Cimpress USA Incorporated -- Moody's downgrades Cimpress plc' CFR to B2; changes outlook to negative
Rating Action: Moody's downgrades Cimpress plc' CFR to B2; changes outlook to negativeGlobal Credit Research - 25 Aug 2022Approximately $1.9 billion in rated debt securities affectedNew York, August 24, 2022 -- Moody's Investors Service ("Moody's") today downgraded all credit ratings of Cimpress plc (Cimpress) and its subsidiary, Cimpress USA Incorporated by one notch, including Cimpress' corporate family rating (CFR) to B2 from B1. The company's speculative grade liquidity (SGL) rating is unchanged at SGL-1 reflecting very good liquidity. Rating outlooks at Cimpress and Cimpress USA Incorporated were changed to negative from stable.The downgrade of the CFR reflects the significantly weaker than expected operating and financial performance in fiscal year ending June 2022 and Moody's expectations that Cimpress leverage will remain high and cash flow will not improve materially in fiscal 2023. High inflation, weakening consumer confidence and the need to continue investing in business transformation will make it difficult for Cimpress to improve profitability and return to its target leverage over the coming year. The company's Moody's adjusted leverage reached 7x on gross basis and 6x on net debt basis for the fiscal year ending 30 June 2022, which is the highest level during the company's rated history since 2014. Free cash flows also weakened, with Moody's adjusted FCF/Debt of 3% from 16.4% in pre-pandemic FYE 6/2019 and 7.9% in FYE 6/2021.The revision of the outlook to negative from stable reflects Moody's view that macroeconomic headwinds may continue to pressure revenue and EBITDA growth over the next 12-18 months, which could result in an extended period of high leverage and weak cash flow generation.Downgrades:..Issuer: Cimpress plc.... Corporate Family Rating, Downgraded to B2 from B1.... Probability of Default Rating, Downgraded to B2-PD from B1-PD....Senior Secured 1st Lien Bank Credit Facility, Downgraded to B1 (LGD3) from Ba3 (LGD3)....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1(LGD5) from B3 (LGD5)..Issuer: Cimpress USA Incorporated....Senior Secured 1st Lien Bank Credit Facility, Downgraded to B1 (LGD3) from Ba3 (LGD3) Outlook Actions: ..Issuer: Cimpress plc ....Outlook, Changed To Negative From Stable..Issuer: Cimpress USA Incorporated....Outlook, Changed To Negative From StableRATINGS RATIONALECimpress' B2 CFR reflects the company's high leverage, Moody's expectation of limited though positive free cash flow over the next 12-18 months and weak interest coverage. The company's earnings remain vulnerable to business and consumer sentiment in a challenging macroeconomic environment. There is pressure on demand for certain of Cimpress' print marketing and consumer products across several of the company's business lines and over a longer time-horizon, there are risks of digital substitutions for certain key products. Nevertheless, the rating garners support from the company's entrenched position and well-known brand. It also factors in the company's very good liquidity, including no debt maturities through 2026.The company's SGL-1 rating reflects very good liquidity supported by a large cash balance and positive free cash flows. With about $327 million in cash and marketable securities, full availability on the $250 million revolver and projected free cash flow of around $60 - $70 million over the next 12 months, Cimpress has very good liquidity to cover an estimated $130 million in annual capex and $11.5 million in mandatory term loan amortization. Cimpress has a favorable debt maturity ladder with no funded debt coming due until June 2026 when the $600 million unsecured note comes due. The company's earnings and cash flows have historically been and we expect will continue to be highly seasonal. Its second fiscal quarter (ending December 31) includes most of the holiday shopping season and accounts for a disproportionately high portion of its earnings for the fiscal year, primarily due to higher sales of home and family products such as holiday cards, calendars, photo books, and personalized gifts.Cimpress maintains a $250 million revolver due May 2026. The revolver has a springing maximum first lien net leverage ratio of 3.25x that is tested if there is any revolver drawing outstanding at the end of a quarter. Moody's does not expect Cimpress to rely on the revolver and expects the company to maintain at least a 20% cushion over the covenant requirement over the next 12 months.ESG CONSIDERATIONSCimpress' ESG Credit Impact Score is highly negative (CIS-4). The score reflects highly negative social (S-4) and governance risks (G-4) and neutral-to-low environmental risk (E-2). Exposure to demographic trends carries the most weight in the highly negative social risks assessment. It reflects Moody's view that some of the company's key products are exposed to demand disruptions from consumer shift to digital services. The company's governance risks reflect its financial policies and concentrated ownership. The company's leverage policy targets Net Debt to EBITDA of under 3.5x (company's definition, before Moody's adjustments).FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA downgrade could result if operating performance fails to substantially improve in fiscal 2023 such that Debt/EBITDA is expected to remain at 6x or above. The ratings could also be downgraded if FCF/Debt is expected to remain in the low-single digit percent range or below, or if liquidity deteriorates.A ratings upgrade is unlikely over the next 12-18 months given the negative outlook. Over time, the ratings could be upgraded if the company sustains steady organic EBITDA growth in the mid-single digit range, Debt/EBITDA is sustained below 5x (Moody's adjusted), and the company maintains very good liquidity.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 fiscal year ended June 2022 was approximately $2.6 billion.The principal methodology used in these ratings was Media published in June 2021 and available at https://ratings.moodys.com/api/rmc-documents/72920. Alternatively, please see the Rating Methodologies page on https://ratings.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. 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