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Cimpress USA Incorporated -- Moody's affirms Cimpress' B1 CFR, rates new credit facility Ba3; outlook stable

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Rating Action: Moody's affirms Cimpress' B1 CFR, rates new credit facility Ba3; outlook stableGlobal Credit Research - 14 Apr 2021Approximately $2 billion in rated debt securities affectedNew York, April 14, 2021 -- Moody's Investors Service ("Moody's") today affirmed Cimpress plc's ("Cimpress") B1 corporate family rating (CFR), B1-PD probability of default rating and B3 senior unsecured rating. The company's speculative grade liquidity rating was upgraded to SGL-1 from SGL-2 reflecting very good liquidity proforma for the refinancing, supported by high cash balance ($452 million proforma) and the proposed credit facility's covenant-lite structure. Concurrently, Moody's assigned a Ba3 rating to the proposed senior secured credit facility issued by Cimpress and its subsidiary Cimpress USA Incorporated. Rating outlooks at Cimpress and Cimpress USA Incorporated remain stable.The company intends to use the net proceeds from its proposed $1.15 billion term loan to repay $260 million of outstanding revolver borrowings (balance as of 12/31/20), repay term loan A ($144 million outstanding as of 12/31/20), and $300 million of second lien notes, with the remaining proceeds of approximately $400 million staying as cash on the balance sheet.The affirmation of the B1 CFR reflects Moody's view that while the refinancing increases leverage on a gross basis to proforma 5.7x from 4.4x as of LTM 12/31/20 (Moody's adjusted), it is leverage-neutral on a net-of-cash basis and significantly boosts liquidity. Cimpress has indicated its intention to maintain a high cash balance going forward as a liquidity cushion since it is downsizing its current $850 million revolver to $250 million in connection with the proposed refinancing. In addition, the transaction extends the term loan maturity to 2028 and revolver - to 2026, from 2025 for both.Moody's still expects fiscal 2021 to remain challenging for Cimpress as many of the sectors Cimpress operates in haven't fully recovered, yet expectations are for the company to steadily improve credit metrics and maintain very good liquidity. Assignments: ..Issuer: Cimpress plc ....Senior Secured 1st Lien Revolving Credit Facility, Assigned Ba3 (LGD3)..Issuer: Cimpress USA Incorporated....Senior Secured 1st Lien Term Loan B (USD), Assigned Ba3 (LGD3)....Senior Secured 1st Lien Term Loan B (Euro), Assigned Ba3 (LGD3)Affirmations:..Issuer: Cimpress plc.... Corporate Family Rating, Affirmed B1.... Probability of Default Rating, Affirmed B1-PD....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD5)Upgrades:..Issuer: Cimpress plc.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2 Outlook Actions: ..Issuer: Cimpress plc ....Outlook, Remains Stable ..Issuer: Cimpress USA Incorporated....Outlook, Remains StableRATINGS RATIONALECimpress' B1 CFR continues to reflect the company's entrenched position and well-known brand, albeit in the highly competitive online custom print market. It also factors in the company's very good liquidity, improving cash flows and Moody's expectation of steady improvements in credit metrics as the operating environment continues to stabilize. The rating is further supported by governance considerations, specifically the company's leverage policy that targets Net Debt to EBITDA of under 3.5x (company's definition, before Moody's adjustments). The company's earnings remain vulnerable to business and consumer sentiment as a result of the coronavirus outbreak and the uneven economic recovery across the company's markets. There is still pressure on demand for Cimpress print marketing and consumer products across several of the company's business lines. Over a longer time horizon, there are risks of digital substitutions for certain key products, such as advertising-related end products or business cards.Moody's anticipates Net Debt to EBITDA to remain elevated and above pre-pandemic levels, at around 4.7x (Moody's adjusted) by the end of fiscal year ending 6/2021. Moody's also projects that in the absence of debt-funded M&A, net leverage can improve closer to 4x (Moody's adjusted) by the end of fiscal year ending 6/2022. On a gross basis, Moody's expects the company's Debt/EBITDA will be closer to 6x by FYE 6/2021 and under 5x by the end of FYE 6/2022 (both metrics are Moody's adjusted).LIQUIDITYThe company's SGL-1 rating reflects very good liquidity proforma for the refinancing supported by positive and improving internally generated cash flows and a large cash balance. The company's $450 million proforma cash after refinancing and cash flow from operations will be more than sufficient to meet its basic cash needs, including $11.5 million loan amortization and roughly $100 million capex over the next four quarters. We do not expect Cimpress to draw on the revolver over the next 12-18 months given its high cash balance and positive internally generated cash flow.The proposed credit agreement has an excess cash flow sweep provision