Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB' long-term issuer rating on Norway-based semiconductor company Nordic Semiconductor ASA. The outlook is stable. The 'N3' short-term issuer rating was also affirmed.
Rationale
The long-term issuer rating reflects the company's strong balance sheet and low financial leverage. The rating also takes account of the company's strong position in growing niche markets within wireless communication technology, and the Internet of Things (IoT) in particular, including products that help monitor various kinds of environmental impact. Nordic Semiconductor has strong customer relationships with world-leading technology companies.
The rating is constrained by the semiconductor sector's historical earnings volatility. Demand for consumer products has declined since the end of the pandemic-induced boom. Moreover, inventory adjustments by customers are amplifying the current negative cycle. However, lower demand has meant that the period of supply constraints on silicon wafers has ended. The rating is also constrained by the need to invest heavily in research and development (R&D) to maintain market share and customer relationships. We adjust our indicative credit assessment down by one notch to reflect the company's small size relative to the major semiconductor companies, which could affect Nordic Semiconductor's ability to develop new technologies in an R&D-intensive sector.
We have revised our view of Nordic Semiconductor's diversification downward due to its higher reliance on the largest customers and on Bluetooth Low Energy (BLE) products, although we believe this is temporary. In addition, we have revised our view of operational efficiency, due to the high operational leverage amid weak market conditions.
Stable outlook
The stable outlook reflects our view that Nordic Semiconductor's financial leverage will remain low. The company has made a prepayment of USD 100m to a new supplier to reduce the risk of the long-term undersupply of wafers, without taking on new debt. We believe that the company's niche markets will continue to grow at least in line with the broader semiconductor market. We could raise the rating if secular growth of target markets leads to greater revenue diversity, or if increased economies of scale lead to EBITDA margins above 30%. We could lower the rating to reflect stronger competition leading to lower market share and revenues, an EBITDA margin below 10%, or net debt/EBITDA above 1.5x.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
The methodology documents used for this rating are NCR's Rating Principles published on 24 May 2022, NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022 and NCR's Corporate Rating Methodology published on 8 May 2023. For the full regulatory disclaimer please see the rating report.