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J2 Global, Inc. -- Moody's affirms J2's B1 rating; stable outlook

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Rating Action: Moody's affirms J2's B1 rating; stable outlookGlobal Credit Research - 26 Apr 2021New York, April 26, 2021 -- Moody's Investors Service ("Moody's") affirmed J2 Global, Inc's (J2) B1 corporate family rating (CFR), B1-PD probability of default rating (PDR) and the Ba3 rating on the company's senior notes due 2030. The speculative grade liquidity (SGL) rating is unchanged at SGL-1. The outlook is stable.The rating actions follow the company's announcement [1] that it would be separating its digital fax business segment into a new publicly listed company called Consensus. The transaction is expected to close in Q3 2021 and remains conditional upon receipt of a private letter ruling from the Internal Revenue Service addressing certain aspects of the spin-off. While the split will result in a decline in EBITDA, the company has publicly committed to repaying its convertible notes and maintain leverage (as reported by the company) of 3x. This commitment to reducing debt in line with the EBITDA decline is a key driver of today's rating action and evidences a prudent financial policy going forward for the new J2 Global entity. Affirmations: ..Issuer: J2 Global, Inc. .... Corporate Family Rating, Affirmed B1.... Probability of Default Rating, Affirmed B1-PD....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD3)Outlook Actions:..Issuer: J2 Global, Inc.....Outlook, Remains StableRATINGS RATIONALEThe affirmation of J2's B1 CFR reflects Moody's expectations that the company's credit metrics will remain strong post-separation of Consensus. The B1 also reflects the company's financial policy to maintain reported gross debt/EBITDA at a maximum of 3x on a run-rate basis, allowing for temporary increases in times of sizeable M&A. The non-Consensus operations of J2 have a history of good revenue growth, which will be bolstered once digital fax is separated as this segment was growing at 2% annually.The B1 rating also takes into account the inherent integration risk that comes with J2's high appetite for M&A. The company has spent $2.5 billion since 2013 in M&A (on over 70 companies), 95% of which in its non-fax segments. While the remaining J2 operations, post-separation, will have faster growth prospects they will also offer less visibility and be more prone to cyclical shifts in consumer spending and advertising demand.The remaining J2 operations are expected to generate revenue of around $1.3 billion in 2021 and the company has guided to EBITDA of around $454-$467 million. At close of the transaction, J2 will retain around 20% of Consensus which it expects to further divest over time. J2 will call its 3.25% convertible notes due 2029, once these become callable post June 2021; this will result in a $402.4 million reduction in debt resulting in pro-forma 2021 leverage of around 2.9x for 2021.The SGL-1 speculative grade liquidity rating indicates a very good liquidity profile, supported by ongoing strong free cash flow generation even post divestiture of the digital fax business. Moody's expects the remaining operations of J2 to deliver more than $200 million in free cash flow in 2021. The company retains full access to its $100 million revolver which is expected to remain undrawn given the company's cash balance which stood at $243 million at year end 2020. The revolver includes two financial covenants which Moody's expects the company to continue to meet with ample flexibility.The instrument ratings reflect the probability of default of the company, as reflected in the B1-PD Probability of Default Rating, an average expected family recovery rate of 50% at default, and the particular instruments' ranking in the capital structure. The Ba3 rating on J2's $750 million of senior unsecured notes due 2030 issued by J2 Global, Inc. reflects the fact the notes benefit from guarantees from all material operating subsidiaries, and rank ahead of the convertible notes (unrated).The stable outlook reflects Moody's view that the company will continue to balance its high M&A appetite with a financial policy to maintain run-rate leverage (Moody's adjusted) below 3x.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's could upgrade the ratings if leverage (Moody's adjusted) declined below 2.0x on a sustained basis and free cash flow to debt (Moody's adjusted) was sustained above 20%.Moody's could downgrade the ratings if leverage (Moody's adjusted) was sustained at or above 3.0x or free cash flow to debt (Moody's adjusted) fell below 10% on sustained basis. Downward ratings pressure would also ensue should the company's liquidity position deteriorate.Based in Los Angeles, CA, J2 Global, Inc. is a provider of business cloud services and digital media. The company's main Cloud Services subsidiary derives the majority of its revenue from telephone number based subscription services, such as unified voice and electronic fax services, with the remainder derived from non-telephone number based services, specifically backup and storage, email and endpoint security and customer relationship management services.Post separation of the electronic fax business into the new Consensus entity, J2's Digital Media subsidiary will generate the majority of revenue and EBITDA. Digital Media mainly operates web properties providing reviews of technology and gaming products as well as lifestyle and healthcare articles, related news and commentary. It derives revenue primarily from display and video advertising, performance-based advertising and some subscription-based products.In 2020, J2 generated approximately $1.49 billion in revenue and $615.7 million in EBITDA.The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. 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_1263068.At least one ESG consideration was material to the credit rating action(s) announced and described above.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.REFERENCES/CITATIONS[1] Form 8-K (SEC) 20-Apr-2021Please 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. Christian Azzi 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 Lenny J. Ajzenman 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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