Fitch Rates Corning's $250MM 1.45% 5-Year Senior Debentures 'A-'
Fitch Ratings has assigned an 'A-' rating to Corning Inc.'s (Corning) $250 million of 1.45% senior debentures due 2017.
Corning will use net proceeds for general corporate purposes. These include the cash tender for up to $75 million aggregate principal amount of specified series of outstanding debt and redemption of $174 million of outstanding debentures, announced Oct. 26, 2012.
The debentures issuance and subsequent execution of the cash tender debentures redemption will lower annual interest expense by approximately $15 million-$20 million.
The cash tender offer, subject to certain conditions and limits, includes the following debt series:
--$75 million of 8.875% debentures due Aug. 15, 2021;
--$75 million of 8.875% debentures due March 15, 2016; and
--$100 million of 6.75% debentures due Sept. 15, 2013.
The tender offer will expire on Nov. 26, 2012. Corning maintains the right but not the obligation to increase the maximum aggregate principal amount of the tender offer.
The company will redeem the following outstanding debt series on Nov. 26, 2012:
--$100 million of 5.90% debentures due March 15, 2014; and
--$73.6 million of 6.20% debentures due March 15, 2016.
The Rating Outlook is Stable. Pro forma for the debentures issuance, full participation in the tender offer and debentures redemption, Fitch's actions affect approximately $4.4 billion of total debt, including the currently undrawn $1 billion revolving credit facility (RCF).
The ratings and Outlook incorporate Fitch's belief that Corning's near-term operating results will fall short of Fitch's expectations but remain solid for the ratings. Macroeconomic headwinds, particularly weak European automotive demand, should offset some stabilization in liquid crystal display (LCD) average selling prices (ASP).
Fitch estimates operating EBITDA margin will remain in the high 20s to low 30s over the near term, versus the mid-30s in each of the last two fiscal years. Fitch believes Corning's ability to maintain current operating profit margins will hinge upon productivity gains in LCD and the completion of modest restructuring.
Fitch expects Corning's credit protection measures to remain solid with total leverage (total debt to operating EBITDA) of less than 1.5 times (x) and interest coverage (operating EBITDA to gross interest expense) in excess of 15x through the business cycle. Both metrics exclude cash dividends from Corning's equity investments, which together could exceed $500 million in 2012.
Fitch anticipates pre-dividend free cash flow (FCF) should exceed $750 million in 2012, down from Fitch's previous forecast of more than $1 billion due to the lower revenue and profitability outlook. Lower capital spending from maturing revenue growth will strengthen Corning's FCF profile beyond the near term.
The ratings and Outlook reflect Fitch's expectations of: i) consistent and solid profitability and cash from operations; ii) strong market positions enabled by technology leadership in LCD glass, fiber for telecom applications, and ceramic filters for automotive applications; iii) solid liquidity position and conservative financial policies, underpinned by a net cash position and disciplined share repurchases; and iv) substantial albeit currently pressured cash dividends from joint ventures.
Concerns center on: i) significant R&D investments and capital spending requirements; ii) the need to offset meaningful annual ASP reductions in LCD with manufacturing efficiencies; iii) the potential emergence of new high performance display technologies; iv) limited revenue growth visibility in fiber-optic cables sales, driven by uneven capital spending by carrier customers and the project-oriented nature of data center customers; and v) exposure to the Japanese Yen.
As of Sept. 30, 2012, Corning's liquidity was strong and supported by:
--Approximately $6.4 billion of cash, cash equivalents, and short-term investments, approximately 63% of which was located outside the U.S.; and
--An undrawn $1 billion unsecured RCF expiring December 2015.
Fitch's expectation for more than $750 million of pre-dividend FCF for 2012 also supports liquidity. Beyond 2012, Fitch anticipates annual FCF approaching $1 billion.
As additional support to capital spending in China, a wholly owned subsidiary of Corning entered into a Chinese Renminbi (RMB) credit agreement during the second quarter of 2011 under which the subsidiary may borrow up to 4 billion RMB (approximately $635 million when translated to U.S. dollars at March 31, 2012). The subsidiary may request advances through the end of 2012, will repay amounts borrowed under this agreement in six equal installments through 2016, and borrowed approximately $120 million under this facility during 2011.
The ratings and Outlook continue to reflect Fitch's belief that the company has the financial flexibility to use excess cash for a combination of share repurchases and acquisitions approximating annual FCF. Through Sept. 30, 2012, Corning has bought back approximately $1.4 billion under the $1.5 billion share repurchase program announced Oct. 5, 2011 and expiring Dec. 31, 2013.
Fitch expects Corning's acquisitions will be technology focused and mostly small in size, which is consistent with historical behavior. Fitch estimates the company has spent less than $150 million annually on average over the past five years. However, Fitch believes occasional larger deals, like Corning's pending $730 million cash acquisition of BD's Discovery Labware business, are possible.
Pro forma for the debt issuance, cash tender and redemption, total debt was approximately $3.4 billion as of Sept. 30, 2012 and consisted of various tranches of senior unsecured notes and debentures with staggered maturities. Corning's nearest debt maturity is $100 million of 6.75% senior debentures due Sept. 15, 2013, although this series is included in Corning's debt tender offer.
Fitch currently rates Corning as follows:
--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured debt rating at 'A-';
--Senior unsecured revolving credit facility (RCF) at 'A-'.
Fitch believes positive rating actions are unlikely in the absence of a more balanced operating profile and commitment to lower total leverage.
Negative ratings actions could result from:
--Meaningfully lower than anticipated annual FCF from Corning's inability to offset LCD glass ASP erosion via manufacturing efficiencies; or
--Significant underperformance by Corning's other businesses, exacerbating profitability pressures and reducing the potential for a more balanced operating profile.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating Technology Companies', Aug. 9 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Technology Companies
Jason Pompeii, +1 312-368-3210
70 W. Madison Street
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John Witt, CFA, +1 212-908-0673
Brian Bertsch, +1 212-908-0549 (New York)