OREANDA-NEWS. March 16, 2016. Fitch Ratings has assigned a first-time 'BB+' Issuer Default Rating (IDR) to Western Digital Corp. (Western Digital). The Rating Outlook is Stable. Pro forma for the acquisition of SanDisk Corporation (SanDisk) and repayment of the bridge facility, Fitch expects its ratings will affect \\$15.1 billion of total debt, including the \\$1 billion revolving credit facility (RCF). A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

--Diversified Storage Portfolio: Fitch believes the acquisition of SanDisk diversifies Western Digital's technology portfolio and strengthens positions in secular growth markets. Western Digital's technology stack, including hard disk drives (HDD), NAND flash-based solid state drives (SSD) and software uniquely positions the company for next generation storage platforms, while reducing nearer-term risks associated with SSD cannibalization of HDDs.

--Increased Scale and Profitability: The combination increases scale and profitability, which Fitch believes will be essential to support higher investment intensity as: i) Western Digital faces larger competitors; and ii) the industry rapidly evolves around significant cloud driven data growth and new storage architectures, such as 3D NAND. Should investment levels needed to keep up with technology developments in 3D NAND intensify and are not satisfied with operating cash flows at the joint venture (JV) or through equipment leases, Western Digital and Toshiba Corporation may jointly decide to contribute capital to the JV.

--Credible Margin Expansion Story: Fitch expects cost synergies related to the deal and integration of Hitachi Global Storage Technologies (Hitachi) will drive meaningful profit margin expansion. Fitch's base case assumes more than \\$500 million of cost synergies in the first year after the deal closes and more than \\$1 billion in subsequent years. Given Western Digital's high fixed cost model, these cost synergies should drive operating EBITDA margin to the mid- to high-20s from the low 20s, pro forma for the acquisition.

--Commitment to Debt Reduction: Fitch expects rapid debt reduction from free cash flow (FCF) and tax efficient use of offshore cash, made possible in connection with a restructuring that is expected to relocate SanDisk's domestic intellectual property (IP) offshore, will result in the Company achieving its 1.5x total leverage (total debt to operating EBITDA) target in the intermediate-term. Fitch expects significant annual FCF of \\$1.5 billion to \\$2 billion beyond the near-term, during which Fitch believes the vast majority of cash restructuring costs will largely offset recurring FCF. Until Western Digital achieves the 1.5x total leverage target, Fitch expects the company will limit share repurchases to offsetting dilution.

--Significant Technology Risk: Fitch believes Western Digital is subject to significant technology risk from the storage industry's rapid evolution and emergence of new storage architectures. Western Digital's strategy of layering optimized software onto hybrid HDDs/SSDs for next generation platform solutions further shifts the company's focus to hyper-scale and traditional data center markets (and away from personal computers) but also intensifies technology risk related to a wider array of competitors with alternative technologies.

--3D NAND Roadmap: Fitch believes Western Digital could structurally trail competitors in 3D NAND through the intermediate term, potentially adversely impacting operating results and reducing FCF for debt reduction. Given SanDisk's cost advantage in 2D NAND, the company plans to ship 3D NAND with a gradual volume ramp beginning in the second-half of calendar 2016 and continuing throughout calendar 2017 and 2018. Intel and Samsung, both larger competitors with greater financial capacity, currently are or will ship 3D NAND in the near term. At the same time, SanDisk owns a number of patents related to 3D NAND that it licenses to certain competitors, indicating the company has invested significantly in the technology.

--Revenue Pressures and Volatility: Fitch expects the combined company will face meaningful near- to intermediate-term revenue pressures and that increased exposure to datacenter spending could exacerbate volatility. Revenues have declined on a constant currency basis in each of the past two years, due to negative PC unit growth and SSD's cannibalization of HDDs in PCs and performance enterprise. Fitch expects SanDisk's removable retail business will continue being pressured by the increased use of cloud based storage and the decreased use of single function electronic devices, such as cameras. Meanwhile, a sales mix shift to datacenters should improve visibility but also add top line volatility from capex cycles. Beyond the next two years, Fitch anticipates low- to mid-single digit organic revenue growth from market growth in datacenters and enterprise markets.

--High Leverage Reduces Flexibility: Fitch anticipates leverage will be 3.4x at the close of the transaction (excluding synergies and pro forma the repayment of the bridge loan), limiting financial flexibility, although Fitch expects rapid debt reduction from higher FCF and offshore cash repatriation. Fitch believes reducing leverage is imperative for Western Digital, as investments in innovation, including potential IP-driven acquisitions, are critical to long-term success given rapid technology evolution.

KEY ASSUMPTIONS

--SanDisk acquisition closes at the beginning of the first quarter in fiscal 2017.
--Mid-double digit negative revenue growth in fiscal 2016, driven by lower PC shipments, cannibalization of HDDs by SSDs, slowing smartphone demand, and a pause in datacenter capacity growth.
--Low-single digit revenue growth in 2017 and mid-single revenue growth in 2018, driven by solid client SSD unit growth, moderating PC unit declines, and significant data growth driving enterprise SSD and nearline HDD unit growth.
--Significant synergies related to Western Digital's integration of Hitachi and SanDisk driving meaningful profit margin expansion, despite pressures in the removable retail business and core NAND markets such as smartphones.
--Repatriation of foreign cash for debt prepayment.
--No increases to the dividend or share repurchases beyond anti-dilution until the company achieves its target leverage of 1.5x.

RATING SENSITIVITIES

The ratings may be downgraded if Fitch expects:

--Sustained negative revenue growth, likely from i) slower than anticipated growth within enterprise that is insufficient to offset the secular decline in PCs and the removable storage market, or ii) market share losses to competing technologies, including 3D NAND; or
--Slower than expected debt reduction resulting in total leverage sustained above 3x.

Positive rating actions would require Fitch's expectations for:

--Consistently positive mid-cycle organic revenue growth from successful implementation of the company's strategy, including increased penetration in enterprise growth markets by leveraging its technology stack; and
--Western Digital to reach 1.5x total leverage from significant voluntary debt reduction.

LIQUIDITY

Fitch believes Western Digital's liquidity position is solid, supported by:

--Estimated U.S. and foreign cash balances of \\$1 billion and \\$3.25 billion at time of deal close (pro forma repayment of the bridge facility); and
--\\$700 million of undrawn capacity under its revolving credit facility.

Fitch's expectation for annual FCF of more than \\$1.5 billion also supports liquidity.

FULL LIST OF RATING ACTIONS

Western Digital Corp.
--Long-term Issuer Default Rating (IDR) 'BB+';
--Senior secured revolving credit facility 'BBB-/RR1';
--Senior secured term loan A 'BBB-/RR1';
--Senior secured term loan B 'BBB-/RR1';
--Senior secured notes 'BBB-/RR1';
--Senior unsecured notes 'BB+/RR4'.