A dispute resolution by payment of damages or through any court judgment that requires significant funds would significantly increase the likelihood of default and lead to a downgrade, which may not be limited to one notch.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Revenue to decline by 10% and 5% in 2015 and 2016 respectively.
- EBITDA to decline by 20% in 2015 and remain flat in 2016.
- Capex/revenue to be around 15% in 2015 and 12% in 2016.
- Cash taxes of USD10m a year.
- No asset sales.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to the IDRs being downgraded include:
- Any resolution of the dispute with bondholders that leads to significant requirement for funds and further liquidity stretch.
- A fall in the liquidity metric (ratio of cash + EBITDA to interest + tax + maintenance capex (assumed to be USD30m)) to below 1.5x (2015 forecast: 2.2x).

Positive: Future developments that may, individually or collectively, lead to Outlook being revised to Stable include:
- Liquidity metric (as defined above) greater than 2.0x on a sustained basis.