Credit Watch: Chartered’s survival hinges on Temasek

Bolaji Ojo
EE Times

Chartered Semiconductor Manufacturing Ltd.’s ability to survive the ongoing economic recession and sliding demand for its services will depend largely on the willingness of parent Temasek Holdings Pte Ltd. to provide financial support for the wafer foundry, according to Standard & Poor’s.

The corporate credit ratings agency on Wednesday (Feb. 25), lowered its ratings on Chartered deeper into junk zone on concerns the company is facing tightening “demand and rising costs,” both of which would likely put a squeeze on its financials in 2009 and perhaps well into 2010 if the market does not recover quickly enough.

“We expect Chartered’s financial performance to continue to weaken in 2009, given the extremely volatile operating environment and the fact that its customers are aggressively reducing orders as they grapple with rising inventories and slowing demand,” said Weekhim Loy, an analyst in the Singapore office of Standard & Poor’s.

“The sharp deterioration in Chartered’s financial performance in 2008 was particularly exacerbated in the last quarter of 2008 as the decline in worldwide demand for semiconductors accelerated,” Loy added.

Chartered appears to have currently enough funds to survive on its own for the next few quarters even if industry conditions worsens further and it can always count on the deep pockets of Temasek, the investment arm of the Singapore government.

Chartered closed its latest quarter with $524 million in cash, down 42 percent, from the $743 million it had at the end of 2007. However, Chartered also has about $750 million in untapped credit facilities, giving it ample room for maneuvering through the difficult economic environment.

Things could quickly get dicey for the company, however, especially considering the sharp falloff in customer orders, which started in the fourth quarter but has now accelerated in the ongoing quarter.

With capacity utilization falling off, Chartered’s operating costs is swelling at a time it cannot count on an increase in orders to help absorb the higher expenses.

In the fourth quarter, Chartered said capacity utilization fell to 59 percent, from 85 percent in the prior quarter and 81 percent in the final quarter of 2007.

Company executives indicate the situation has worsened in the ongoing quarter and said they could not provide accurate revenue and profit guidance for the period but said sales could fall as much as 32 percent sequentially.

“The negative macroeconomic environment and difficult end market conditions are continuing to impact the foundry industry and our business in a significant way as we go into the first quarter of 2009,” said George Thomas, CFO of Chartered in a statement announcing the company’s results. “Foundry customers are cutting orders even more aggressively as they grapple with worsening visibility in the market place and rising inventories.”

As a result of the poor first quarter performance and expectations for further decline in semiconductor sales in 2009, S & P’s said it could further lower Chartered’s ratings in 2009 if the company’s “ratio of funds from operations to debt falls below 20 percent on a sustained basis.”

Such a scenario is not farfetched. Chartered currently has debt payment of about $163 million due and although the company can easily cover this from available funds, it also has about $1.7 billion in long-term debts, 70 percent of which are due in 2010.

The company may be forced to default on the payment if it is unable to generate enough cash to cover the debts or is unable to refinance the loans, hence the lower S & P’s rating, which basically indicates creditors would have a less than 50 percent recovery opportunity if the company were to default on the obligation.

Chartered has a secret weapon, though. Parent Temasek Holdings has an investment portfolio of about $134 billion and its pocket is deep enough to support and fund any obligations Chartered may have.

Additionally, the Singapore government, which controls Temasek, has continuing interest in keeping the company’s investment in the semiconductor market active and this could serve as a driving force for rescuing Chartered if and when necessary.

In fact, S & P’s rating on Chartered reflects the support the ratings agency expects the wafer foundry could get from Temasek, according to analyst Loy.

“Standard & Poor’s continues to factor in support from Chartered’s parent Temasek into the rating on” the company, Loy said. “We believe that Temasek could provide extraordinary support to Chartered if it faces financial distress.”

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