Vanguard International Semiconductor Corp. Rating Affirmed At 'BBB-'; Outlook Stable
- Vanguard International Semiconductor Corp., a specialty foundry services provider in Taiwan, generated about new Taiwan dollar (NT$) 44 billion revenue and NT$15.7 billion EBITDA in 2024.
- We believe the technical support provided by TSMC to Vanguard's joint venture in Singapore and long-term contracts with key clients significantly lower execution and cash flow risk associated with the project.
- We expect Vanguard's debt leverage to peak in 2027 but gradually trend down thereafter, supported by stronger free operating cash flow from 2027, particularly from the joint venture.
- We therefore affirmed our 'BBB-' long-term issuer credit rating on Vanguard.
- The outlook remains stable to reflect our view that Vanguard's enhanced foundry services and lower execution risk can temper the negative impact of a temporary spike in leverage on the ratings.
TAIPEI (S&P Global Ratings) April 28, 2025--S&P Global Ratings took the rating action described above.
Technology and resource support from TSMC help reduce execution risk for Vanguard's Singapore joint venture. Vanguard's largest shareholder, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), will provide its proven process technology and technical assistance in the construction of Vanguard's new 12-inch fabrication (fab) in Singapore. Vanguard will operate the new fab through a joint venture agreement with NXP Semiconductors N.V. We believe that through the technical assistance and relevant resources provided by TSMC, Vanguard could complete the construction of the fab and ramp up production with good yields in a timely manner.
The joint venture agreement and long-term contracts with key clients alleviate demand risk and margin uncertainty. Under the agreement, NXP has committed to utilize the fab's capacity based on its shareholding in the joint venture, which could significantly lower demand risk for the joint venture because it provides NXP with much needed 12-inch wafer foundry capacity. We believe NXP's 40% ownership in the joint venture demonstrates the company's commitment to utilize the fab's available capacity. The proven process technology from TSMC, Vanguard's cost competitiveness, and the favorable location of the fab also strengthen NXP's incentive to fully utilize its capacity commitment, in our view. NXP does not possess its own 12-inch wafer foundry capacity.
Success of the new 12-inch fab could moderately strengthen Vanguard's business position. This is because the 12-inch fab could allow Vanguard to extend its technology nodes to 40 nanometers, with a broader product offering and more diversified downstream applications. The company can also mitigate the associated technology migration risk by gradually using the new 12-inch capacity to manufacture some of its products. This could provide more economical benefits, given the larger wafer size compared with its existing 8-inch capacity. Furthermore, Vanguard could reduce exposure to the volatile display driver IC segment, because the new facility will focus on mixed signal, power management, and analog products. These factors could enhance the company's operating scale, market position and profitability stability over the long run.
However, the fab's limited initial capacity and Vanguard's lack of operating track record in 12-inch wafer foundry services constrain the initial benefits from the joint venture. Vanguard plans to commission the new fab in 2027 and increase capacity to 55,000 wafers per month in 2029, which will still be much smaller than its larger peers' 12-inch wafer services. Vanguard will also need to establish a solid operating record, including a satisfactory yield rate and sustainable utilization to prove its manufacturing capabilities. That's despite the technical assistance and relevant resource support from TSMC. Meanwhile, Vanguard will continue to face intense market competition because it will still only be a provider of foundry services using mature process technology, which faces higher overcapacity risk.
Enhanced service offerings and reduced cash flow uncertainty alleviate heightened leverage risk. We forecast Vanguard's ratio of debt to EBITDA could materially rise to 3.3x in 2027, from a net cash position in 2024. This is to support high capital expenditure (capex) for the Singapore fab. Vanguard has reduced its debt funding needs through equity injections and capacity access fees from NXP, which will account for around 40% of the planned US$6.8 billion spending on the first phase of the fab. We also assume that prepayments from key clients for long-term purchase contracts will help fund the expansion.
The stable rating outlook on Vanguard reflects our view that the company could significantly lower its execution and cash flow risk associated with its 12-inch fab project over the next two years. This should enable the company to generate stronger cash flow to manage its debt leverage over the same period. Technology assistance from TSMC, a joint venture agreement with NXP, and long-term contracts secured by prepayments from key clients underpin such derisking. This is despite Vanguard's leverage could remain elevated for a relatively long period to support the high capex for the 12-inch fab.
The outlook also reflects our view that Vanguard will maintain a prudent expansion strategy and financial management to limit the financial impact of any future expansion in 12-inch wafer foundry services.
We could lower the long-term rating on Vanguard if:
- The company's debt leverage stays materially higher than our forecast without demonstrating deleveraging trend towards a ratio of debt to EBITDA of 2.0x after the initial high capex for the fab. This could happen if: (1) the 12-inch wafer project suffers a severe cost overrun or project delay; (2) a prolonged market downturn or the underutilized of the 12-inch fab causes much weaker cash flow generation than our forecast; or (3) Vanguard significantly increases shareholder friendly actions or engages in significant investments or acquisitions without capital balancing measures; or
- Vanguard's EBITDA margin dips and stay persistently below 20%, which could happen if: (1) aggressive capacity additions from other mature node foundries lead to sustained overcapacity and intensifying price competition that Vanguard fails to absorb; (2) Vanguard fails to ramp up the new 12-inch fab with a satisfactory yield rate or a competitive cost structure; or (3) the company fails to develop competitive technologies and products, which leads to a major loss of customers and business opportunities.
We may upgrade Vanguard if the company delivers above-average revenue growth and sustains its profitability through industry cycles with extended technology nodes. This would require Vanguard to improve its performance and stability with a larger operating scale and more diversified product portfolio, including significant growth in 12-inch wafer foundry services for more specialty applications such auto and industrial, while at the same time maintaining the debt-to-EBITDA ratio materially below 2.0x.
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| Primary Contact: | James Hung, CFA, Taipei 886221756839; james.hung@spglobal.com |
| Secondary Contact: | Anne Kuo, CFA, Taipei 886221756828; anne.kuo@spglobal.com |
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