CHICAGO--(BUSINESS WIRE)-- Fitch Ratings stated today that the following ratings for Freescale Semiconductor Holdings I, Ltd. (Freescale) are unaffected by the company's initial public offering (IPO):

--Issuer Default Rating (IDR) of 'CCC';

--senior secured bank revolving credit facility (RCF) of 'B-/RR3';

--Senior secured term loans of 'B-/RR3';

--Senior secured notes of 'B-/RR3';

--Senior unsecured notes of 'C/RR6';

--Senior subordinated notes of 'C/RR6'.

The Rating Outlook is Positive.

Fitch believes Freescale's proposed initial public offering (IPO) could provide $800 million - $1 billion of gross proceeds and enable the company to chip away at significant debt maturities. However, Freescale's proposed IPO comes on the heels of a robust upturn in the semiconductor market and Fitch estimates Freescale's total leverage (total debt to operating EBITDA) was approximately 6.9 times(x) for the latest 12 months (LTM) ended April 1, 2011, versus more than 30x at the trough of the most recent recession. Given Fitch's expectations for moderating end-market demand beyond the near term, Fitch believes Freescale's proposed IPO could be consummated at the cyclical peak.

Fitch continues to believe Freescale will be challenged to generate free cash flow sufficient to meet significant intermediate-term debt maturities. Nonetheless, the Positive Outlook recognizes Freescale's lower fixed costs from restructuring and solid design wins in automotive and across a number of embedded markets, which have positioned the company to potentially outperform the broader semiconductor market and achieve meaningful revenue growth and free cash flow.

The ratings continue to reflect Freescale's:

--Leading share positions in microcontrollers (MCU) and embedded processing markets, particularly automotive; these markets are characterized by longer product lifecycles;

--Substantial and increasing customer and end-market diversification, driven by solid design wins in microcontrollers and embedded processing and increased attach rates within the company's Analog and Sensors segment; and

--Low capital intensity from the company's 'asset-light' manufacturing strategy.

Ratings concerns center on Freescale's:

--Onerous capital structure with significant interest expense and medium-term debt maturities;

--Challenges to achieving the revenue and operating EBITDA growth rates necessary to organically meet debt service requirements, which are exacerbated by the company's increased focus on end-markets with meaningful incumbent supplier advantages; and

--Structurally lower absolute operating EBITDA levels, following significant market share losses by the domestic tier 1 automotive suppliers and loss of Motorola as a wireless handset customer.

Positive rating action could result from:

--Consistently solid revenue and operating profitability growth over the medium term, providing evidence of the company's ability to reduce debt levels over the longer term;

--Meaningful reduction of intermediate-term debt maturities from annual free cash flow or proceeds from the proposed IPO, relieving Freescale of the potential for the acceleration of its extended term loans in September 2014.

Negative rating action could result from the company's inability to grow revenues and benefit from meaningful operating leverage, most likely from diminished competitiveness or a double-dip recession. In either case, Fitch believes this would meaningfully lessen Freescale's ability to meet or refinance intermediate-term debt maturities.

Fitch believes Freescale's liquidity was sufficient as of April 1, 2011 and consisted of: i) approximately $1 billion of cash and equivalents and ii) approximately $58 million of remaining availability under the $590 million senior secured RCF due Dec. 1, 2012. Fitch's anticipation for more than $250 million of annual free cash flow over the next couple of years, driven by solid revenue growth and higher profitability also supports liquidity.

Total debt was approximately $7.6 billion as of April 1, 2011 and consisted of:

--$532 million of borrowings under the senior secured RCF Dec. 1, 2012;

--Approximately $2.3 billion of senior secured term loans due Dec. 1, 2016;

--Approximately $2.1 billion of senior secured notes due 2018;

--Approximately $2 billion of senior unsecured notes due 2014;

--$764 million of senior subordinated notes due 2016.

The senior secured credit agreement provides holders the right to accelerate the maturity of the senior secured term loans if, as of Sept. 1, 2014, more than $500 million of the approximately $2.1 billion of senior unsecured debt due on Dec. 1, 2014 is outstanding and total leverage exceeds 4x.

The Recovery Ratings (RR) for Freescale reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's belief that Freescale's enterprise value, and hence recovery rates for its creditors, will be maximized as a going concern rather than liquidation scenario.

In deriving a distressed enterprise value, Fitch applies a 35% discount to its estimate of Freescale's operating EBITDA for the LTM period ended April 1, 2011 of approximately $1.1 billion. Fitch applies a 5x distressed EBITDA multiple to reach a reorganization enterprise value of approximately $3.6 billion.

As is standard with Fitch's recovery analysis, the revolver is assumed to be fully drawn and cash balances fully depleted to reflect a stress event. After reducing the amount available in reorganization for administrative claims by 10%, Fitch estimates the senior secured debt would recover 51%-70%, equating to 'RR3' Recovery Ratings. The senior unsecured and senior subordinated debt tranches would recover 0%-10%, equating to 'RR6' Recovery Ratings and reflecting Fitch's belief that minimal if any value would be available for unsecured noteholders.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 13, 2010;

--'Evaluating Corporate Governance', dated Dec. 16, 2010;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', dated Nov. 24, 2009.

Applicable Criteria and Related Research:

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628491

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

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CONTACT:

Fitch Ratings
Primary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
Fitch, Inc.
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or
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Email: brian.bertsch@fitchratings.com

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