Rating Action: Moody's confirms Digital Room Holdings Inc.'s B3 CFR; outlook revised to negative
Global Credit Research - 24 Jul 2020
New York, July 24, 2020 -- Moody's Investors Service, ("Moody's") concluded its review of Digital Room Holdings Inc.'s ("DRI") ratings initiated on April 24, 2020 and confirmed the issuer's B3 corporate family rating ("CFR"), B3-PD probability of default rating ("PDR"), the B2 rating on DRI's senior secured first lien credit facilities, and the Caa2 rating on the company's second lien term loan. The ratings outlook was revised to negative given Moody's expectation of a meaningful near term weakness in demand from DRI's customer base that is anticipated to considerably weigh on the company's operating performance trends and financial flexibility in 2020.
Moody's confirmed the following ratings:
---Corporate Family Rating-B3
---Probability of Default Rating-B3-PD
---Senior Secured Revolving Credit Facility expiring 2024 -- B2 (LGD3)
---Senior Secured First Lien Term Loan due 2026 -- B2 (LGD3)
---Senior Secured Second Lien Term Loan due 2027 -- Caa2 (LGD5)
Outlook revised from Rating Under Review to Negative
DRI's B3 CFR is constrained by the company's high adjusted debt/EBITDA of over 7x (Moody's adjusted for operating leases) as of March 31, 2020 (LTM) and Moody's expectations that this metric could approach and potentially exceed 9x in 2020 due to a sharp projected drop in the company's EBITDA during this period. DRI's CFR is also negatively impacted by the company's small size, potential competitive pressures from larger commercial printers and web based rivals, and exposure to ongoing cyclicality in the print advertising market in the event of prolonged weakness in macroeconomic conditions. Additionally, the company's ownership by H.I.G. Capital ("HIG") presents corporate governance concerns with respect to DRI's financial strategies, particularly given the potential for additional debt-funded acquisitions and equity distributions.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial credit implications of public health and safety which may lead to material, albeit temporary, disruptions of DRI's day-to-day operations. Today's outlook revision reflects the impact on DRI's credit profile of the breadth and severity of this shock, particularly with respect to weak demand trends from the company's predominantly SMB-focused customer base and the resulting deterioration in credit quality it has triggered.
The risks associated with DRI's credit profile are partially offset by the company's strong presence in the online short-run print market as well as its solid customer relationships and historically strong retention rates which contribute to revenue predictability. Additionally, the company's modest capital budget should support improving free cash flow ("FCF") generation once operating conditions normalize.
DRI's adequate liquidity is principally supported by a cash balance of $32.5 million as of March 31, 2020 following the company's full drawdown of its $30 million revolving credit facility. Moody's does not expect the company to generate meaningful FCF in 2020. DRI's bank loans are subject to financial maintenance covenants based on a maximum net leverage ratio (8.5x first lien net leverage, 10x total net leverage). Moody's believes the company will remain below the maximum levels allowed by this limitation over the balance of 2020.
The negative ratings outlook reflects Moody's expectation that DRI's revenues and EBITDA will decline considerably in 2020, resulting in debt-to-EBITDA (Moody's adjusted) approaching, and potentially exceeding 9x. Operating performance trends are expected to recover in 2021 as macroeconomic conditions normalize with credit protections expected to improve at a similar pace.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While unlikely over the near term, the rating could be upgraded if DRI profitably expands its scale and continues to generate healthy FCF while adhering to a conservative financial policy, resulting in debt to EBITDA sustained (Moody's adjusted) below 6.5x.
The rating could be downgraded if DRI were to incur FCF deficits on a sustained basis, liquidity deteriorates, the company experiences a weakening competitive position, or maintains aggressive financial policies that prevent meaningful deleveraging.
DRI, owned by HIG, is a leading e-commerce provider in the online short-run print market. Moody's forecasts DRI to generate revenues of approximately $200 million in 2020.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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_1133569.
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.
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.
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Lee Zeltser Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Karen Nickerson Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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