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Panther Guarantor II, L.P. (Forcepoint) -- Moody's assigns B3 CFR to Forcepoint

·15 min read

Rating Action: Moody's assigns B3 CFR to Forcepoint

Global Credit Research - 19 Jan 2021

New York, January 19, 2021 -- Moody's Investors Service ("Moody's") assigned a B3 corporate family rating ("CFR") and a B3-PD probability of default ("PD") rating to first time issuer Panther Guarantor II, L.P. ("Forcepoint"). Moody's also assigned a B3 rating to the proposed first lien credit facilities, which will be issued at Forcepoint's subsidiaries, Panther Purchaser LLC and Panther Commercial Holdings, L.P.'s. The credit facilities will be used to fund the acquisition of certain cybersecurity assets by private equity firm Francisco Partners from Raytheon Technologies Corporation for roughly $1.1 billion as part of a carve-out transaction. The outlook is stable.

RATINGS RATIONALE

The B3 CFR reflects Forcepoint's very high initial leverage at deal close, challenges of separating as a stand-alone company while simultaneously restructuring operations and potential for near term negative free cash flow. The rating also reflects the company's leading position across various commercial and government cybersecurity software markets and favorable demand drivers in the security software industry.

Forcepoint has seen strong growth in its Government business in recent years while seeing more challenging performance in its larger Commercial business. However, Forcepoint's Commercial business should see more consistent topline performance as the company's new cloud and hybrid Secure Web Gateway (SWB), Data Loss Prevention (DLP), and Next-Gen Firewall (NGFW) products offset their legacy, on-prem predecessor products. Pro forma leverage at closing is over 20x excluding certain one-time costs (and far higher including those items) and free cash flow pro forma for the new capital structure is negative. Francisco Partners plans to enact sizeable cost restructuring initiatives however, which, have the potential to drive adjusted debt leverage to 6.0x and free cash flow positive over the next two years if the company can maintain low single digit growth through the process.

The stable outlook reflects Moody's expectation that Forcepoint will make significant headway under its restructuring program, modestly grow revenue and improve its run-rate EBITDA margin to the mid-teens over the next two years.

Forcepoint's environmental risks are low and in line with other software peers. Social risks are low to moderate, in line with the software sector, mainly stemming from social issues linked to data security, diversity in the workplace and access to highly skilled workers. Cyber security risks are moderate at Forcepoint and arise from breaches on installed customer software as well as internal Forcepoint systems. Forcepoint is privately held by private equity firm Francisco Partners and does not have an independent Board. Financial policies are expected to be aggressive as highlighted by the high leverage at closing and significant restructuring plans.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Forcepoint's CFR could be upgraded if the company is able to grow revenues, maintain or improve market share, leverage is sustained below 6.5x (including Moody's adjustments) and free cash flow to debt is sustained above 5%.

Forcepoint's CFR could be downgraded if performance deteriorates as a result of the separation or restructuring plan, leverage remains over 8x (including Moody's adjustments) on other than a temporary basis, or free cash flow to debt is not on track to be positive in 2022 or if liquidity otherwise deteriorates.

Liquidity is good based on a pro forma cash balance of $93 million, although a portion of this cash balance is earmarked for certain one-time costs related to the cost savings plan and the stand-up costs related to the carve-out from Raytheon Technologies. We expect free cash flow will be breakeven to negative in the first of deal close due to these one-time costs. The company will also have a $75 million undrawn revolving credit facility at closing.

Assignments:

..Issuer: Panther Guarantor II, L.P. (Forcepoint)

.... Corporate Family Rating, Assigned B3

.... Probability of Default Rating, Assigned B3-PD

..Issuer: Panther Purchaser LLC

....Gtd Senior Secured 1st Lien Revolver Credit Facility, Assigned B3 (LGD3)

....Gtd Senior Secured 1st Lien Term Loan, Assigned B3 (LGD3)

Outlook Actions:

..Issuer: Panther Guarantor II, L.P. (Forcepoint)

....Outlook, Assigned Stable

..Issuer: Panther Purchaser LLC

....Outlook, Assigned Stable

The proposed secured debt facilities has flexibility that could be detrimental to lenders, including a provision for incremental secured facilities up to the greater of $110 million or 1x EBITDA. Asset sale proceeds are required to pay down debt based on a leverage based test with 18 month reinvestment provisions (and an additional 180 day extension if the purchase is committed to within the initial 18 month window).

Forcepoint is a security software company serving both enterprise and government customers, with approximately $650 million of revenue for the fiscal year ended December 31, 2019. The company will be owned by private equity -firm Francisco Partners at close of the transaction.

The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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.

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.

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.

Matthew B. Jones VP - Senior Credit Officer 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 Stephen Sohn 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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