Rating Action: Moody's assigns first-time Ba3 CFR to ANGI Group, rates debut notes Ba3 and withdraws IAC/InterActiveCorp's Ba2 CFR; outlook stable
Global Credit Research - 12 Aug 2020
Approximately $500 million of new debt rated
New York, August 12, 2020 -- Moody's Investors Service ("Moody's") has assigned to ANGI Group, LLC ("ANGI Group") a Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating (PDR). Concurrently, Moody's assigned a Ba3 rating to ANGI Group's proposed $500 million senior unsecured notes and SGL-1 Speculative Grade Liquidity ("SGL") rating. The outlook is stable.
Moody's also withdrew IAC/InterActiveCorp's ("IAC") Ba2 Corporate Family Rating, Ba2-PD Probability of Default Rating, SGL-1 rating and stable outlook given that IAC is no longer an issuer of rated debt. ANGI Group is a wholly-owned subsidiary of ANGI Homeservices Inc. ("ANGI" or the "company"), which, in turn, is 85%-owned by parent, IAC.
Net proceeds from the debt raise will be used for general corporate purposes, including potential future acquisitions and return of capital. The ANGI notes will be unsecured debt instruments guaranteed by ANGI's material domestic operating subsidiaries. The notes will not benefit from a downstream IAC guarantee, similar to the existing debt residing at ANGI. Pro forma for the new notes, ANGI's outstanding debt as of 30 June 2020 will total $740.6 million consisting of: (i) an undrawn $250 million revolving credit facility (RCF) maturing 2023 (unrated); (ii) a $240.6 million outstanding term loan A maturing 2023 (unrated); and (iii) the new $500 million senior unsecured notes due 2028.
..Issuer: ANGI Group, LLC
Corporate Family Rating, Assigned Ba3
Probability of Default Rating, Assigned Ba3-PD
$500 Million Senior Unsecured Notes due 2028, Assigned Ba3 (LGD4)
.Corporate Family Rating, Withdrawn, previously rated Ba2
.Probability of Default Rating, Withdrawn, previously rated Ba2-PD
Speculative Grade Liquidity Actions:
..Issuer: ANGI Group, LLC
Speculative Grade Liquidity, Assigned SGL-1
Speculative Grade Liquidity, Changed to Rating Withdrawn from SGL-1
Outlook Actions: ..Issuer: ANGI Group, LLC Outlook, Assigned, Stable ..Issuer: IAC/InterActiveCorp
Outlook, Changed to Rating Withdrawn from Stable
ANGI's Ba3 CFR benefits from the company's position as the leading player in the high growth on-demand home remodeling, repair and maintenance space, an estimated $500 billion market in the US. The rating is supported by: (i) the potential for long-term growth given that the marketplace is relatively underpenetrated; (ii) ANGI's B2C online content delivery expertise reinforced by an effective technology platform; (iii) good customer loyalty with improving take rates; (iv) solid EBITDA and free cash flow generation characteristics; (v) and very strong liquidity. The rating is challenged by the company's high pro forma financial leverage, small scale, narrow business line, high geographic concentration and low margin profile. Helping to offset these constraints is the parent's long and successful track record of acquiring, cultivating, growing and scaling its businesses to profitability in a disciplined and cost-effective manner, which Moody's believes will continue while ANGI remains majority owned by IAC. Though IAC is not a guarantor of ANGI's debt, Moody's expects IAC will provide implicit financial support to the company, if needed, given that ANGI represents IAC's largest investment and accounts for more than 75% of IAC's pro forma EBITDA (excluding corporate overhead) following the recent spin-off of Match Group, Inc.
