Nordic Credit Rating said today that it had revised the outlook on its 'BBB' long-term issuer rating on Norway-based Nordic Semiconductor ASA to negative from stable. The long-term rating was affirmed, as was the 'N3' short-term rating.
Rating rationale
The outlook revision reflects continued weak demand and reduced predictability of market recovery. It also reflects the possibility that recent adverse trends could be more persistent than we previously expected. Nordic Semiconductor is facing reduced end-user demand and an increase in customer inventories as a result of previous supply chain issues. These factors have resulted in lower revenues and reduced market visibility beyond the next quarter. The company has been unable to cancel wafer orders for 2023 and is consequently building up working capital, which could force it to use a portion of a revolving credit facility. Management expects to be able to reduce working capital from early 2024, thereby lowering the need for external financing.
The recent fall in revenues has been largely driven by broad market customers. Conversely, large customers account for a growing share of revenues and underpin the company's market share. This effectively demonstrates Nordic Semiconductor's strong customer relationships with world-leading technology companies. While we expect the adverse conditions facing the company to prove temporary in the current downturn, a continued negative environment could increase business risk. Nordic Semiconductor has announced layoffs intended to reduce its cost base and improve future cash flow. The redundancies could negatively impact longer-term development, which in turn could pressure the company's role as a technological leader if the market downturn persists.
Positively, Nordic Semiconductor maintains an extremely strong balance sheet and low financial leverage. We expect the company to maintain a negative net debt position, even if it obtains additional financing and cash flow weakens in the near term. We could revise our view of financial risk if leverage becomes a concern.
If Nordic Semiconductor were to issue senior unsecured debt, we would likely rate such instruments 'BBB' to reflect the fact that that gross secured debt to EBITDA has remained below 2.0x on a sustained basis. Currently, the company has no secured debt.
Negative outlook
The negative outlook reflects the possibility that market conditions could remain weak, reducing Nordic Semiconductor's ability to invest sufficiently in research and development to sustain its leading position in wireless communication technology. It also reflects the possibility that weaker market conditions could increase financial leverage. We could revise the rating to stable if increased end-user demand and lower customer inventory levels lead to improved demand for the company's products, thereby improving margins and cash flow. We could lower the rating to reflect continued low demand resulting in an EBITDA margin below 10% over a protracted period, or major acquisitions or other investments leading to net debt/EBITDA above 1.5x.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB | None |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@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.