Tower Semiconductor Ltd.

May 3, 2022

 

Research Update

 

Rating Raised To 'ilAA' On Continued Growth In Operations; Outlook Stable

 

Primary Credit Analyst:

Sivan Mesilati, 972-3-7539735 sivan.mesilati@spglobal.com

 

Additional Contact:

Tom Dar, 972-3-7539722 tom.dar@spglobal.com

 

Table of Contents

 

Rating Action Overview	2
Rating Action Rationale	2
Outlook	3
Downside Scenario	3
Upside Scenario	3
Company Description	3
Base Case Scenario	4
Key Metrics	4
Liquidity	4
Covenant Analysis	5
Environmental, Social, And Governance	5
Capital structure	5
Analytical conclusions	5
Modifiers	5
Related Criteria And Research	5
Ratings List	6

1 | May 3, 2022

Research Update

Research Update

 

Rating Raised To 'ilAA' On Continued Growth In Operations; Outlook Stable

 

Rating Action Overview

 

 

 

 

 

 

Rating Action Rationale

 

 

Accordingly, the Company's adjusted EBITDA grew by about 32% to about $470 million. At the same time, the Company's adjusted debt decreased to about $315 million due to the repayment of Series G bond maturities. As a result, the Company’s gross debt to EBITDA in 2021 was about 0.7x, compared with about 1.1x in 2020.

 

 

We also assume that the Company will continue supporting growth in upcoming years, and therefore will refrain from distributing dividends in the short term. As a result, we expect adjusted gross debt to EBITDA to be in the 0.5x-1.0x range in the next two years.

 

Outlook

 

The stable outlook reflects our assessment that the Company will maintain its competitive position in the analog chip market and strong liquidity in the medium term. We also expect the Company to continue improving its facilities’ utilization rates. We expect the Company to maintain an adjusted gross debt to EBITDA ratio below 1.5x, commensurate with the current rating.

 

Downside Scenario

 

We may lower the rating if the Company’s competitive position is undermined. This could happen if market conditions worsen, leading to lower utilization rates in the Company’s facilities and to a continued or material decline in profitability. The rating will also come under pressure if the Company consistently fails to generate free positive cash flows and if its adjusted gross debt to EBITDA exceeds 1.5x.

 

Upside Scenario

 

We may consider a positive rating action if Tower’s business risk profile materially improves, as reflected, among other things, by a higher market share, materially improved profitability, wider geographical spread of its plants, and a wider clientele base and product variety compared with peers.

 

Company Description

 

Tower Semiconductor Ltd. is an Israeli manufacturer of semiconductors and integrated circuits (“chips”). It is a pure-play foundry, i.e. focused on production according to clients’ or third parties’ specifications. Chips produced by the Company are embedded in a wide variety of products in various markets, including electronic consumer products, personal computers, communication products, auto products, industrial products and medical products. Tower also provides engineering support services and complimentary manufacturing services. The Company produces in eight facilities located in Israel, U.S.A., Japan and Italy.

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Base Case Scenario

 

Our base case scenario is underpinned by the following assumptions:

 

 

 

 

 

 

We are taking into account gross debt without deducting cash.

 

Key Metrics

 

A - actual. E – Estimate. FFO – funds from operations.

Liquidity

 

According to our criteria, the Company’s liquidity is “strong”. We estimate that the ratio between the Company’s sources and uses will exceed 1.5x in the next 12-24 months. This assessment mainly reflects expected operating cash flow and the Company's cash and liquid investment balance, which are sufficient to support its investment and working capital needs. We note that the Company has a large share of liquid and available assets to finance its debt maturities in the next two years. In addition, the Company intends to avoid distributing dividends in the medium term in accordance with its organic-growth-oriented strategy.

 

In our base-case scenario we estimate the Company's main sources in the 12 months starting January 1, 2021, to be as follows:

 

Our assumptions regarding the Company’s main uses for this period are:

 

 

 

Covenant Analysis

 

We expect the Company to maintain sufficient headroom (over 30%) on all financial covenants. According to the terms of its bond series, the Company must maintain a net financial debt to EBITDA ratio of up to 2.5x and equity of at least $850 million.

 

Environmental, Social, And Governance

 

ESG Credit Indicators: E-2, S-2, G-2

 

ESG factors have an overall neutral influence on our credit analysis of Tower Semiconductor Ltd.

 

Issue Ratings--Subordination Risk Analysis Capital structure

 

As of December 31, 2012, Tower's capital structure included unsecured senior bonds amounting to about $64 million issued by the Company and bank loans to TPSCo amounting to about $96 million.

 

Analytical conclusions

 

We rate Tower’s debt at ‘ilAA’, identical to the issuer rating, as we believe the subordination risk in its capital structure is negligible.

 

Modifiers

 

Diversification/portfolio effect: Neutral

Capital structure: Neutral

Liquidity: Neutral

Financial policy: Neutral

Management and governance: Neutral

Comparable ratings analysis: Positive

 

Related Criteria And Research

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratings List

 

S&P Maalot is the commercial name of S&P Global Ratings Maalot Ltd. For a list of the most up-to- date ratings and for additional information regarding S&P Maalot’s surveillance policy, see S&P Global Ratings Maalot Ltd. website at www.maalot.co.il.

 

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