Andrea Tan & Patricia Kuo
Chartered Semiconductor Manufacturing Ltd., a unit of Singapore sovereign fund Temasek Holdings Pte, had its debt rating cut to junk at Fitch Ratings on concern it’s not generating enough cash.
Chartered’s senior unsecured debt and long-term foreign currency issuer default ratings were cut to BB+, one level below investment grade, from BBB-, Fitch said in a statement today.
Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. slashed their share-price estimates on Chartered after the company said last month it will lose money in the third quarter. Chartered derives about two-thirds of its sales from the U.S., where household spending is projected to stall as wages fail to keep up with inflation and property values slump.
“The conditions for the company are still very challenging and it’s going to be difficult to make it profitable,” said William Dong, head of Taiwan research at UBS AG, who has a “neutral” rating on the stock with a price target of 65 Singapore cents.
Chartered shares have slumped 44 percent this year, underperforming the 19 percent decline in Singapore’s benchmark Straits Times Index. The stock was unchanged at 54.5 cents today, the lowest since the company sold shares to the public in 1999.
Lim Li Chuen, Chartered’s head of investor relations, declined to comment on Fitch’s decision to cut the company’s debt rating. Junk bonds, classified as high-yield and high-risk debt, can raise a company’s borrowing costs as a lower debt rating increases the perceived risk of a company’s inability to pay debt.
Cash flow concern
Chartered, which makes chips that power the Xbox 360 game console, had $516.6 million of cash, $1.16 billion of unused bank loans and $1.63 billion of long-term debt as of the end of June, according to its earnings report.
“The company’s operating and financial performance has been lackluster,” Fitch said. Negative free cash flow — or the cash flow from operating activities minus capital expenditures — was “substantial” at 20 percent of 2007 revenue, according to Fitch.
Chartered’s free cash flow has been negative in 31 of the 34 quarters since the company sold shares in 1999, according to data compiled by Bloomberg.
The company’s debt is ranked the lowest investment grade by Standard & Poor’s and Moody’s Investors Service. Fitch has a “stable” outlook on its BB+ rating.
“We don’t have any plans to cut their rating at the moment,” Wonnie Chu, a Hong Kong-based analyst at Moody’s, said today by phone. “We’re closely monitoring the situation but it’s unlikely to be cut as our rating has factored in the cyclicality of the industry.”
Moody’s rates Chartered’s debt Baa3, the lowest investment grade, with a “stable” outlook.
Default risk rises
S&P said in June that Chartered may be “vulnerable” to a rating downgrade as demand slows in the U.S. S&P analyst Wee Lee Cheng didn’t immediately respond to voicemail and e-mail messages today. Chartered’s debt is rated BBB- at S&P.
Credit-default swaps on Chartered jumped 12.5 basis points from before the downgrade to 247.5 basis points, according to Barclays Capital’s prices. That means it costs $12,500 more a year to protect $10 million of the company’s debt from default for five years. A basis point is 0.01 percentage point.
The downgrade also pushed up the extra yield investors demand above U.S. Treasuries to buy Chartered Semiconductor’s $300 million 6.25 percent bonds maturing in 2013. The spread widened 4 basis points to 418 basis points, BNP Paribas SA’s prices show.
Ten analysts tracked by Bloomberg recommend investors sell Chartered shares. Seven suggest holding them, while three say investors should buy the stock.
Support from Temasek?
Fitch said the rating already takes into account the fact that the Singapore government has a majority stake in the company through Singapore Technologies Semiconductors Pte, which is owned by Temasek. Both Temasek and Singapore are rated Aaa by Moody’s and S&P.
“The agency’s support argument is based on the company’s strategic importance within Singapore’s electronics and technology sector, and prior track record of financial support from controlling shareholder, Temasek,” Fitch said. The stable outlook on Chartered is “based on the view that some form of financial support would be available from Temasek should it be required.”
Temasek owns about 60 percent of Chartered, it said in an e- mailed statement today.
“Rating agencies form a view on the creditworthiness of companies they assess and they may make certain assumptions on what Temasek might or might not do with regard to our portfolio companies,” Temasek said. “It is not our practice to comment on such assumptions made.”
Stats Chippac Ltd., the semiconductor tester and packager that’s 84 percent-owned by Temasek, also has a non-investment- grade rating from Moody’s and S&P.