Research: Rating Action: Moody’s assigns TSMC’s proposed senior unsecured notes Aa3

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Hong Kong, July 19, 2022 – Moody’s Investors Service has approved the proposed Secured Senior Unsecured Notes issued by TSMC Global Ltd. – a wholly owned subsidiary of Taiwan Semiconductor Manufacturing Co Ltd (TSMC, Aa3 stable) – are assigned a rating of Aa3. – and unconditionally and irrevocably guaranteed by TSMC.

The rating outlook is stable.

TSMC will use the proceeds from the proposed bonds for general corporate purposes.

REASONS FOR VALUATION

“The Proposed Offering will enhance TSMC’s already strong liquidity and maturity profile without materially impacting its credit metrics. This is because the debt increase is being offset by higher earnings and strong net liquidity,” said Chenyi Lu, Moody’s vice president and chief loan officer.

“TSMC’s Aa3 rating is supported by its technology leadership in the growing market for applications processors for smart devices. As a leading foundry service provider, the company is well positioned to extend its technological lead in advanced nodes and suite of intellectual property technologies to meet increasing performance requirements,” added Lu.

The rating is also supported by the company’s open and independent business model, as TSMC focuses on manufacturing its customers’ designs and does not develop its own chipset or compete with its customers. This model has led to many long-term customer relationships and won new customers.

The rating also reflects TSMC’s strong economies of scale, which have enabled it to generate the highest profit margin in the industry, minimize cash flow volatility, and continue to invest even in downturns.

TSMC is prudently financially managed with strong net cash and low levels of debt. These characteristics result in a strong capital structure with a large financial buffer for business expansion, shareholder returns and potential merger and acquisition activity.

However, the Aa3 rating is constrained by the capital intensive and cyclical nature of the semiconductor industry. TSMC needs to make significant investments to fund continued technological development and meet increasing demand from existing and new customers.

Moody’s estimates that TSMC revenue will grow 40% to NT$2.22 trillion in 2022. TSMC’s solid revenue growth is supported by strong demand for its advanced nodes (7-nanometer chips and below), particularly its 7-nanometer and 5-nanometer chips, which launched ahead of their competitors and gained significant market share to have.

Applications related to 5G wireless technology and high-performance computing will drive the enrichment of semiconductor content and drive demand for TSMC’s advanced technologies.

Moody’s also estimates that the company’s adjusted EBITDA margin will increase from 68.7% in 2021 to around 70% in 2022, thanks to a more favorable exchange rate and strong cost and expense controls.

Moody’s expects the company to maintain a strong net cash position over the next two years, which will provide it with a strong buffer against industry cycles and allow for business expansion. Its strong earnings growth will partially fund its investments, with its adjusted net cash position falling to NTD315 billion in 2022 from NTD438 billion in 2021.

Moody’s also expects TSMC’s adjusted debt/EBITDA to fall to 0.6x over the next two years from 0.7x in 2021, driven by higher earnings. This is partially offset by increased borrowing, including the planned issuance, to build up its cash reserve to support its operations and invest in growth. These strong financial metrics place TSMC appropriately in the Aa3 rating category.

FACTORS THAT COULD RESULT IN AN UPGRADE OR DOWNGRADE IN RATINGS

The stable outlook reflects Moody’s expectation that TSMC will maintain its leadership position in the pure foundry market. Moody’s also expects the company to maintain its (1) technology leadership, (2) strong and broad product offerings, (3) manufacturing excellence, (4) ability to smoothly migrate to more advanced technology nodes, (5) financial prudence, and (6) solid net cash position.

Moody’s could upgrade the rating if (1) TSMC improves its free cash flow generation while maintaining a solid net cash position to provide a strong financial cushion; and (2) the rating of the Government of Taiwan, China (Aa3 Positive) is upgraded because the Company conducts most of its operations and activities in Taiwan.

Moody’s could downgrade the rating if (1) TSMC’s market share steadily declines, (2) its profitability erodes persistently, causing its Adjusted EBITDA margin to fall below 55%-60% sustainably, (3) its balance sheet liquidity decreases, or (4 ) the company employs more aggressive financial policies that weaken its credit profile.

The main methodology used in these ratings was Semiconductors, published September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74959. Alternatively, you can also look at the Assessment Methods page https://ratings.moodys.com for a copy of this methodology.

Taiwan Semiconductor Manufacturing Co Ltd (TSMC) is a dedicated integrated circuit (IC) company established in 1987. It manufactures products for various platforms, covering a variety of smartphone, high-performance computing, Internet of Things, automotive and digital consumer electronics segments. The total capacity of the manufacturing facilities managed by TSMC, including its subsidiaries and joint ventures, was approximately 13 million to 14 million 12-inch equivalent wafers per year in 2021.

TSMC’s total revenue hit a new high of NTD1.59 trillion in 2021. The company is headquartered in Hsinchu Science Park, Taiwan and provides customer support, account management and technical services through offices in China, Europe, North America, Japan and South Korea.

LEGAL DISCLOSURES

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The first name below is the senior rating analyst for this credit rating and the last name below is the person primarily responsible for approving this credit rating.

Chenyi Lu
VP – Senior Loan Officer
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensweg
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

Clemens Cheuk Yiu Wong
Deputy General Manager
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

Approving office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensweg
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

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