OREANDA-NEWS. Fitch Ratings has placed Taiwan-based Advanced Semiconductor Engineering, Inc.'s (ASE) 'BBB' Foreign-Currency Issuer Default Rating (IDR), 'BBB' senior unsecured rating and 'A+(twn)' National Long-Term Rating on Rating Watch Negative. The agency has simultaneously placed the 'BBB' rating on Anstock II Limited's 2.125% USD300m senior unsecured guaranteed notes due 2017 on Rating Watch Negative. The notes are unconditionally and irrevocably guaranteed by ASE.

The ratings have been placed on Negative Watch following the announcement by ASE of a proposed cash acquisition of 75.01% of the shares in Siliconware Precision Industries Co., Ltd. (SPIL) that it does not own. The offer would cost around TWD129bn (about USD4bn).

ASE has requested that SPIL's directors respond to the proposal by 21 December 2015 and any agreement reached would be subject to regulatory approvals and endorsement by shareholders of both SPIL and ASE. ASE says that SPIL's management has been hostile to a tie-up with ASE and a condition of the offer is that SPIL terminate or cancel a proposed deal to issue new shares to Tsinghua Unigroup Ltd.

The Rating Watch will be resolved when the outcome of the proposed takeover is certain and Fitch has discussed the source of funds for the acquisition and the financial profile of the combined entity with management. We may affirm the ratings at their current levels with Stable Outlook or downgrade the ratings, though this is likely to be limited to a single notch.

KEY RATING DRIVERS

Weaker Leverage, Stronger Position: We estimate that, if the deal happens and is funded entirely by debt, ASE's pro-forma funds flow from operations (FFO)-adjusted leverage could exceed 2.8x in 2016 from 1.95x in 2014, compared to our downgrade rating guideline of 2.0x. However, we recognise the business benefits of the deal to ASE, in terms of improvements in market share to about 30% in the outsourced semiconductor assembly and testing industry, opportunity to achieve cost synergy and benefits from pooling resources to cater for the fast-growing system in package (SiP) business.

Therefore, even if the deal is completed and leverage rises, we may affirm the ratings at their current level with Stable Outlook, if, following discussions with the company, we determine that lower business risk offsets the higher financial risk associated with weaker credit metrics.

Increasing Influence Over SPIL: Should SPIL's management reject the offer, it is possible that ASE will try to strengthen its control over SPIL to influence SPIL's strategy, given ASE's ambitions to consolidate the industry, and the hostility of SPIL's management towards ASE's investment and cooperation with ASE. Therefore, even if SPIL does not agree to enter into discussions with ASE by 21 December 2015, we are likely to keep the Rating Watch in place until it is clear whether ASE will pursue further investment in SPIL and how much it is likely to spend.

RATING SENSITIVITIES

The following sensitivities are for ASE, excluding SPIL. If the deal goes ahead, we will reassess these given the likely stronger market position of any combined entity.

Negative: Future developments that may, individually or collectively, on a sustained basis, lead to negative rating action include:
- operating EBIT margin below 5% (2014: 11.5%)
- FFO-adjusted leverage above 2.0x
- negative free cash flow (FCF)

Positive: Future developments that may, individually or collectively, on a sustained basis lead to positive rating action include:
- operating EBIT margin rises to above 10%
- FFO-adjusted leverage falls to below 1.0x,
- pre-dividend FCF margin rises above 7% (2014: 3%).

However, Fitch is unlikely to consider an upgrade without a substantial increase in ASE's market share or reduction in business risk.

LIQUIDITY AND DEBT STRUCTURE

At end-September 2015, ASE's had unrestricted cash of TWD42bn and available undrawn committed facilities of TWD149bn, compared with short-term debt of TWD50bn and the potential SPIL acquisition cost of TWD129bn.

FULL LIST OF RATING ACTIONS

Advanced Semiconductor Engineering, Inc.
- Long-Term Foreign Currency IDR of 'BBB' placed on Rating Watch Negative
- National Long-Term Rating of 'A+(twn)' placed on Rating Watch Negative.
- Foreign-currency senior unsecured rating of 'BBB' placed on Rating Watch Negative

Notes issued by Anstock II Limited
- Rating on 2.125% USD300m senior unsecured guaranteed notes due 2017 of 'BBB' placed on Rating Watch Negative