HONG KONG: S&P Global Ratings has affirmed its ‘AA-‘ issuer credit ratings on Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). S&P also revised liquidity assessment on the company to strong from exceptional.

TSMC’s plan to accelerate investments in advanced 7 nanometer (nm) and 5nm process technology should help it maintain its technology leadership, support faster growth than its foundry peers, and generate very strong, albeit slightly lower, EBITDA margins in 2019-2020.

“We also expect TSMC to remain debt free on an adjusted basis over the period. That’s despite the company’s discretionary cash flow could turn negative temporarily during the period due to its plan to raise its capital expenditure (capex) significantly to US$14 billion-US$15 billion annually in 2019 and 2020, up from TSMC’s previous guidance of US$10 billion-US$11 billion for 2019”.

S&P has revised assessment of TSMC’s liquidity to strong from exceptional to reflect the impact of the significant increase in capex and the company’s lower cash balance and short-term investments at the end of September 2019. “We now expect that TSMC’s ratio of liquidity sources to liquidity uses to be 1.5x-2.0x for the 24 months ending Sept. 30, 2021. The revision has no impact on the ratings”.

The stable outlook reflects that TSMC’s dominant market position, strengthened leadership in process technologies, and more diversified end-market applications will help the company sustain strong profitability and cash flow over the next two years. “We also expect TSMC to remain debt free on an adjusted basis during the period. This is despite the company’s proposed significant increase in capex could lead to negative discretionary cash flow in 2019-2020”.

“We may lower the long-term rating over the next two years if TSMC fails to maintain its leading technology position and loses market share, resulting in significant deterioration in its profitability and cash flow generation. We may also lower the rating if the company pursues a less-prudent financial policy such as through more aggressive shareholder distributions or mergers and acquisitions, and takes on high leverage. A ratio of debt to EBITDA exceeding 1.0x for an extended period, increased cash flow volatility due to mergers and acquisitions, or a weakening competitive position could indicate such a change”.

Higher volatility and competition in the global semiconductor foundry industry and still-significant customer concentration constrain the potential for an upgrade over the next two years.