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Array Tech, Inc. -- Moody's affirms Array Tech's B1 secured bank debt ratings; downgrades CFR to B2 following STI acquisition

·16 min read

Rating Action: Moody's affirms Array Tech's B1 secured bank debt ratings; downgrades CFR to B2 following STI acquisitionGlobal Credit Research - 16 Dec 2021New York, December 16, 2021 -- Moody's Investors Service ("Moody's") affirmed the first lien senior secured bank debt ratings of Array Tech, Inc. (Array) at B1. Concurrently, Moody's downgraded the company's CFR and PDR by one notch to B2 and B2-PD, respectively from B1 and B1-PD. The company's Speculative Grade Liquidity (SGL) rating was downgraded to SGL-3 (adequate liquidity) from SGL-2 (good liquidity). The ratings outlook is stable.The rating downgrades reflects risks stemming from the company's pending acquisition of Spain-based, Soluciones Técnicas Integrales Norland S.L. (STI). The acquisition will result in an increase in financial leverage at the same time that Array continues to face its own operational challenges. The recent significant rise in commodity prices (namely steel) and logistics costs have caused significant margin deterioration and resulted in a degradation in Array's cash flow. These challenges are exacerbated by Array's inherently lumpy, project-based work which results in significant volatility in revenue and earnings. The STI acquisition -- while it will increase scale and geographic diversity -- will also increase leverage, and add integration and execution risk as it enters into new international markets.The acquisition purchase price of approximately E570 million is being financed with both debt and equity. The cash portion of the purchase price will be largely funded by the company's recently issued $425 million 1% convertible senior notes due 2028 (unrated). The remaining cash portion of the acquisition is being funded by approximately $50 million of preferred stock. Further, up to an additional E55 million is payable in 2022 based on the amount that STI's full year 2021 exceeds an EBITDA threshold. The company expects the acquisition to close during the company's first quarter of 2022.The affirmation of the company's B1 first lien secured bank debt, despite the downgrade of the CFR, reflects the addition of a meaningful amount of newly issued unsecured convertible notes to the capital structure. The convertible notes are effectively and structurally subordinated to the bank debt, providing increased first loss absorption to the senior secured lenders.The SGL-3 reflects Moody's expectation that the company will maintain adequate liquidity. Near-term Moody's expects continued negative free cash flow, though turning positive overall for 2022. The acquisition of STI also reduces the availability of preferred stock as a source of liquidity to $100 million from $150 million. That said, liquidity will be supported by the company's cash balances and access to a $200 million revolving credit facility (approximately $175 million is available, net of letters of credit). The company has no near term debt maturities, and Moody's expects the company to be in compliance with covenants.Moody's took the following rating actions:Affirmations:Issuer: Array Tech, Inc..... Senior Secured 1st Lien Bank Credit Facilities (Term Loan and Revolver), Affirmed at B1 (LGD3)Downgrades:.... Corporate Family Rating, Downgraded to B2 from B1.... Probability of Default Rating, Downgraded to B2-PD from B1-PD.... Speculative-Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2 Outlook Actions: ....Outlook, Remains Stable RATINGS RATIONALE Array's B2 CFR reflects inherent earnings and free cash flow volatility as well as high financial leverage that will increase for the STI acquisition. This is balanced against adequate liquidity, a strong market position, patent protection and a strong backlog that will support revenue growth in 2022 and 2023. Pro forma for the transaction, FY 2021 debt/EBITDA (based on total debt and including Moody's standard adjustments) will be in the 6.5x range. Moody's expects that leverage will decline as earnings improve, primarily in 2022, stemming from backlog conversion and the company's recent actions to mitigate the impact of steel price increases, logistics, supply chain and other inflationary cost pressures.The acquisition of STI will increase the company's revenue base to over $1 billion, will contribute favorably to Array's margin profile and broadens the company's global presence by adding a presence in Europe (particularly Spain) and Brazil. That said, the company is incurring additional debt to finance the acquisition as it is in the midst of recovering from the negative impact of historically high inflationary cost pressures and supply chain headwinds on margins and cash flow. The related acquisition integration risk is also a consideration as the company expands into markets where it currently does not have a meaningful presence.The ratings outlook reflects Moody's expectation that the company will maintain an adequate liquidity position over the next 12 to 18 months while meaningfully improving its financial leverage in 2022 primarily through earnings growth.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe company's ratings could be downgraded if margins meaningfully deteriorate or free cash flow weakens further such that Moody's expects debt/EBITDA to remain above 5.5x beyond 2022. A material erosion in liquidity could also drive negative ratings pressure. More aggressive financial policies, including use of cash towards another meaningful acquisition or dividends rather than debt repayment would also exert downward ratings pressure.The ratings could be upgraded if Array successfully integrates the STI acquisition without any material operating disruption and restores its own profitability such that debt-to-EBITDA is sustained below 4.5x and free cash flow to debt is sustained in the double digits. The ratings could also be upgraded if the nature of Array's business changes such that the company demonstrates reduced quarterly earnings and cash flow variability.Headquartered in Albuquerque, New Mexico, Array Technologies, Inc., the parent company of Array Tech, Inc., manufactures ground-mounting systems used in solar energy projects. The company generated revenues of approximately $821 million for the last twelve months ended September 30, 2021.The principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287885. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jadijhe (Gigi) Adamo Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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