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Freescale enters debt-swap to cope with downturn

Posted: 18 Mar 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Freescale debt swap? market recession? IC downturn?

Freescale Semiconductor Inc.'s top executives are hinging the company's survival and ability to prosper through the ongoing recession on a series of actions the IC vendor has taken in recent months, the most important of which is a multibillion-dollar debt swap.

By the middle of March, Freescale is scheduled to wrap up a bond-exchange deal that will help to sharply reduce the company's $650 million in annual interest payment on loans, a development that executives said would further shift resources to critical R&D as well as other product development and marketing activities.

In an interview with EE Times, Freescale treasurer David Stasse and head of investor relations Mitch Haws said the company's goal in an ongoing debt-exchange program that is scheduled to close on March 10 is primarily to help reduce cash utilization by lowering interest payments.

The plan would also help Freescale substantially cut its outstanding long-term debt of about $9.8 billion down by as much as 20 percent, according to company executives.

"If we have less debt, we pay less in interest expense," Stasse said. "It's another one of the things we are doing to give ourselves financial flexibility now and into the future."

The latest transaction is a fairly complicated debt-exchange program under which Freescale is agreeing to swap some of its unsecured outstanding debtsmost of which it currently trades publicly for substantially less than the face value, or between 20 cents and 30 cents on the dollar, according to industry sourcesfor senior secured debts.

Cutting long-term debt
Under the new agreement, investors in bonds due in 2014 and 2015 would exchange these notes for new debts totaling approximately $1 billion. Since the notes to be exchanged are being swapped at rates far below their face value, Freescale gets the benefit of a reduction in its total long-term debt.

"It is healthy for us if we are able to move long-term debt into the future because then we would have less debt that matures five years from now and we would also pay less interest expense in the interim," Haws said. "Technically, we pay about $650 million a year in interest expense and interest savings [from the debt swap] would give us more flexibility to do those things that help grow the business."

In turn, the company's creditors get a premium on the outstanding debts, which would now be replaced by secured bonds, helping to reduce the danger of losing their entire investment in the event of a default. As Feb. 27, Freescale had received confirmation of participation in the debt swap from investors holding approximately $2.95 billion of its existing notes, translating into new debts of $703 million for the company, or slightly less than 24 percent of the replaced notes.

Freescale pushed out the date for investors to receive a premium for participating in the offer to March 10 to enable the company reach its goal of a total of $1 billion in new debt swapped for the older bonds. The company said it does not expect to swap the entire four tranches of debts with a face value of $5.8 billion under the current transaction.

If Freescale reaches its $1 billion goal in new debt for older debts, the company could reduce its total outstanding debt by one-fifth, helping to sharply reduce annual interest payments on the bonds.

Nevertheless, a successful debt-swap will not completely eliminate pressure on the company. The debt-swap plan will immediately attract a cut in the company's ratings from corporate rating agencies, including Standard & Poor's, which has already indicated it would lower the company's rating to "selective default."

Furthermore, while Freescale would benefit substantially from lower interest payment, the company's real salvation may lie more in a sharp reversal in demand for its products and resurgence in the semiconductor market, both of which are doubtful in the current economic downturn.

Excerpts from the interview with Stasse and Haws follow:

EE Times: What is Freescale trying to achieve with this debt exchange?
Stasse: A debt exchange allows you to reduce long-term debt and the related interest expense. What we are doing is exchanging existing debt for new debt and a new term loan, but we are doing it in a way that ultimately we would have less debt on our balance sheet. If we have less debt, we pay less in interest expense. So it is another one of the things that we are doing to give ourselves financial flexibility now and into the future.

We've got four individual tranches of debt. These are unsecured bonds that trade publicly. The offer that we've put forth is to issue up to $1 billion of new secured term loans under our existing credit agreement of secured term loans and exchange those for these four tranches of unsecured bonds.

How much of the unsecured bonds are you expecting would go into the secured debt? The statement you put out indicates there's a total of about $5.8 billion in the outstanding four unsecured bond tranches? Do you expect to swap all that?
: There are no expectations that all the bonds would be involved in this transaction.

Haws: The total new additional term loan that we are talking about is $1 billion. That's the maximum that could go in. There's been $3 billion essentially tendered or pledged to go into that. Lower priced bonds are being exchanged for bonds issued at the opening back at the time of our [leveraged buyout].

Do you have a goal in mind as to how much debt the company expects to have once this transaction closes, and are you expecting to do another round of debt swap?
Stasse: The transaction is still underway and we've made some good progress. It's a bit premature to comment other than to say the reduction in debt and the reduction in associated interest expense would be significant. When it's closed we can give you a bit more color, but at this stage we've entered the process but it's not complete. However, we are talking about a meaningful reduction in our debt and our interest expense.

Are you satisfied with the response from the bond holders?
Stasse: The initial goal is to raise $1 billion and we are already over $700 million. So we are pleased with the progress so far.

You mentioned earlier that this is secured debt. What are you using to secure the debt?
: It's secured by the same collateral package that our existing credit agreement has. It's fairly complex to get into what is in that collateral package, but it is the same that our existing term loan lenders have. This $1 billion transaction is part of the allowable transaction under our existing credit agreement.

What message is Freescale sending to the market with this transaction?
: We are taking lots of different steps to improve our position through the downturn. We have generated cash from our businesses and we have used our revolving credit facility. We have essentially been able to double our cash position since the [leveraged buyout]. We've been able as well to initiate a number of key cost reduction activities and we've targeted $600 million in annualized savings.

These are the key components of our plans for getting through this downturn and prospering at the end. We've purchased debts in the open market and we've reduced just with our own cash about $100 million in long-term debts. Today, we've retired about $200 million of debt just through open market purchases. The debt exchange is another key building block because if you think about our long term future, if we are able to move long-term debt out into the future, that is healthy because that is less debt that matures five years from now and is less interest expense we pay in the interim.

We are talking about the potential for a very significant reduction in debt just because of the level of participation to date. Technically, we pay about $650 million a year in interest expense. As you know, we spend a lot of money on R&D and other things that we would like to continue to do to invest in our future. Interest savings in the interim gives us more flexibility to do those things to grow the business. It would be a very meaningful reduction from the $650 million that we pay today.

It's a challenging environment out there but we think we are taking all the right steps that will help us emerge stronger on the other side. We do think that even though some of our markets are under pressure right now, long term the value proposition in our end markets is still very compelling. It's clearly a challenging time but we think that with the liquidity we have today and the steps we are taking to shore up that liquidity we think we are well positioned.

-Bolaji Ojo
EE Times

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