Nordic Credit Rating (NCR) has placed its 'BBB-' long-term issuer rating on Norway-based Nordic Semiconductor ASA on watch negative. The 'N3' short-term issuer rating and 'BBB-' senior unsecured issue rating have also been placed on watch negative.
Rating rationale
The watch placement follows an announcement that Nordic Semiconductor will acquire software-as-a-service provider Memfault for USD 120m, a transaction which we expect to increase debt and elevate financial risk. We recognise that the acquisition would enable Nordic Semiconductor to monetise its software products, create cross-selling opportunities, and possibly enhance the competitiveness of its product offering. In our view, the acquisition would have a minimal effect on Nordic Semiconductor's business mix, market position, diversity and profitability due to the limited scale of the target.
Nordic Semiconductor has obtained senior unsecured bridge financing of USD 110m to enable the transaction. The remainder of the purchase price is financed through cash. We currently have limited visibility into the company's intended long-term capital structure, which could influence our assessment of the transaction's impact on financial risk and, consequently, the rating. Previously, our base-case forecast projected Nordic Semiconductor's NCR-adjusted net interest coverage at 6.2–13.2x, with free operating cash flows breaking even in early 2026. If the acquisition is fully debt financed, we expect NCR-adjusted net interest coverage to fall below 6x over the next two years, with limited free operating cash flow generation. We anticipate Nordic Semiconductor to experience significant margin expansion, which should offset the impact of increased working capital and capital spending during our forecast period through 2027. Increased debt and expectations of limited organic repayment capacity over the next years increases the risk associated with negative deviations from our base-case forecast.
Our view of Nordic Semiconductor's financial flexibility is influenced by its operational commitment to maintaining cash equivalent to one year's research and development (R&D) spending (about USD 150m) on its balance sheet. In our opinion, this requirement is essential for conducting business with some of its largest customers and could result in increased debt if earnings decline, the R&D budget rises, or the cash balance decreases. While the company has some short-term flexibility in connection with this requirement, we consider this cash to be restricted.
Watch negative
The watch placement reflects our uncertainty about Nordic Semiconductor's long-term capital structure and the Memfault transaction's impact on its financial risk profile. We see a risk that the transaction could increase financial leverage without offsetting measures, which could pressure key credit metrics and debt-servicing capabilities, in turn negatively affecting our view of financial risk and risk appetite. Depending on the final long-term capital structure, the rating could be lowered by up to two notches.
We could lower the rating if Nordic Semiconductor proceeds with the transaction using full or partial debt financing. This would likely weaken key credit metrics and elevate financial risk due to the company's limited free operating cash flows, which would in turn limit organic deleveraging capabilities. The eventual rating level would depend on the proportion of debt financing.
We could affirm the current long-term rating if the company appears likely to maintain NCR-adjusted net debt/EBITDA below 1x (treating one-year R&D expenses as restricted cash) as of end-2026. Maintaining the current rating would depend on the company's ability to generate higher margins, resulting in meaningful free operating cash flow and organic deleveraging over time.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB- | BBB- |
| Outlook: | Stable | |
| Watch: | Watch Negative | |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB- | BBB- |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.