Newport Beach-based chip maker Conexant Systems Inc. faces the prospect of more costly borrowing just as the company could most use some cash.
To weather a steep sales downturn and mounting losses, Conexant has been drawing down its cash in the past couple of quarters. And, with a lackluster market for chip stocks, the company no longer is banking on an infusion of cash from an initial public offering of its Mindspeed Technologies unit.
Conexant is in talks with bankers about new lines of credit after Credit Suisse First Boston Corp. and others ended the company’s $475 million credit line on May 9. The creditors walked after Conexant fell out of compliance with financial terms set out when the credit was extended before the company’s 1999 spin off from Rockwell International Corp.
Specifically, Credit Suisse and the others pulled their backing because Conexant failed to meet its interest coverage ratio, which indicates what portion of debt interest is covered by a company’s cash flow.
Observers say Conexant shouldn’t have a problem finding new credit. But the company is likely to end up paying higher interest than it has previously.
“They will be able renew their credit line. I don’t see a problem with that,” said John Prichard, a portfolio manager at Newport Beach-based money management firm Knightsbridge Asset Management LLC who looked at investing in Conexant last year and has followed the company. “What this would mean is that interest costs will go up.”
Conexant’s credit facility with Credit Suisse dates back to 1998 and was expanded last year from $355 million. The company hasn’t used the credit since June 1999. Credit Suisse was set to be one of the lead underwriters for the planned spinoff of Mindspeed Technologies, shares of which are set to be distributed to Conexant shareholders by November.
Conexant has backed off from trying to raise money in a public offering for Mindspeed, the company’s fastest-growing business. Instead, Mindspeed could end up eventually trading on its own, not unlike the split into public companies Aliso Viejo-based Fluor Corp. did with Massey Energy Co.
Given Credit Suisse’s long-running ties to Conexant, one observer said he was surprised the two weren’t able to strike a new pact.
“Normally in such a situation, CSFB would have tried to renegotiate the terms with Conexant,” said an investment banker who asked not to be quoted. “They (CSFB) would only withdraw their credit line as a last resort.”
The withdrawal of credit is the latest in a string of woes at Conexant, which has watched its market value plunge from more than $25 billion a year ago to around $2 billion of late.
Earlier this year, a sharp slowdown in orders from Conexant’s biggest customers left the maker of chips for cable and analog modems with big inventories. To meet the challenge, Conexant’s management has instituted a hiring freeze, cut back on staff and trimmed operating costs.
“Conexant’s problems are industry-wide. Anybody who is selling to Lucent or Cisco Systems is having problems,” Prichard said.
For Conexant’s second quarter ended March 31, the company posted a $398 million operating loss, which widened from $105 million in the year-ago period.
Meanwhile, Conexant is drawing down cash. For the first six months of its fiscal year, the company had a $707 million cash outflow compared with an inflow of $532 million for the same period last year. If the company has a similar outflow over the next six months, it could run out of money, observers say.
As of March 31, Conexant had $439 million in cash and short-term securities, down from $831 million as of Sept. 30.
A Conexant representative said that the company’s cash position would improve once it negotiates a new line of credit. And the company has said its cost-reduction plan could result in $200 million in annualized savings once it is implemented fully in the next five months. n
