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

The rating affirmation follows the conversion in December 2015 of China Integrated Circuit Industry Investment Fund Co., Ltd.'s (IC fund) shareholder loan into equity, which makes it the shareholder with the largest effective stake in STATS. However, Fitch believes Jiangsu Changjiang Electronics Technology Co. Ltd. (JCET) will retain management control over STATS.

The agency has also assigned STATS's 8.5% USD425m senior secured notes due 2020 a final rating of 'BB'. The final rating on the notes follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 9 November 2015. The notes are guaranteed by all the key operating companies, except those in China and Thailand. STATS will use the proceeds of the bond to refinance its existing borrowings.

KEY RATING DRIVERS

Strong Linkages with JCET: A consortium led by JCET in October 2015 completed the acquisition of 100% of STATS for an equity value of USD780m. STATS's ratings are based on the consolidated credit profile of JCET, its controlling shareholder, 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: Fitch believes JCET will continue to act as controlling shareholder, and maintain management control and the majority of seats on the board even after IC fund becomes the largest shareholder. 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.

We believe Semiconductor Manufacturing Investment Corp. (SMIC) and IC fund - the other consortium members - are likely to act as junior partners. In time, JCET's control over STATS could be strengthened as SMIC has put options to exit for cash or swap for JCET equity.

Notes Rated Higher: The notes 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 notes 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 leverage. Following the conversion of IC fund's USD140m shareholder loan to equity, we expect the group's 2015 FFO-adjusted leverage to be around 3.6x-3.9x, which is higher than the average of 2.0x for its top-four peers in the OSAT industry. The market leader - Advanced Semiconductor Engineering Inc.'s (ASE, BBB/Rating Watch Negative) 2015 FFO-adjusted leverage is around 2.0x.

Fragmented Back-end Industry: OSAT businesses generally have weak credit profiles because they 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. Post-refinancing, we expect STATS's USD93.9m cash and equivalents and committed undrawn banking facilities of up to USD500m to fully cover its short-term debt of USD116.2m.

KEY ASSUMPTIONS

Fitch's key assumptions within the 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.
- JCET will continue to control STATS, notwithstanding that the IC fund is now the largest shareholder in STATS.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- JCET consolidated FFO-adjusted leverage of over 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.
- JCET's loss of control and/or majority board representation in STATS and its holding companies.

Positive: 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.