S&P places Western Digital on watch

S&P said it placed its ratings on Western Digital Corp. on CreditWatch with negative implications.

The placement follows Monday’s announcement that WDC plans to spin off its flash business to shareholders. Management expects the transaction will close in the second half of calendar 2024. The hard disk drive business will stay with WDC.

“We believe near-term credit metrics will not be indicative of default risk given the deep inventory correction occurring in the HDD market caused by hyperscale data center customers' aggressive purchases in fiscal 2022 (ending in June) when supply chains were tight, and the subsequent drawdown of those inventories as supply improved. We will base our rating outcome on our view for mid-cycle credit metrics, which we expect to see in fiscal 2025 or 2026.

“We estimate HDD revenue in the mid-$7 billion area, S&P Global Ratings-adjusted EBITDA margin around 20%, EBITDA of $1.5 billion, and free operating cash flow (FOCF) around $500 million under a mid-cycle scenario,” S&P said in a statement.

The agency warned, “These metrics yield S&P Global Ratings-adjusted leverage of 5x and FOCF to debt in the mid-single-digit percentage area, which would likely justify a multiple-notch downgrade.”

S&P said it aims to resolve the negative watch once it knows more details about the full suite of operating metrics for the HDD business and plans for the post-spinoff capital structure.

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