Junk bonds : Chartered Semiconductor debt rating lowered to junk By Fitch

This article belongs to the Singapore stagflation watch story arc.

bloomberg.com :

Chartered Semiconductor Manufacturing had its debt rating cut to junk at Fitch Ratings on concern it's not generating enough cash. Junk bonds can raise a company's borrowing costs as a lower debt rating increases the perceived risk of a company's inability to pay debt. Chartered said it will lose money in Q3 2008. Chartered derives about two-thirds of its sales from the US, where household spending is projected to stall as wages fail to keep up with inflation and property values slump. Negative free cash flow was "substantial" at 20% of 2007 revenue. Chartered's free cash flow has been negative in 31 of the 34 quarters since the company sold shares in 1999. Chartered shares have slumped 44% this year, underperforming the 19% decline in Singapore's benchmark Straits Times Index.

- I started tracking Chartered's activities in a sort of offhanded way for personal reasons : Biow used to work there, a brother-in-law still works there, and my own parents had lost some money buying their shares earlier. In the larger scheme of things, this company plays an important part in Singapore's economic landscape, being a billion-dollar company with over 5,000 employees. But at the rate things are going, the only billion-dollar thing about Chartered would probably be their billion-dollar debt.

When people asked me what was wrong with Chartered several months ago, I would tell them, "Fab 7 is idle". Fab 7, of course, being the higher-end facility where they make the latest, greatest chips (or rather, used to be latest) with the higher margins, such as the AMD64 processors and the chips for the Microsoft Xbox360 console. But with AMD not doing too well against Intel, and the Xbox360 not doing that great either, obviously that would go all the way upstream, and result in idled capacity - which isn't very good for very expensive equipment, which I'd suppose, looking at their debt position, they borrowed money to buy in the first place. And as we know, semiconductor manufacturing equipment tends to get obsolete frighteningly fast.

It's not a pretty picture, and it explains why Chartered's shares fell to just 40 cents today, from over $1 around Q4 2007, down from, I don't have the exact figures right here but I've heard it was over $10 back in the dotcom times. My worst mining juniors have done better than that. Not a pretty picture.

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