(The following statement was released by the rating agency)
May 29 - Fitch Ratings has downgraded Switzerland-based STMicroelectronics’ (ST) Long-term Issuer Default Rating (IDR) and senior unsecured ratings to ‘BBB’. The Outlook on the IDR is Negative.
The downgrade reflects adjustments to Fitch’s rating case forecasts following deterioration in operating performance at the company’s wholly owned businesses, evident most recently in Q112 results. Based on these trends, and taking into account the medium-term margin targets revealed at the company’s Investor Day last week, the agency currently forecasts at least one of the downgrade guidelines set for company in February, to be breached this year.
Expectations of weak free cash flow performance and the level of volatility present in the business, added to concerns over the macro-economic outlook and the prospect of ongoing losses at wireless joint venture, ST-Ericsson (STE), mean the company’s risk profile is no longer consistent with a ‘BBB+’ rating.
The operating margin from ST’s wholly owned businesses was 0.8% in Q112 compared with 11.4% for FY11 and a downgrade guideline of 9%. The trend has been weakening for several quarters, with two of the four wholly divisions loss making in Q1. While ST is predicting a recovery in revenues in H2, which may be expected to help support margin expansion, the metric will require a strong recovery to avoid breaching the downgrade threshold for the full year.
The Negative Outlook reflects concerns that ST’s operating weakness no longer seems contained to the wireless JV, that Nokia (‘BB+’/Negative) related issues are more pervasive than previously thought and that performance at the stronger divisions have been trending negatively for several quarters. Sales to Nokia, previously the company’s single largest customer, have fallen to what is expected to be materially below 10% in 2012 from 18% of consolidated sales in 2009. This kind of customer concentration and the difficulties experienced at this customer have seemingly affected several parts of ST’s business.
While management has proven capable of managing business risk in the past, for example in the successful exit from flash memory, restructuring is a recurring feature at ST, while STE, already three years old, is now at the start of a three-year turnaround plan. Underlying weakness in the wholly owned businesses was unexpected.
With management guiding to a stronger second half, visibility of results for the full year should be better when the company reports Q312 figures. Signs of good sequential improvement in margins in the wholly owned businesses, as well as progress in materially reducing losses at STE (as management has suggested), could potentially result in the agency stabilising the Outlook.