Rating Action: Moody’s upgrades MACOM’s CFR to B2 and senior secured to Ba2; outlook positiveGlobal Credit Research – 24 Mar 2021New York, March 24, 2021 — Moody’s Investors Service, (“Moody’s”) upgraded the ratings of MACOM Technology Solutions Holdings, Inc (“MACOM”), including the Corporate Family Rating (CFR) to B2 from B3, the Senior Secured Term Loan (Term Loan) to Ba2 from B3, and the Speculative Grade Liquidity (SGL) rating to SGL-2 from SGL-3. The outlook is positive.The upgrade to the CFR follows MACOM’s announced plans to repay about $500 million of the Term Loan using $100 million of balance sheet cash and the net proceeds from the issuance of Convertible Senior Notes due 2026 (Convertible Notes) , which will improve free cash flow (FCF) generation due to the reduction in cash interest expense. The upgrade to the CFR and the positive outlook also reflects MACOM’s improved operating profile due to strengthening end market demand and the positive impact of MACOM’s operational restructuring efforts. Moody’s anticipates that the strengthening end market demand and expense discipline will allow MACOM to generate increasing profitability over the near term.Upgrades:..Issuer: MACOM Technology Solutions Holdings, Inc….. Corporate Family Rating, Upgraded to B2 from B3…. Probability of Default Rating, Upgraded to B2-PD from B3-PD…. Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3….Senior Secured Bank Credit Facility, Upgraded to Ba2 (LGD2) from B3 (LGD3)Outlook Actions:..Issuer: MACOM Technology Solutions Holdings, Inc…..Outlook, Changed To Positive From StableRATINGS RATIONALEThe B2 CFR reflects MACOM’s financial leverage, which at 6.5x debt to EBITDA (twelve months ended January 1, 2021, Moody’s adjusted) is high given MACOM’s small scale and the volatility of demand in most of the end markets it serves. MACOM competes against a number of semiconductor firms that have much greater financial resources and product breadth, such as Broadcom Inc, which Moody’s believes places MACOM at a competitive disadvantage and exposes the company to the risk of product displacement. The CFR also reflects MACOM’s exposure to the volatile Telecom and Data Center end markets. These two segments account for about 60% of revenues and contribute to revenue volatility as these end markets tend to experience surges and pauses in demand driven by the capital expenditures of the ultimate end market customers, which are comprised of a limited number of very large telecommunications carriers and hyperscale data center owners. Moreover, with about 45% of revenues generated by sales through distributors, and most sales done through purchase orders rather than under long term contracts, MACOM has limited visibility into end market demand.Still, the reduction of the cash interest expense due to the issuance of the Convertible Notes to repay a large portion of the higher cash interest Term Loan, will contribute to an improvement in MACOM’s free cash flow generation. Moreover, Moody’s expects that revenues will grow in the upper single digits percent, driven by continued strong end market demand in the Industrial & Defense (I&D) segment and a recovery in Data Center demand later in the year. The increasing revenues and MACOM’s improved cost structure, should drive further growth in profitability such that Moody’s expects that financial leverage will steadily improve, with debt to EBITDA (Moody’s adjusted) declining toward 5x over the next 12 to 18 months. The I&D segment, which comprises about 40% of revenues, benefits from generally longer product cycles, providing a base of more stable revenues relative to MACOM’s other two segments.As of January 15, 2021, the Ocampo family holds 27.9% of the shares. With this concentrated ownership, we believe that MACOM has the capacity to manage the company more aggressively than if the vast majority of the shares were publicly-traded. We believe that this ownership structure makes it more likely that MACOM could engage in a spirited acquisition program. Nevertheless, we believe that the pool of public shareholders, though limited in number, does limit the risk that MACOM will make significant use of leverage to fund an acquisition program or shareholder returns.The positive outlook reflects Moody’s expectation that revenues will grow in the upper single digits percent and that the EBITDA margin (Moody’s adjusted) will improve toward the low 20 percent level. This will contribute to deleveraging, with debt to EBITDA (Moody’s adjusted) improving toward 5x over the next 12 to 18 months. With the increased EBITDA and the lower cash interest burden, Moody’s expects that FCF to debt (Moody’s adjusted) will be maintained above the mid-teens percent level over the period.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if MACOM:** Generates organic revenue growth at least in the upper single digits percent** Sustains the EBITDA margin (Moody’s adjusted) of around 20% or higher** Maintains FCF to debt (Moody’s adjusted) above 15%** Maintains a conservative financial policyThe ratings could be downgraded if:** Revenues remain flat or decline** The EBITDA margin (Moody’s adjusted) declines to below 15%** FCF to debt (Moody’s adjusted) declines toward 5%.The Ba2 rating of the Term Loan reflects its seniority in the capital structure, the collateral package, and the large cushion of unsecured liabilities, including the unrated Convertible Notes.The Speculative Grade Liquidity (SGL) rating of SGL-2 reflects MACOM’s good liquidity profile. Moody’s expects that MACOM will keep at least $100 million of cash and short term investments and will generate FCF of at least $70 million over the next year. Moody’s expects that the $160 million senior secured revolver maturing November 2021 (Revolver) will remain undrawn given the strong FCF generation. The Revolver is subject to a net leverage covenant (as defined in the credit agreement), which is tested when usage exceeds 35%. There are no financial maintenance covenants governing the Term Loan.MACOM Technology Solutions Holdings, Inc.(“MACOM”), based in Lowell, Massachusetts, produces high performance analog communication semiconductor products across the radiofrequency spectrum. These include integrated circuits and discrete semiconductors used in data center, telecommunications infrastructure, industrial, and defense market applications, such as optical networking, telecom backhaul, and RADAR. MACOM utilizes a fab-lite manufacturing model, outsourcing a large portion of its semiconductor chip manufacturing, which limits capital expenditures.The principal methodology used in these ratings was Semiconductor Methodology published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1248106. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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