NEW YORK--(BUSINESS WIRE)-- Fitch Ratings rates Freescale Semiconductor Holdings I, Ltd.'s (Freescale) $750 million senior unsecured notes offering 'C/RR6'.

Fitch currently rates Freescale as follows:

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

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

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

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

--Senior unsecured notes 'C/RR6';

--Senior subordinated notes 'C/RR6'.

The Rating Outlook remains Positive. Fitch's actions affect approximately $6.7 billion of total debt, pro forma for Freescale's announced debt reduction from net initial public offering (IPO) proceeds.

Freescale will issue $750 million of senior unsecured notes via private placement. The company plans to use net proceeds to repay senior unsecured debt due in 2014. In conjunction with the use of approximately $93 million of net proceeds from the IPO to redeem a portion of the company's approximately $255 million of outstanding 9.125% senior unsecured toggle notes due 2014, Fitch estimates Freescale will avoid the potential acceleration of the extended term loans in September 2014. The notes will be pari passu with Freescale's outstanding senior unsecured debt.

Freescale's recent IPO provided approximately $783 million of gross proceeds and will enable the company to further reduce debt. However, the IPO was consummated within the context of a robust upturn in the semiconductor market, and Fitch estimates Freescale's total leverage (total debt to operating EBITDA) was approximately 6.6 times(x) for the latest 12 months (LTM) ended April 1, 2011, pro forma for the proposed debt reduction, 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 IPO was consummated at the cyclical peak. As a result, Fitch believes incremental access to capital markets could be under less favorable terms.

Fitch continues to believe Freescale will be challenged to generate free cash flow sufficient to meet significant 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 and 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;

--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 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;

--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, as well as Motorola's loss of global handset market share.

Positive rating action could result from meaningful debt reduction from consistently solid revenue and operating profitability growth over the medium-term or further equity issuances.

Negative rating action could result from the company's inability to grow revenues and benefit from meaningful operating leverage, most likely from diminished competitiveness, a downturn in the semiconductor market, or a double-dip recession. Fitch believes any of these scenarios would meaningfully reduce the potential for debt reduction.

Fitch believes Freescale's liquidity, pro forma for the IPO and debt redemption, was sufficient as of April 1, 2011 and consisted of:

--Approximately $1.2 billion of cash and equivalents and

--An undrawn $425 million of senior secured RCF due July 1, 2016.

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, pro forma for the anticipated debt reduction, was approximately $6.7 billion as of April 1, 2011 and consisted of:

--Approximately $2.2 billion of senior secured term loans due Dec. 1, 2016;

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

--Approximately $355 million of senior unsecured notes due 2014;

--Approximately $488 million of senior unsecured notes due 2020;

--$750 million of the proposed senior unsecured notes;

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

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 latest 12 month (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:

Corporate Rating Methodology

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

Evaluating Corporate Governance

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

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

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

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CONTACT:

Fitch Ratings
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Jason Pompeii, +1-312-368-3210
Senior Director
Fitch, Inc.
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or
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