OREANDA-NEWS. Fitch Ratings has published Singapore-based semiconductor assembly and test company STATS ChipPAC Ltd.'s (STATS) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook is Stable.

Fitch has also assigned an expected rating of 'BB(EXP)' to STATS's proposed senior secured bond. The proposed bond is guaranteed by all the key operating companies, except those in China and Thailand. The final rating of the proposed notes is contingent upon the receipt of documents conforming to information already received.

KEY RATING DRIVERS

Strong Linkages with Parent: On 5 August 2015, the Jiangsu Changjiang Electronics Technology Co. Ltd. (JCET)-led consortium's offer to acquire 100% of STATS for an equity value of USD780m became unconditional. STATS's ratings are based on the consolidated credit profile of JCET, its new parent, given strong financial, operating and strategic linkages between the two entities. STATS will account for about 60% of JCET's pro-forma 2015 revenue and EBITDA respectively.

Linkages to Strengthen: After the acquisition, Fitch believes JCET will act as controlling shareholder and Semiconductor Manufacturing Investment Corp. (SMIC) and China Integrated Circuit Industry Investment Fund Co., Ltd. (IC fund) - the other consortium members - are likely to act as junior partners. In time, JCET's control over STATS could be strengthened as the IC fund and SMIC have put options to exit for cash or swap for JCET equity.

STATS is also important to JCET's capital structure and will account for 60% of JCET's total 2015 debt. JCET is also the guarantor for a USD120m loan arranged by Bank of China to JCET-SC (Singapore) Pte. Ltd., the immediate holding entity of STATS. Temasek, previously a shareholder of STATS, also has the right to sell USD200m of perpetual securities to JCET after three years.

Proposed Bond Rated Higher: The bonds are rated one notch higher than the IDR, reflecting the recovery benefits of the security package, which covers principally all of STATS's group assets outside China and Thailand. About 70% of STATS's group revenues are generated by the subsidiaries providing security. The guarantors on the bond generate about 75% of the group's revenue and EBITDA.

Combined Group Stronger: The combined entity will benefit from an improved market position as the fourth-largest player with a 10% revenue share in the fragmented USD25bn Integrated Circuit (IC) outsourced assembly and testing (OSAT) industry. It will also benefit from advanced IC packaging capability, established relationships with US- and Europe-based customers and growing demand from China.

Profitability Depends on Utilisation: We forecast the combined entity's 2015 pro-forma revenue at around USD2.5bn with an operating EBITDAR margin of 20%-21%, as capacity utilisation and cost savings could increase to offset the one-time restructuring costs. Utilisation could improve due to greater exposure to growing Chinese semiconductor demand backed by STATS's advanced technological capabilities. Cost, capex and revenue synergies will be realised from elimination of duplication in marketing and R&D costs and relocation of STATS's Shanghai facility closer to JCET's Chinese facilities.

Higher Leverage than Peers: The ratings are constrained by the JCET group's relatively high 2015 forecasted FFO-adjusted leverage of around 3.8x - 4.0x - higher than average of 2.0x for its top-four peers in the OSAT industry. The market leader - Advanced Semiconductor Engineering Inc's (ASE, BBB/Stable) 2015 FFO-adjusted leverage is around 2.0x.

Fragmented Back-end Industry: Fitch believes that a market leader in the OSAT sector can be rated at 'BBB' at best, because OSAT companies lack pricing power due to the fragmented industry and they have relatively low bargaining power due to customer concentration and low switching costs. OSAT is a relatively small segment of the USD350bn semiconductor industry; about half of the industry's assembly and testing services are carried out in-house by foundries and integrated device manufacturers.

Adequate Liquidity: STATS had USD262m in cash and equivalents and banking facilities of USD113m at end-September 2015. It also has a committed undrawn bridge loan of USD352m (out of total of USD890m). It issued a USD200m of perpetual securities in August 2015 to refinance its short-term debt maturities, other than bonds, of USD207m.

The company's proposed secured bond will be used partly to refinance its drawn bridge loan of USD538m and unpaid existing unsecured bonds of USD116m. The bridge loan was used to pre-pay a part of (USD695m) of its two existing senior unsecured bonds - USD200m due in 2016 and USD611m due in 2018. The two bonds will need to be repaid in full as the acquisition has triggered a change of control clause.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:

- The combined entity's revenue to rise by mid-single-digit percentage, benefitting from higher capacity utilisation.
- Operating EBITDAR margin of 20%-21%.
- Capex/revenue of around 16%.
- 2015 total debt of the combined entity around USD2.2bn - including USD200m of lease-adjusted debt.

RATING SENSITIVITIES

Negative Rating Guidelines: Future developments that may, individually or collectively, lead to negative rating action include:
- JCET consolidated FFO-adjusted leverage of over 4.0x (estimated 2015: 3.8x - 4.0x) on a sustained basis.
- Larger-than-expected restructuring/integration costs post-acquisition and/or evidence that the acquisition is having an adverse impact on STATS's customer relationships.

Positive Rating Guidelines: Future developments that may, individually or collectively, lead to positive rating action include:
- An improvement in JCET consolidated FFO-adjusted leverage to below 3.0x.
- Sustained positive FCF margin.