Nordic Credit Rating (NCR) said today that it had lowered its long-term issuer rating on Norway-based Nordic Semiconductor ASA to 'BBB-' from 'BBB'. The outlook is stable. The short-term rating was affirmed at 'N3', while the senior unsecured issue rating was lowered to 'BBB-' from 'BBB'.
Rating rationale
The rating action on the long-term issuer rating reflects higher-than-previously-anticipated cyclicality and weakened demand in Nordic Semiconductor's end markets. It also reflects reduced revenue visibility and uncertainty about the likelihood of a rebound in those markets. In addition, we see a risk of increased need for debt financing due to restrictions imposed by some customers on the company's cash balance.
We have lowered our assessment of the operating environment as we no longer expect the niche market in which Nordic Semiconductor operates to be less sensitive to the cyclicality of the broader semiconductor industry. The company experienced sharp declines in demand across all of its markets in 2023, with group revenues declining by 30% year on year. This resulted in a sharp drop in profitability and negative operating profits in the fourth quarter. We believe that adverse economic conditions are likely to offset some expected improvements in NCR-adjusted EBITDA margins and constrain revenue growth due to less supportive pricing conditions. Nordic Semiconductor was unable to cancel wafer orders in 2023, which resulted in inventory build-up in a market downturn. Positively, we now expect the company to reduce inventories from their current levels, which should support operating cash flows in the remainder of the year.
We have lowered our assessment of Nordic Semiconductor's financial ratios to reflect the sensitivity of the company's credit metrics to operational commitments. Customers require the company to hold the equivalent of one year's research and development spending on its balance sheet, effectively restricting use to financing working capital and repayment of debt. We believe that revenue visibility is now lower than we previously thought and that diminished predictability of any recovery in end markets is likely to delay a rebound in revenues and margins.
Stable outlook
The stable outlook reflects our expectations that Nordic Semiconductor's operating profits will rebound by end-2024, although the timing and extent of any recovery remains unclear due to currently low revenue visibility in the broader semiconductor market. The outlook also reflects our expectations that the company will continue to invest in research and development and successfully develop new technologies, allowing it to sustain its position as market leader in the Bluetooth Low Energy niche. In addition, we expect Nordic Semiconductor to undertake operational improvements and seek to restore profitability.
We could raise the rating to reflect significantly increased scale, a broader product portfolio, and increased end market diversity. We could also raise the rating to reflect a sustained improvement in working capital management and an NCR-adjusted EBITDA margin above 30%.
We could lower the rating to reflect protracted negative market conditions and continued low visibility. We could also lower the rating if the company were to lose its technological leadership. The rating could also be lowered if the company were to experience negative free cash flows over a protracted period, resulting in increased need for debt to meet operating commitments.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB- | BBB |
| Outlook: | Stable | Negative |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB- | BBB |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@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 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.