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Investing.com -- Moody’s Ratings has downgraded the senior unsecured rating of Microchip Technology Inc (NASDAQ:MCHP). (Microchip) from Baa1 to Baa2, while also changing the company’s outlook from negative to stable. The decision is based on Microchip’s weakened financial profile due to a significant decrease in earnings.
Microchip intends to issue about $1.35 billion of mandatory convertible preferred stock, primarily using the net proceeds to repay outstanding commercial paper, valued at $1.3 billion as of December 31, 2024. The debt repayment through the issuance of convertible preferred stock is expected to decrease Moody’s adjusted gross leverage by more than 1x.
The company is also replacing its existing $2.75 billion senior unsecured revolving credit facility, due December 2026, with a new 5-year senior unsecured revolving credit facility with a capacity of up to $2.25 billion. Despite these measures to enhance liquidity and reduce financial leverage, the company’s $1.2 billion of senior unsecured notes due in September 2025 will continue to exert pressure on liquidity.
Microchip’s Baa2 rating reflects Moody’s expectation that the firm’s new CEO will implement measures to reduce structural costs, rectify previous execution errors, and align the company’s production capacity with its reduced long-term growth expectations. These actions are anticipated to reinforce the company’s financial profile over the next 12 to 18 months.
Moody’s expects Microchip’s revenue growth to rebound by late 2025, and cost savings and inventory reduction to generate sustained positive free cash flow after dividends in the fiscal year ending March 2026. However, these projections could be negatively affected if demand in Microchip’s end markets is significantly impacted by macroeconomic and trade policy uncertainties.
The Baa2 senior unsecured rating is backed by Microchip’s high margin portfolio of microcontroller, analog, mixed signal, and specialized semiconductor solutions, which have promising long-term growth prospects. The company’s broad revenue diversification by product, process, end market, customer, and geography, along with its fab-lite manufacturing model, supports cash flow generation over time.
The stable outlook is based on Moody’s expectation that Microchip’s year-over-year revenue growth will turn positive by the end of 2025 and operating margins will bottom out by mid-2025. The company is expected to maintain good liquidity, comprised of cash balances, access to funds under its revolving credit facility and commercial paper program, and positive free cash flow in FY ’26, along with manageable current debt maturities.
Microchip’s ratings could be upgraded with a strong and sustained improvement in profitability and a conservative financial policy. Conversely, a downgrade could occur if the anticipated improvements in operating performance over the next 12 months fail to materialize, or if the leverage does not improve to below the 3x debt to EBITDA level by FY ’27.
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