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RE/MAX, LLC -- Moody's affirms RE/MAX's credit ratings, changes outlook to stable

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Rating Action: Moody's affirms RE/MAX's credit ratings, changes outlook to stableGlobal Credit Research - 12 Feb 2021Approximately $245 million of rated debt securities affectedNew York, February 12, 2021 -- Moody's Investors Service, ("Moody's") affirmed RE/MAX, LLC's (RE/MAX) credit ratings, including the Ba3 Corporate Family Rating, and changed the outlook to stable from negative. Concurrently, Moody's upgraded the company's Speculative Grade Liquidity rating to SGL-1 from SGL-2, reflecting very good liquidity.The rating affirmation and change in outlook to stable from negative reflect RE/MAX's strong recovery in operating and financial performance buoyed by the rebound in housing market and the resiliency of the company's fully franchise-based model. Existing home sales volume and mortgage refinance activity have recovered strongly from the trough in April/May 2020 and now exceed pre-pandemic levels. According to RE/MAX's November 2020 Housing report[1], the overall average number of home sales was up 19.7% compared to November 2019. The company's faster than anticipated operating recovery enables better cash flow generation and liquidity going forward.Moody's expects that RE/MAX will return to pre-pandemic credit metrics by the end of 2021. This includes generating cash flow from operations of around $100 million in fiscal 2021, in line with FY2019. Moody's also projects Debt/EBITDA improvement to roughly 2.4x -- 2.6x by the end of 2021, down from 2.9x as of LTM 9/2020, and in line with the pre-pandemic level (was 2.5x in 2019). All metrics incorporate Moody's-standard accounting adjustments.The upgrade in the Speculative Grade Liquidity rating to SGL-1 reflects Moody's expectation for solid cash flow and a high cash balance over the next 12-18 months, which will be more than sufficient to meet cash needs without relying on external sources of liquidity.Moody's took the following rating actions on RE/MAX, LLC:...Affirmations..Corporate Family Rating, affirmed at Ba3..Probability of Default Rating, affirmed at Ba3-PD..$10 million Sr Secured First Lien Revolving Credit Facility due 2021, affirmed at Ba3 (LGD3)..$235 million Sr Secured First Lien Term Loan B due 2023, affirmed at Ba3 (LGD3)...Upgrades..Speculative Grade Liquidity Rating, upgraded to SGL-1 from SGL-2Outlook Actions on RE/MAX, LLC:..Outlook, changed to Stable from NegativeRATINGS RATIONALEThe company's Ba3 CFR reflects the protections offered by its 100% franchised business model that mitigates the volatility in transaction activity even in the face of the coronavirus outbreak, good liquidity and solid credit metrics. The strong RE/MAX brand recognition and leading market position drive the company's fairly predictable revenues, strong margins and substantial cash generation. In addition to its well-recognized global real estate brokerage RE/MAX brand, the company's credit profile also benefits from its Motto Mortgage brand in the US. The company's Motto brand is still small relative to RE/MAX but is growing rapidly as evidenced by the number of franchises sold and will play a significant part of the company's future growth.With projected FY2021 Debt/EBITDA in the 2.4x-2.6x range and EBITA/Interest approaching 8x (both ratios Moody's adjusted), RE/MAX's credit metrics are very strong for the rating category but governance risks constrain positive rating movement. Governance risks we consider in RE/MAX's credit profile include the risk of more aggressive financial policies and the potential for a re-leveraging of the balance sheet to acquire independent regions. Moody's believes the company's financial policies are evolving now that the founder no longer retains majority voting control and as the company's public status subjects it to increased investor scrutiny and shareholder activism. RE/MAX's concentrated ownership by its founder and affiliates (around 42%) and a lack of a publicly defined succession plan also present credit risk. However, such risk is partially mitigated by its listed status and the presence of independent directors on the board.The rating also recognizes ongoing risks from the pandemic, cyclicality of the housing market and the potential for new entrants. Demographic and societal trends which would lead to a significant adoption of online alternatives to full-service agents is a long-term risk that could hurt RE/MAX's growth prospects and profitability. RE/MAX and other traditional real estate brokerage firms were already under competitive pressure from non-traditional technology-enabled competitors before the COVID-outbreak. These competitors include some that offer deeply discounted commissions to consumers and other newer entrants, including iBuyers, such as Redfin and Zillow, and the virtual brokerage platform of eXp Realty. However, RE/MAX's performance during the pandemic has demonstrated that the role of a real estate agent is invaluable in the home selling/buying process even when customers use digital platforms in initial stages of the transaction. However, social trends toward heavier reliance on digital platforms present a long-term risk that could hinder traditional real estate brokerages that are not adapting to a changing environment quickly enough.LIQUIDITYThe SGL-1 Speculative Grade Liquidity rating reflects the company's very good liquidity supported by predictable free cash flow generation, substantial cash on balance sheet, and low capital investment needs. Moody's expects that RE/MAX will fund itself through internally generated cash flow and cash on hand over the next 12-18 months. The company's cash balance was about $83 million as of September 30, 2020. We expect the company to generate free cash flows (after dividends) in the $30 - $35 million range in 2021. In combination with cash on hand, internal cash flows are sufficient to meet basic cash needs including $8-$10 million in annual capex, $2.4 million in term loan amortization and $40-$50 million in member distributions this year.The company's $10 million undrawn revolver expires on 15 December 2021 and Moody's expects that RE/MAX will take the necessary steps to ensure uninterrupted access to a credit line. Moody's also expects that the revolver will remain undrawn until expiration. The size of the current commitment is small compared to the company's fixed charges, covering about 8 months' worth of debt service. The revolver is subject to two springing financial maintenance covenants (maximum net leverage of 4x and minimum interest coverage of 3x, as defined in the facility agreement), which come into effect only when the revolver is drawn. Moody's does not expect the covenants to spring, but should the covenant be tested, the cushion over the requirements is expected to be at least 25% or more.The stable outlook reflects Moody's expectations for mid-single global growth in agent count to drive high single digit revenue growth and good liquidity. The stable outlook also anticipates that RE/MAX will repay or refinance its 2023 debt maturities well in advance of their due dates.FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if RE/MAX commits to maintaining conservative financial policies such that Debt/EBITDA is maintained below 3x (Moody's adjusted) as it continues to expand the size and scope of revenues through product and regional expansion. An upgrade will also require that RE/MAX maintains very good liquidity, including an extended debt maturity profile.The ratings could be downgraded if liquidity weakens, or an aggressive financial policy or earnings decline leads to deterioration in credit metrics such that Moody's expects Debt/EBITDA to be sustained over 4x or FCF-to-debt declines to under 8% (all metrics are Moody's adjusted).RE/MAX, LLC (RE/MAX) operates as a franchiser of real estate services in the U.S., Canada, and internationally and mortgage brokerage services in the U.S. RE/MAX derives its revenues primarily from continuing franchise fees, annual dues, broker fees, new franchise sales and renewals, and other revenue. RE/MAX, LLC is a subsidiary of RE/MAX Holdings Inc. (NYSE: RMAX) and is headquartered in Denver, Colorado. Moody's estimates RE/MAX's 2020 revenues of around $260 million.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.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.REFERENCES/CITATIONS[1] Nov-2020 Housing Report posted on the company's website 17-Dec-2020Please 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. Dilara Sukhov, CFA 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 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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