As one of the early movers in the industry dating back to IAC's initial 2004 investment in Service Magic (later rebranded as Home Advisor), ANGI has grown organically and through several acquisitions to become the premier digital home services marketplace that connects homeowners with service professionals. Secular growth potential exists for the online home services market given the: (i) increasing number of consumers using the internet to find qualified and vetted service professionals for home projects; (ii) growing number of US service professionals shifting their businesses and advertising digitally; and (iii) highly underpenetrated nature of the home services market with only about 20% of home projects fulfilled via an online inquiry or lead. ANGI benefits from strong customer loyalty, which is facilitated by transparent upfront pricing for a large variety of projects, in-app scheduling and payment, and guaranteed service levels.
ANGI has experienced consistent double digit organic revenue growth in recent years, partly driven by its user-friendly app, which is a function of the company's strong B2C online content delivery model that emphasizes a frictionless consumer experience, a capability inherited from its parent, IAC. While acquisitions over the years helped to add operating and international scale, IAC has effectively leveraged ANGI's technology infrastructure for acquired companies to lower customer acquisition costs. Marketing and sales, however, are managed independently at the country level and each acquired company maintains its own brand identity.
The rating considers Moody's expectation for subdued revenue growth in 2020 in the mid-to-high single digit range, primarily arising from the economic impact of the novel coronavirus (COVID-19), as well as suppressed margins due to continued spending on discretionary investments and marketing to supplement ANGI's offering with more services and grow market share. The growth strategy is to promote higher priced projects with greater monetization value and provide new services such as project financing, bundled tasks and subscription plans to homeowners. While these investments will pressure EBITDA margins over the near-term, Moody's expects they will lead to increased revenue growth and expanding margins over the long-term as take rates improve.
The Ba3 rating is constrained by ANGI's high financial leverage. Pro forma for the notes issuance, ANGI's gross debt will triple to approximately $741 million as of 30 June 2020 and total debt to EBITDA will rise to around 6.8x from 3x (including Moody's standard adjustments for non-cash stock based compensation expense (SBC), operating leases and purchase obligation commitments). While leverage appears high for the Ba3 category, an offsetting factor is ANGI's very good internal liquidity profile. Pro forma cash balances of roughly $920 million (includes net proceeds from the pending debt raise) will exceed gross debt, producing a net cash position. Further, we expect continued strong conversion of EBITDA to free cash flow (FCF) and project FCF in the range of $100 - $150 million in 2020 (FCF was approximately $185 million at LTM 30 June 2020), increasing to about $150 - $175 million over the next twelve months. Given that ANGI's "asset-lite" operating model facilitates robust free cash flow, supporting very good liquidity, Moody's expects the company will focus on deleveraging. As such, the Ba3 CFR is forward-looking and Moody's projects leverage will decline to the 3.5x-4x range by 2022 through a combination of debt reduction, organic EBITDA growth and incremental EBITDA from acquisitions. Liquidity is supplemented by a $250 million RCF that Moody's expects will remain undrawn.
ANGI's scale as measured by revenue of approximately $1.4 billion is lower than many comparably rated companies. However, given the strong secular growth potential in the homes services market and the likelihood that the company will continue to make acquisitions, Moody's projects that revenue will approach $2 billion by 2022. Revenue concentration in the home services market constrains the rating because the business is sensitive to economic events and can be adversely impacted by consumer confidence, discretionary spending and access to credit. Additionally, about 95% of revenue is generated in North America. The absence of meaningful international diversification exposes ANGI to the economic and cyclical conditions of only one region, which could magnify EBITDA and cash flow volatility during economic cycles. ANGI's EBITDA margin profile in the 8%-10% range (Moody's adjusted) weighs on the rating since lower margins provide less cushion during periods of underperformance as well as reduced capacity to reinvest in the business and convert EBITDA to free cash flow.
Further, ANGI is exposed to digital advertising revenue, which can be cyclical and experience commoditized pricing in certain categories or weak pricing during downturns. The rating also reflects potential declines in website traffic due to rapidly changing technology and industry standards, changes in approaches for content delivery and distribution as well as sudden changes in how consumers engage with media content over time. ANGI is exposed to possible revisions to Google's search engine algorithms that could minimize its websites' listings placements and weaken paid traffic results. Concentrated ownership from the large 98% voting stake of IAC, which, in turn, is controlled by Mr. Barry Diller, and historically shareholder-friendly financial policies of IAC heightens governance risk. However, given that ANGI is IAC's largest investment and contributes a significant amount of IAC's earnings, Moody's believes IAC will act as a prudent steward to efficiently allocate capital for growth initiatives and return of capital to shareholders.