of 50% with step downs to 25% and 0% upon consolidated leverage ratio of 3.5x and 3x, respectively. Following the refinancing and the second lien debt redemption, Cimpress will have a favorable debt maturity ladder with no material funded debt coming due until June 2026 when the $600 million unsecured note comes due.The proposed credit agreement permits dividends and other distributions so long as the pro forma consolidated leverage ratio does not exceed 3.25x. The company's most recent reported consolidated leverage ratio for LTM 12/31/2020 was 3.5x. Moody's expects that Cimpress will pause share repurchases until its leverage is well under its financial policy limit.Following are some of the preliminary credit agreement terms, which remain subject to market acceptance.The proposed first lien term loan is expected to have no financial maintenance covenants while the proposed revolving credit facility will contain a springing maximum first lien net leverage ratio of 3.25x that will be tested if there is any revolver drawing outstanding at the end of a quarter.The credit agreement provides covenant flexibility for transactions that could adversely affect creditors, including incremental facility capacity of up to the greater of consolidated EBITDA at closing or 100% of consolidated EBITDA, plus an additional amount subject to 2.25x pro forma first lien net leverage ratio (for pari passu first lien debt). No portion of the incremental may be incurred with an earlier maturity than the initial term loans.The credit agreement does not permit the designation of unrestricted subsidiaries, preventing collateral "leakage" to unrestricted subsidiaries.ESG CONSIDERATIONSCimpress' social risk is elevated. Technological advancement is impacting the way customers consume data. Due to ongoing digitalization for some key advertising-related end products, we consider Cimpress' longer-term risk of digital substitution when assessing the company's business strength.From a governance perspective, Moody's considers Cimpress' commitment to moderate leverage one of key credit considerations supporting the rating.Prescott General Partners LLC (PGP) and Spruce House Investment Management LLC (Spruce House), together hold roughly 30% of the company's publicly traded stock. PGP, Spruce House and the company's Chairman and CEO Robert Keane hold a roughly 40% equity representation on the company's board, which can be a credit risk if the concentrated ownership results in equity interests being prioritized over creditor interests.The stable outlook incorporates Moody's expectation that Cimpress' operating performance and cash flows will continue to improve and Cimpress will adhere to its leverage policy that targets Net Debt/EBITDA of under 3.5x (company's definition). It also assumes that Cimpress will maintain a significant cash balance and an undrawn revolver over the next 12-18 months.STRUCTURAL CONSIDERATIONSThe instrument ratings reflect the probability of default of the company, as reflected in the B1-PD Probability of Default Rating, an average expected family recovery rate of 50% at default given the mix of secured and unsecured debt in the capital structure, and the particular instruments' ranking in the capital structure. The company's proposed $1.4 billion senior secured credit facility ($1.15 billion term loan and $250 million revolver) is rated Ba3, one notch above the CFR, reflecting its senior ranking with respect to the $600 million senior unsecured note, which is rated B3. The proposed credit facility is rated one notch lower than the existing credit facility due to the loss of cushion provided by the $300 million second lien note that the company intends to repay.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA downgrade could result if operating performance fails to show continued signs of recovery in the second half of calendar 2021 or if more aggressive financial policies are implemented before long-term financial targets are achieved. The ratings could be downgraded if FCF/Debt is maintained in the mid-single digit percent range or below or if Moody's expects Debt/EBITDA to be sustained above 5x along with a material decline in cash from the proforma cash position.The ratings could be upgraded if the company sustains steady organic revenue growth in the mid-single digit range, debt-to-EBITDA is sustained below 4x (Moody's adjusted) and the company maintains very good liquidity. If the company establishes a track record of maintaining substantial cash levels and commits to maintaining cash at these levels, gross leverage upgrade guidance could be relaxed.Headquartered in Dundalk, Ireland, Cimpress plc is a provider of customized marketing products and services to small businesses and consumers worldwide, largely comprised of printed and other physical products. Revenue for the twelve months ended March 31, 2021 was approximately $2.4 billion.The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.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. Dilara Sukhov, CFA Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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