Fitch Affirms Sanmina-SCI at 'B+'; Negative Outlook.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has removed Sanmina-SCI Corporation (Sanmina) from Rating Watch Negative and affirmed the following ratings: --Issuer Default Rating (IDR IDR In currencies, this is the abbreviation for the Indonesian Rupiah. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) at 'B+'; --Senior secured credit facility at 'BB+/RR1'. --Senior unsecured term loan at 'BB+/RR1'; --Senior subordinated debt Subordinated Debt A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known as "junior security" or "subordinated loan". at 'B/RR5'. The Rating Outlook is Negative. Fitch's action affects approximately $1.7 billion of total debt. The removal of the Rating Watch Negative reflects Sanmina's successful filing of its fiscal third quarter 2006 10Q and fiscal 2006 10K reports. The company also refinanced $525 million 3% convertible subordinated notes, which were set to mature in March 2007, using a $600 million senior unsecured term loan that matures in January 2008. Sanmina's ratings were placed on Rating Watch Negative on Aug. 22, 2006 after the company failed to file its third quarter fiscal 2006 10Q filing with the SEC, thereby creating a technical default under its bond covenants. The ratings and Negative Outlook reflect weak operating trends including a 7% decline in revenue in fiscal 2006 (end Sept. 30) versus fiscal 2005, low operating EBIT EBIT See: Earnings Before Interest and Taxes EBIT See earnings before interest and taxes (EBIT). margin of 2.2% and cash conversion cycle (CCC CCC A very speculative grade assigned to a debt obligation by a rating agency. Such a rating indicates default or considerable doubt that interest will be paid or principal repaid. Also called Caa. ) days of 44, among the highest of Fitch-rated EMS companies, in fiscal 2006. Sanmina also carries the largest debt balances among tier 1 EMS companies leading to the highest leverage ratio (Total Adjusted Debt to Operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become ) of the group at 5.2 times (x). In addition, the company's fiscal 2006 10K filing identifies a material weakness in Sanmina's internal controls over financial reporting. Specifically, the material weakness is comprised of internal control deficiencies in stock option administration. Fitch expects a difficult competitive environment within the EMS industry in 2007 driven by continued pricing pressure from Asian EMS and ODM (Original Design Manufacturer) A contract manufacturer that uses its own designs and intellectual property (IP). See contract manufacturer. vendors as well as a continued trend by OEMs to consolidate EMS vendors, both of which could hamper efforts to improve the operating performance at Sanmina. The company is currently evaluating its strategy and position within the market and recently announced a shift in its original design manufacturing (ODM) business to a joint design manufacturing (JDM JDM Japanese Domestic Market JDM Judgment and Decision Making JDM Juvenile Dermatomyositis (Childhood immune disease affecting skin and muscles) JDM Justin Downey Marketing (Irving, TX) ) model. In addition, Sanmina is considering various strategic alternatives for its low margin personal computing, low-end server and storage businesses. Actions including a divestiture of lower margin businesses to improve overall operating performance, the use of proceeds from asset divestitures to pay down debt, a successful refinancing of the $600 million term loan, or correcting the internal control deficiencies could stabilize Sanmina's ratings. The Recovery Ratings and notching reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's expectation that the enterprise value of Sanmina, and hence recovery rates for its creditors, will be maximized in liquidation rather than in a going concern enterprise value scenario. In estimating Sanmina's liquidation value Liquidation value Net amount that could be realized by selling the assets of a firm after paying the debt. under a distressed scenario, Fitch applied advanced rates of 80%, 20%, and 10% to Sanmina's current balance of accounts receivable, inventory, and property, plant and equipment, respectively. That leads to a distressed enterprise value estimate of approximately $1.3 billion, providing the basis for a waterfall analysis to determine recovery ratings. The current 'RR1' recovery rating for Sanmina's secured credit facility and unsecured term loan reflects Fitch's belief that 100% recovery is realistic. As is standard with Fitch's recovery analysis, the revolver is fully drawn and cash balances fully depleted to reflect a stress event. The current 'RR5' Recovery Rating for the senior subordinated debt reflects Fitch's estimate that a recovery of only 10%-30% would be achievable. As of Sept. 30, 2006, Fitch believes liquidity was adequate and supported by $492 million in cash and equivalents; $500 million senior secured revolving credit facility due December 2008, of which $400 million remains available; and various receivables sales facilities totaling approximately $400 million, of which approximately $100 million remains available. While Fitch estimates Sanmina's free cash flow for fiscal 2006 was negative $473 million, largely due to increases in working capital driven by higher cash conversion cycle days, Fitch expects working capital trends to moderate, which should enable Sanmina to produce positive free cash flow in fiscal 2007. Pro forma for the $600 million term loan and convertible subordinated note redemption, Fitch estimates total debt was $1.7 billion consisting of $100 million drawn against a $500 million senior secured revolving credit agreement Revolving credit agreement A legal commitment in which a bank promises to lend a customer up to a specified maximum amount during a specified period. revolving credit agreement See line of credit. ; a $600 million senior unsecured term loan that expires in January 2008; $400 million in 6.75% senior subordinated notes due 2013; and $600 million in 8.125% senior subordinated notes due 2016. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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