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Dycom Industries, Inc. -- Moody's assigns Ba3 rating to Dycom's senior unsecured notes; affirms all ratings

·16 min read

Rating Action: Moody's assigns Ba3 rating to Dycom's senior unsecured notes; affirms all ratingsGlobal Credit Research - 24 Mar 2021New York, March 24, 2021 -- Moody's Investors Service ("Moody's") has assigned a Ba3 rating to Dycom Industries, Inc.'s (Dycom) proposed $400 senior unsecured notes. The company plans to use the proceeds from the note offering to pay down its revolver and term loan borrowings, redeem the remaining $58 million of convertible notes when they mature in September 2021, for general corporate purposes and to cover fees and expenses. At the same time, Moody's affirmed Dycom's Ba2 Corporate Family Rating, its Ba2-PD Probability of Default Rating and the B1 rating on its $58 million convertible unsecured notes. The Speculative Grade Liquidity (SGL) rating remains unchanged at SGL-2 and the ratings outlook remains stable.Affirmations:..Issuer: Dycom Industries, Inc..... Corporate Family Rating, Affirmed Ba2.... Probability of Default Rating, Affirmed Ba2-PD....Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed B1 (LGD6)Assignments:..Issuer: Dycom Industries, Inc.....Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD5)Outlook Actions:..Issuer: Dycom Industries, Inc.....Outlook, Remains StableRATINGS RATIONALEDycom's Ba2 corporate family rating is supported by the stable outlook for capital spending in the telecom sector due to increased demand for network bandwidth to ensure reliable video, voice, and data service and as wireless carriers upgrade their networks contemplating next generation mobile solutions in response to the significant demand for wireless broadband. Dycom's rating also reflects its relatively low leverage and long-standing customer relationships with large telecommunication service companies, which is reflected in its sizeable order backlog and provides some revenue visibility for services under contract. Dycom's rating is constrained by its inconsistent free cash flow generation as well as its high customer concentration with its top five customers compromising 74% of total revenue for the fiscal year ended January 2021 and its dependence on the capital expenditure budgets of major telecommunications and cable television providers, which are subject to both seasonality and cyclicality.Dycom experienced a limited impact from the coronavirus outbreak in fiscal 2021 since its operations are considered an essential service and its customers actually benefited from some of the lifestyle changes associated with the virus such as people working from home, distance learning, telemedicine, increased video streaming and a focus on fiber deployment to rural areas. The company also continues to benefit from the rollout of fifth generation (5G) networks. However, some of the benefits on the residential side of Dycom's business have been tempered by weakness at small and midsize businesses and the timing of project activity. As a result, Dycom's revenues declined by 4.2% in fiscal 2021 despite the benefit of an extra week versus fiscal 2020. However, the company benefitted from cost cutting measures including headcount reductions and efficiency improvement initiatives, which led to expanding margins and only a modest deterioration in its operating performance with adjusted EBITDA of $333 million versus $339 million in the prior year. Moody's anticipates its operating performance will modestly improve in fiscal 2022 due to the favorable sector fundamentals and its sizeable $6.8 billion backlog.Dycom generated about $324 million of free cash flow in fiscal 2021 due to its cost cutting initiatives, lower capital spending and working capital inflows resulting from accounts payable management and the unwinding of investments over the past two fiscal years to support revenue growth. It used this free cash flow along with revolver borrowings to repurchase $100 million of its common stock and $401.7 million principal amount of its convertible senior notes for $371.4 million including interest and fees and reduced the principal amount outstanding to $58.3 million. Dycom's debt reduction initiatives lowered its adjusted leverage ratio (debt/EBITDA) to about 1.9x and raised its interest coverage (EBITA/Interest) to around 4.4x. These credit metrics are somewhat strong for the Ba2 corporate family rating, but will likely weaken in fiscal 2022 despite a modest improvement in adjusted EBITDA due to a $165 million increase in outstanding debt from the proposed refinancing net of the convertible redemption in September 2021. Dycom's moderate scale and somewhat weak diversity also limit its upside ratings potential.The new senior notes are rated Ba3 since they are ranked below the senior credit facilities in Moody's loss given default notching model. Moody's believes the stock pledge provides limited support to the guarantee on the credit facilities, which are guaranteed by material domestic subsidiaries and are secured only by the stock of the subsidiaries. However, the lender control created by financial maintenance covenants in the credit facility provide protection to the lenders that is not afforded to the senior note holders. The proposed notes also permit the company to grant additional security to the credit facility without having to pledge such assets to the notes.The speculative grade liquidity rating of SGL-2 reflects Dycom's good liquidity. The company had $11.8 million of cash and $559 million of availability under its $750 million revolving credit facility as of January 2021. We anticipate positive free cash flow in fiscal 2022 and expect the company to consider opportunistic share repurchases or bolt-on acquisitions and to repay its $58 million of convertible notes when they mature in September 2021.The stable ratings outlook reflects our expectation that Dycom's operating performance will be relatively stable and its credit metrics will continue to support the Ba2 rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSDycom's rating upside is limited by the company's moderate scale and limited end market and customer diversity. However, an upgrade could occur if the company increases its scale and diversity while maintaining a leverage ratio below 2.0x and interest coverage above 4.0x.Factors that could lead to a downgrade include debt-financed acquisitions, excessive share repurchases, a decline in earnings, or the loss of projects from key customers. A deterioration in liquidity or the expectation that its leverage ratio would be sustained above 3.0x, or interest coverage below 2.5x could also result in a downgrade.Dycom Industries, Inc. (Dycom), located in Palm Beach Gardens, Florida, is a leading provider of specialty contracting services in North America. Dycom provides engineering, construction and maintenance services that assist telecommunication and cable television providers to expand and monitor their network infrastructure. To a lesser extent, Dycom provides underground locating services for telephone, cable, power, gas, water, and sewer utilities. Dycom generated contract revenues of $3.2 billion for the fiscal year ended January 30, 2021 and had a backlog of $6.8 billion.The principal methodology used in these ratings was Construction Industry published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454. 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. Michael Corelli, CFA Senior Vice President 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 Glenn B. Eckert 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 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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