Rating Action: Moody's assigns Caa1 CFR to iQor upon bankruptcy emergence; outlook stable
Global Credit Research - 22 Dec 2020
New York, December 22, 2020 -- Moody's Investors Service, ("Moody's") assigned new ratings to iQor US, Inc. ("iQor") following its emergence from bankruptcy on November 19, 2020, including a Caa1 Corporate Family Rating (CFR), a Caa1-PD Probability of Default Rating (PDR), a B1 rating on the $95 million senior secured first lien first-out term loan and a Caa2 rating on the $300 million senior secured first lien second-out term loan. The company's new capital structure also includes an unrated $80 million asset-based revolving credit facility, which will have approximately $25 million drawn at the year-end.
iQor has materially reduced its debt and leverage through the bankruptcy process, but financial and operating risks remain high owing to current industry challenges due to the coronavirus pandemic, still heavy debt service costs, capital expenditures, as well as modest operating margins. The company will continue to face earnings pressure over the next 12 months as a result of weak consumer spend environment, contraction in the media and telecom sectors and lower volumes associated with collections businesses. The rating also incorporates Moody's expectation for weak liquidity over the next 12-15 months, constrained by limited balance sheet cash, significant revolver draws, and negative free cash flow generation that may limit the company's ability to offer competitive solutions and win new business.
The company is in the process of selling its product solutions business, which is expected to close by the end of 2020. Proceeds from the sale will be used to fund the restructuring of this business in the first half of 2021. iQor will also be required to use $12.5 million of funds held in an escrow account to prepay the second-out term loan, if the sale is effectuated. Alternatively, if the company does not close on the sale, the $12.5 million of escrow funds will be released to fund the shutdown of the product solutions business.
..Issuer: iQor US, Inc. (New)
.... Corporate Family Rating, Assigned Caa1
.... Probability of Default Rating, Assigned Caa1-PD
....Gtd Senior Secured 1st Lien First-Out Term Loan, Assigned B1 (LGD2)
....Gtd Senior Secured 1st Lien Second-Out Term Loan, Assigned Caa2 (LGD4)
Outlook Actions: ..Issuer: iQor US, Inc. (New) ....Outlook, Assigned Stable RATINGS RATIONALE
iQor's Caa1 CFR reflects the company's high leverage and expectation for continued operating uncertainty associated with industry conditions, leading to negative free cash flow generation and increase revolver usage. Moody's projects iQor will have weak liquidity over the next 12-15 months, including negative free cash flow and modest remaining availability under its asset-based revolving credit facility, somewhat mitigated by lack of near term maturities. Moody's projects the company's debt-to-EBITDA (Moody's adjusted) to trend towards mid-5x over the next 12-18 month, from 5.1x as of December 31, 2020. The rating also reflects the company's modest scale, low operating margin relative to other rated business and consumer services companies, meaningful customer concentration, as well as the highly competitive and fragmented market segments in which iQor operates.
Positively, the rating acknowledges the significant amount of debt and leverage reduction during the reorganization and management's good business execution through the bankruptcy process and the pandemic. The credit profile also benefits from iQor's good global market coverage, long-tenured and diversified customer base, solid contract pipeline and Moody's expectation for long-term favorable trends in the customer care services industry due to the ongoing increase in outsourcing. The right-sizing of the capital structure and the business restructuring should position iQor for long-term growth despite ongoing industry consolidation.
The stable outlook reflects Moody's view that although iQor's operating performance will remain challenged in 2021 by the disruption from the COVID-19, the company's solid contract pipeline and excess seat capacity support full recovery to pre-pandemic levels in 2022.
Moody's expects iQor to have weak liquidity over the next 12-15 months. Sources of liquidity consist of approximately $35 million of balance sheet cash at December 31, 2020, Moody's expectation for negative annual free cash flow of around $5-10 million over the next-12-15 months (depending on the level of capital spend) along with projected $25-35 million of availability under the asset-based revolving credit facility expiring in 2023. The bank loan agreement contains a provision that allows the company to pay up to 50% of its annual interest expense under the second-out term loan in kind. Moody's expects the company will pay all interest in cash on the outstanding debt over the next 12-15 months, despite having the flexibility to defer payments in a PIK-option. Borrowings under the first lien credit facility are subject to a net first lien leverage ratio maintenance covenant of 7.75x beginning with the quarter ending December 31, 2020 through the end of fiscal 2021, followed by an aggressive quarterly step-down schedule thereafter. Moody's expects the company will maintain adequate cushion with the covenant based on our projected earnings and debt levels.
The first lien credit agreement does not contain provisions for an incremental facility. There is very little flexibility for transactions that could adversely affect creditors. The term loan facility has a first lien net leverage ratio covenants with contractual step-downs through the life of the loan. The ABL facility agreement contains a cash dominion trigger if the excess availability is less than the greater of $12 million and 20% of the line cap for a period of at least three business days. There are no leverage-based step-downs to the asset sales proceeds prepayment requirement.
The assigned B1 rating to the first lien first-out term loan, three notches above the CFR, reflects its senior priority of claim in the recovery waterfall (behind the asset-based revolving credit facility) and the first loss position of the first lien second-out term loan. The assigned Caa2 rating on the first lien second-out term loan, one notch below the CFR, reflects the subordination of the lien of this class of debt and its size in the liability waterfall.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A ratings upgrade would require the company to successfully execute on its business plan, in particular reversing negative operating trends, improving cash flow growth and increasing revolver availability. Quantitatively, the ratings could be upgraded if the company's debt-to-EBITDA (Moody's adjusted) is sustained below 5.0x, (EBITDA -- Capex)/interest expense (Moody's adjusted) above 1.25x, and at least adequate liquidity is maintained.
The ratings could be downgraded if iQor's revenue or earnings decline more severely than expected, free cash flow remains largely negative, revolver usage is higher than anticipated or probability of default increases.
iQor is a global provider of customer engagement and technology enable business process outsourcing (BPO) solutions. Solutions include, customer service, third-party collections and accounts receivable management to world's largest brands. The company uses integrated digital capabilities and proprietary technology and analytics to enhance the customer experience lifecycle. The company is expected to generate annual revenue of $670 million as of the fiscal year ended 2020. Post-bankruptcy emergence, the company's equity ownership is allocated to pre-existing debt holders. The company is in the process of sale/exit of the remaining product support business, expected to close by year-end 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.
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Oleg Markin Asst Vice President - 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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