June 13, 2017 / 9:20 AM / 7 months ago

Fitch Downgrades Global A&T to 'CC'

(The following statement was released by the rating agency) SINGAPORE, June 13 (Fitch) Fitch Ratings has downgraded Singapore-based outsourced assembly and testing (OSAT) services company Global A&T Electronics Ltd's (GATE) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) to 'CC', from 'CCC'. The rating action reflects Fitch's view that default is now probable and possible remedies that avoid a debt restructuring have all but evaporated. The company has also hired lawyers and investment bankers to contemplate debt restructuring ahead of a coupon payment due in August 2017. KEY RATING DRIVERS Default is Probable: We believe that GATE will struggle to pay the USD55 million bond coupon. Its end-March cash balance of USD77 million will be depleted further as we expect GATE to have an FCF deficit of around USD70 million-80 million in 2017. We estimate its 2017 EBITDA of USD150 million will be insufficient to cover annual interest cost of USD110 million and maintenance capex of USD100 million. Excessive Refinancing Risk: GATE has an unsustainable capital structure and limited access to external financing. It had only USD11.5 million of undrawn committed bank facilities at end-March 2017. We think that the company will struggle to redeem secured notes due in February 2019. We believe that the company's legal dispute with a group of holders of the first tranche of its first-lien bonds is likely to remain unresolved in the medium term. Compromised Business Model: Fitch expects GATE's EBITDA to stay relatively flat at around USD150 million in 2017, underpinned by slow recovery in global demand for semiconductors. GATE lacks the technological capability and pricing power in the fragmented USD25 billion OSAT industry to be able to service its current level of debt. GATE's independent auditor has given a disclaimer of opinion, concluding that it is unable to obtain sufficient evidence regarding the likely outcome of any negotiations with bondholders over interest payment. Therefore, the auditor has not expressed an opinion on the 2016 financial statements. DERIVATION SUMMARY The rating action reflects Fitch's assessment that short-term liquidity has deteriorated to a position where default is probable. The company is not likely to be able to pay its August 2017 coupon, and the capital structure is unsustainable with excessive refinancing risk given that we expect cash generation to be insufficient to cover interest costs and maintenance capex. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to stay relatively flat in 2017. - Operating EBITDA margin of 22%-23% in 2017-2018 (2016: 22.4%). - Annual capex of USD100 million in 2017-2018. - Annual cash taxes and cash interest of around USD10 million and USD110 million, respectively. - No asset sales or capital injection. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Negative Rating Action - Default is imminent or inevitable, or the issuer is in standstill - In Fitch's opinion, the company has experienced an uncured payment default - Announcement by the company, or its agent, of a distressed debt exchange Developments That May, Individually or Collectively, Lead to Positive Rating Action -Improvement in its liquidity position such that it can pay its short-term obligations. LIQUIDITY Liquidity to Worsen: Fitch expects liquidity stress to increase in the next 12 months, based on a cash balance of USD77 million as of end-March 2017 and sustained negative FCF in the medium term. Continuing weak business prospects would place considerable pressure on GATE to meet its interest commitments in August 2017. Access to external financing is also limited; it had only USD11.5 million of undrawn credit and banking facilities available for working-capital purposes as at end-March 2017. Contact: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd. One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Janice Chong Director +65 6796 7241 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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