MagnaChip Semiconductor S.A. -- Moody's changes MagnaChip's rating outlook to positive

RATINGS RATIONALE

"The change in outlook reflects improvements in MagnaChip's business and financial profile as it has diversified its product portfolio by building a Power Solutions (PS) division and strategically focusing on the applications segment, such as smartphones and tablets, which continues to see strong demand," says Yoshio Takahashi, a Moody's Assistant Vice President, adding "Growing earnings from the PS business will continue to offset the ongoing decline in earnings from the traditional Display Solutions (DS) business."

"Furthermore, despite challenging economic conditions, MagnaChip's core foundry business continues to generate relatively stable earnings," comments Takahashi.

Revenue and profit contributions from DS are expected to continue to decline because of weak demand for TVs, however, the company's shift to the growing applications segment (which includes small- and medium-sized displays), as well as its long-established relationships with leading Korean customers, will also mitigate downside risk on earnings in this segment.

Accordingly, Moody's expects Magnachip's adjusted debt/EBITDA to improve over the next 2 years and remain in the 1.5x-2.0x range. The build-up in retained earnings will result in adjusted debt/capitalization improving to around 55% in 2012 (down from about 60% in 2011) and 50% in 2013.

MagnaChip's liquidity profile remains strong, given the absence of mandatory debt payments and relatively low capital expenditure due to its focus on analog and mixed signal chips. It also held USD166 billion in cash and deposits in 3Q 2012, against USD202 billion in total debt maturing in 2018. However, such a liquidity position is required given that the company does not currently have a committed revolving credit facility in place.

Despite the improved business and financial profile, the rating remains constrained by MagnaChip's end exposure to the volatile and competitive consumer electronics industry as well as a high degree of customer concentration, although this is an industry-wide phenomenon. While MagnaChip is relatively lowly geared, this is a function of its 2009 debt restructuring following default on $845 million of debt and its access to bank financing has been limited.

Upward rating pressure could arise if the company can: (1) maintain its solid quarterly performance by improving its competitive positions and diversifying its customers and applications; (2) sustain its strong liquidity position; and (3) improve access to financing. Maintaining debt/EBITDA in the 1.5x-2.0x range and debt/capital below 55% would also be positive for the rating.

Downward rating pressure is limited, given the positive outlook. However, the outlook could revert to stable if: (1) the company's profitability and cash flow weakened, such that debt/EBITDA increases to 2.5x-3.0x and EBITDA/interest falls below 3.0x; (2) its balance sheet liquidity deteriorates significantly as a result of aggressive investment plans, high dividend payments, or negative free cash flow or; (3) it fails to improve access to bank facilities.

The principal methodology used in rating MagnaChip was the Global Semiconductor Industry Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

MagnaChip is a Korean-based designer and manufacturer of analog and mixed-signal semiconductor products mainly for high-volume consumer applications, such as TVs, PCs, mobile phones, and tablets.

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Yoshio TakahashiAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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