Dutch chipmaker NXP Semiconductors Inc., owned by a quintet of buyout shops, pinged Standard & Poor’s radar late last month after posting a bland second-quarter report.
The ratings agency responded by placing NXP Semiconductor’s B+ rating on credit watch and noting that an upcoming downgrade is likely, owing to “excessive leverage, low operating margins, and negative cash flow generation.” However, S&P also said that a recent deal made by the semiconductor company could give it enough cash to help stave off a ratings action, or at least lessen its severity. Its current “B+” rating indicates, according to S&P, that the company remains vulnerable to defaulting on it debt obligations although it currently has the wherewithal to meet them.
NXP Semiconductors was formed in late 2006 when
Club deals in operational or financial rough patches can represent special challenges for their sponsor owners, as general partners from various firms with different backgrounds and experiences, all have to work together to figure out a solution to the company’s problems. NXP Semiconductors is the latest in a line of club deals to begin to show signs of stress. Buyouts is currently tracking eight multi-sponsor-backed companies that S&P has marked as potential defaulters, and another five that already have defaulted this year. Both Apax Partners and KKR declined to comment for this story. The remaining three firms in the consortium did not return phone calls by press time.
NXP Semiconductors’s adjusted EBITDA amounted to $114 million for the second quarter of 2008, down from $190 million for the same period the year before, according to a regulatory filing dated July 22. The company reported a net loss of $330 million for the quarter, an improvement on a loss of $359 million a year earlier. Total debt was reported at $6.7 billion. As for the road ahead, S&P believes NXP Semiconductors could struggle to generate enough EBITDA to create positive free cash flow after interest and capital expenditures. “As a result, NXP will find it difficult to reduce leverage sufficiently to bring it back in line with the current ratings,” the ratings agency said.
That said, the deal recently struck between NXP Semiconductors and Geneva-based chip manufacturer STMicroelectronics promises to give the company a little breathing room. On July 28, NXP Semiconductors sold 80 percent of its wireless chip business to STMicroelectronics for $1.55 billion, thereby creating a new wireless company called ST-NXP. “The new organization will start with a cash balance of about $350 million, in a very healthy financial position and able to grow its business with all of its wireless customers,” according to a joint statement released by NPX Semiconductors and STMicroelectronics. NXP Semiconductors holds a 20 percent stake in ST-NXP and, according to terms of the sale, must hold on to its stake for a period of three years.
The cash generated by the sale should alleviate some of NXP Semiconductors’s strain, but S&P remains worried that the influx won’t be enough to allow the company to enhance its operations and profitability. The ratings agency said it is concerned that the company might use a large part of the proceeds to repay revolver drawings and to fund its restructuring, rather than for EBITDA-enhancing acquisitions. According to its quarterly report, NXP Semiconductor has drawn $450 million under its senior revolving credit facility.
Also potentially affecting NXP Semiconductors’s future performance is a high-level personnel move that took place in the second quarter. In May, NXP Semiconductor CFO Peter van Bommel stepped down. He was replaced by Karl-Henrik Sundström, who also serves as executive vice president of the company.
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