Fitch Ratings has assigned a first-time 'BB+' Long-Term Issuer Default Rating (IDR) to
The Rating Outlook is Stable. In addition, Fitch has assigned a 'BBB-'/'RR1' senior secured term loan issue rating to the company's planned issuance.
MKS is seeking to issue a
Key Rating Drivers
Cyclicality: Fitch believes the acquisition of
The addition of
Diversification: The addition of
Financial Policies: The company has demonstrated a willingness to utilize elevated financial leverage in pursuit of strategic M&A, but management has historically prioritized debt repayment to quickly reduce debt levels thereafter. Fitch expects that management will maintain the policy post the
Previously, the 2016 acquisition of Newport was financed with the issuance of a
FCF: MKSI generated FCF margins averaging 14% over the most recent four years and has demonstrated strong cash flow resiliency during adverse environments with a 2019 margin of 7% in a period that saw semiconductor production volumes and aggregate industry capex declines of 3% and 8.5%, respectively. Fitch expects the current strong demand conditions to contribute to FCF margin expansion to 17% in fiscal 2023 as the additional scale from
Secular Tailwinds: MKSI benefits from strong secular tailwinds as increasing technological intensity and complexity across sectors generates demand for precision manufacturing and process control. The company's heritage in semiconductor capital equipment subsystems positions it well to benefit from the increasing cost and complexity of sustaining Moore's law that is expected to drive a 45% increase in wafer fab equipment spending by 2025.
In addition, demand growth for the company's Advanced Markets segment is supported by trends towards miniaturization, higher densities, expanded use cases and new materials across a variety of applications including printed circuit boards, digital displays, electronics packaging, solar panels, fiber optics, materials processing,, quantum computing and medical technologies.
Fitch expects the secular dynamics to lead to mid-cycle organic growth of 4%-6% per annum. In addition, Fitch believes the trends will extend MKSI's competitive advantages as technological capability, breadth of product portfolio, and deep partnerships with customers serve as increasing points of differentiation.
Strategic Fit: Fitch believes the industrial logic for the
Derivation Summary
Fitch evaluates MKSI pending its acquisition of
Fitch believes MKSI's technological leadership in process control and precision manufacturing has led to strong market shares with the company achieving leadership positions across 15 product categories. Despite leading share and technological capability, the company has historically been challenged by elevated cyclicality and constrained profitability, similar to TTM and
MKS scores well across operating metrics as Fitch expects a continuation of the constructive demand environment to result in consistent EBITDA margins of 29%-30% over the rating horizon, which compares well to the to the 22% peer median. In addition, low capital intensity and a small dividend, contribute to a favorable FCF profile with Fitch forecasting FCF margins to range 12%-17%, well above the 6% peer median. Fitch notes that recent and forecast EBITDA and FCF margins are consistent with the 'A' rating category. However, Fitch believes that the overall credit profile is weighed down by volatility of profitability, as seen recently in 2019 where an 8% decline in revenue contributed to 700 bps of EBITDA margin compression while FCF margins were reduced by roughly half to 7%. Relative to peers, Fitch believes the company's strategy to increase diversification and scale will moderate impacts from future down cycles as our stress case models demonstrate FCF margin compression to 12% in a hypothetical scenario similar to 2019, suggestive of a stronger credit profile than the similarly rated peers.
MKSI has demonstrated a willingness to utilize elevated financial leverage in pursuit of strategic M&A opportunities, but management has historically prioritized debt repayment to quickly reduce debt levels thereafter. Fitch expects that management will maintain the policy post the
Fitch believes the rating is supported by the leverage profile in line with similarly rated peers, declining cyclicality, strong FCF and growing competitive advantages, while historical volatility of profitability and a debt-funded acquisitive strategy act as the leading constraints of the rating in comparison to peers. No country-ceiling, parent/subsidiary or operating environment aspects impacted the rating.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Acquisition of
MKSI standalone growth of 24% in fiscal 2021, contribution of
EBITDA margin of 29% in fiscal 2021 with expansion of 50 bps per annum due to gradual realization of
Capital intensity of 3% per annum, consistent with historical average;
Dividends of
Debt repayments of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Reduced volatility of profitability;
Increased customer and end-market diversification;
Mid-cycle leverage or a publicly announced explicit leverage defined as total debt with equity credit/operating EBITDA at or below 2.75x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Mid-cycle leverage defined as total debt with equity credit/operating EBITDA at or above 3.5x;
Cash Flow from operations - Capex/total debt with equity credit sustained below 15%;
Sustained revenue declines or margin compression due to decreased bargaining power relative to customers or decreased competitive advantage.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Ample Liquidity: Fitch expects abundant liquidity for MKSI over the rating horizon. Pro forma for the transaction, liquidity will be comprised of
Issuer Profile
MKS provides process control and precision manufacturing solutions. Primary served markets include semiconductor, industrial technologies, life and health sciences, research and defense.
Summary of Financial Adjustments
Fitch made standard financial adjustments as described in the applicable ratings criteria.
Date of Relevant Committee
Sources of Information
The principal sources of information used in the analysis are described in the applicable criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING RECOVERY
MKS Instruments, Inc. LTIDR BB + New Rating
senior secured
LT BBB- New Rating RR1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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