IPO Would Help Freescale Cut Debt to 7X, S&P Says

Standard & Poor’s Ratings Services appears to like Freescale Semiconductor’s plans to go public again.

S&P said Monday it has placed all of its ratings for Freescale, including the ‘B-‘ corporate credit rating, on CreditWatch with positive implications.

The change comes after Freescale filed for an IPO last week. The Austin-based chipmaker could raise as much as $1.15 billion with the offering. The company is expected to use much of the IPO proceeds to cut its massive debt load and for general corporate purposes. Freescale has about $7.6 billion in long-term debt, as of Dec. 31, plus another $602 million in other liabilities.

Freescale could experience “rapid de-levering” with the IPO proceeds, in addition to its expanding base of EBITDA generation, wrote Lucy Patricola, an S&P credit analyst, in a research note Monday. Patricola calculates Freescale had $922 million EBITDA in fiscal 2010 while debt to EBITDA was 8.25X. Assuming all proceeds are used to reduce debt, leverage would decline to 7X, she said. In fact, leverage could drop to below 6X by the fiscal year-end 2011 after the IPO, Patricola said.

But wait. FreeScale is currently owned by Blackstone, Carlyle, Permira and TPG. The PE firms took the company private in 2006 and own a combined 99.98% of the chipmaker. It was not clear how much the buyout shops intend to sell–or if they would sell anything– in the offering. Buyout shops typically hold their shares during an IPO and sell once the lockup period is over.

Even if the PE firms choose to sell nada, Freescale will get at most $1.5 billion, which would reduce their long-term debt to about $6 billion. This is still a lot. Of course, the IPO could get resized, and Freescale may boost the offering, but it may also cut it.

Still, it’s nice to see that Freescale may be able to reduce some of its debt, especially since all that leverage isn’t its fault. The PE consortium acquired Freescale for $17.6 billion after it was spun out by Motorola. As part of its acquisition, the Blackstone-led group loaded Freescale up with debt. Freescale had only $832 million in long-term debt in September 2006 (plus an additional $353 million in other liabilities), according to an earnings statement from that time. That has ballooned to $7.6 billion in long-term debt.

Patricola expects Freescale to continue to improve and will experience “modestly positive operating trends,” she wrote.