The stable outlook reflects Moody's view that ANGI will continue to experience strong growth, albeit subdued in 2020. The outlook also incorporates Moody's expectation that the company will maintain a consolidated EBITDA margin in the 8%-10% area (Moody's adjusted), generate positive free cash flow and retain a sizeable cash balance in excess of gross debt as it pursues strategic growth objectives. The stable outlook reflects Moody's view that ANGI's web-based B2C content delivery and services model will remain fairly resilient during the COVID-19 outbreak and economic recession as consumers increasingly shift their activities, media consumption and purchases online.
Nonetheless, Moody's expects decreases in consumer demand for home services requests to have an impact ANGI as some consumers may be unwilling to interact with service professionals face-to-face or have service professionals in their home. Moody's also expects lower advertising spend by clients will negatively impact advertising rates in the ad-supported segment of the business. Further, with the global economy in recession this year combined with the prospect of extended business closures, layoffs and high rates of unemployment, an erosion of consumer confidence will lead to a reduction in discretionary consumption. The magnitude of the impact will depend on the depth and duration of the pandemic, the impact that government restrictions to curb the virus will have on consumer behavior and the pace of business re-openings. As a result, Moody's expects delayed de-leveraging in 2020 with leverage remaining high near 7x (Moody's adjusted, including SBC) due to moderating EBITDA and then declining in 2021 to around 5x as the economy recovers, which is factored in the stable outlook. Moody's projects a global economic recession this year with the US and G-20 advanced economies contracting 5.7% and 6.4%, respectively, followed by rebounding growth of 4.5% and 4.8% in 2021.
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 our ESG framework, given the substantial implications for public health and safety. ANGI's credit profile reflects the impact of the outbreak on its profitability given its exposure to the US economy and consumer spending, which has left it vulnerable to government lockdown mandates and shifts in market demand and sentiment in these unprecedented operating conditions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A ratings upgrade is unlikely over the near-term given the expectation for weak debt protection measures for the rating category. Over time, an upgrade could occur if ANGI exhibits revenue growth that is in line or ahead of market growth, expanding EBITDA margins and improved business and geographic diversification through increased scale and profitability. An upgrade would also be considered if financial leverage as measured by total debt to EBITDA is sustained near 3.5x (Moody's adjusted, including SBC) and free cash flow as a percentage of total debt is sustained at or above 6% (Moody's adjusted). ANGI would also need to adhere to conservative financial policies with respect to share purchases and dividends to be considered for upward ratings pressure.
Ratings could be downgraded if ANGI's competitive position were to weaken as evidenced by revenue declines of 5% or more, EBITDA margins sustained below 10% (Moody's adjusted), rising traffic acquisition costs or increasing customer churn. Ratings could experience downward pressure if total debt to EBITDA is sustained above 5x (Moody's adjusted, including SBC) beyond 2021. A downgrade could also arise if ANGI sustained higher total debt to EBITDA than Moody's base-case expectation or liquidity deteriorates significantly due to lower-than-expected free cash flow generation or cash levels weakened due to high share purchase activity or increased acquisition spend without a proportionate increase in EBITDA.
Headquartered in Denver, CO, ANGI Homeservices Inc. is a leading online marketplace for home remodeling, repair and maintenance that connects quality service professionals with consumers. Major brands include HomeAdvisor, Angie's List, Handy and Fixd Repair. The company is 85%-owned by IAC/InterActiveCorp, a leading consumer media and internet company that owns more than 150 internet-based brands and products. ANGI's revenue totaled approximately $1.4 billion for the twelve months ended 30 June 2020.
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.
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