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Paysafe Holdings (US) Corp. -- Moody's upgrades Paysafe to B1; stable outlook

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Rating Action: Moody's upgrades Paysafe to B1; stable outlookGlobal Credit Research - 01 Apr 2021London, 01 April 2021 -- Moody's Investors Service (Moody's) has today upgraded Paysafe Group Holdings II Limited's (Paysafe or the company) corporate family rating (CFR) to B1 from B3 and probability of default rating (PDR) to B1-PD from B3-PD. Concurrently, Moody's has upgraded to B1 from B3 the instrument rating on the first lien backed senior secured facilities held by Pi Lux Finco S.a r.l., Paysafe Holdings (US) Corp. and PI UK BidCo Limited. The outlook has been changed to stable from ratings under review.The rating action concludes the review for upgrade which was initiated on 22 December 2020 upon the announcement that Paysafe would be acquired by the special purpose acquisition company (SPAC) Foley Trasimene Acquisition Corp. II (Foley Trasimene) in a transaction that has led to the public listing of Paysafe on the New York Stock Exchange. The investment from the SPAC, along with proceeds from a private investment in public equity (PIPE) and a forward purchase agreement with Cannae Holdings, Inc, total around $3.6 billion of new equity. The new equity was used primarily to acquire a controlling interest in Paysafe and repay $1.2 billion of existing debt. The transaction closed on 30 March 2021."Today's rating action reflects the strengthening of Paysafe's credit profile following the closing of the SPAC transaction resulting in its transition to a public company and a significant reduction in Moody's-adjusted leverage to around 6x from 9x" says Luigi Bucci, Moody's lead analyst for Paysafe."At the same time, the rating also reflects a certain degree of debt-funded M&A risk as Paysafe continues to target consolidation in the industry as part of its growth strategy. The company's long-term financial leverage target is only slightly lower than the pro forma level, indicating that any financial flexibility created by improvements in operating performance will be used for acquisitions" adds Mr. Bucci.A full list of affected ratings is provided towards the end of this press release.RATINGS RATIONALEThe B1 CFR of Paysafe primarily reflects (1) geographical diversification of earnings, with presence across the US, Europe and Asia; (2) sound growth prospects across its key segments; (3) positive growth dynamics from the deregulation of online gaming in the US market; (4) more predictable financial policy post-SPAC transaction closing; and (5) good liquidity supported by a solid free cash flow (FCF) generation and access to its $225 million revolving credit facility (RCF).Conversely, Paysafe's CFR is constrained by (1) its high Moody's-adjusted gross leverage of 6x, pro forma for the transaction and based on preliminary 2020 financials; (2) the high reliance on US small and medium businesses (SMBs), where a portion of business is secured via US independent sales organisations (ISOs), a market subject to a high level of competition and pricing pressure; (3) uncertainties around macroeconomic recovery post-coronavirus, which may hinder the company's growth prospects; (4) risk that organic deleveraging after 2021 could be slowed down by debt-funded acquisitions as the company continues to participate in the consolidation of the industry; and (5) socially driven regulatory risks related to the company's exposure to online gambling.Moody's expects Paysafe's revenues to grow in the mid-single digit and mid-to-high single digit over 2021 and 2022, respectively, noting a material improvement from 2020 levels. While the deregulation of online betting in the US provides potential upside to these estimates, uncertainties remain around the pace of a macroeconomic recovery post-coronavirus and the ultimate impact of the pandemic on SMBs in the US. The rating agency forecasts company-adjusted EBITDA, pre-restructuring costs and impact of potential M&A, to grow towards $530-540 million in 2022 (2020: $426 million), driven by top-line growth and, to a lesser extent, by the publicly announced cost savings to be achieved post-SPAC transaction closing.The rating agency anticipates pro forma Moody's-adjusted leverage at closing, based on preliminary 2020 financial information and pro forma for the debt reduction, of around 6x. Under Moody's current expectations, Paysafe's Moody's-adjusted leverage is likely to decline towards 5.0x-5.5x by 2021-2022 driven by the anticipated recovery in EBITDA. While Paysafe retains strong deleveraging potential, Moody's anticipates that the company will use most of the financial flexibility created through operating performance enhancements for debt-funded M&A.Moody's forecasts Moody's-adjusted FCF/debt to improve towards 8%-10% over 2021-2022 (2020: 5%) largely driven by EBITDA improvements and by lower interest payments. The potential impact on FCF from the publicly announced cost savings initiatives will be likely limited over this timeframe because of the exceptional charges to achieve those.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSPaysafe has meaningful exposure to customers in the gaming industry which is identified as having high social risk in Moody's ESG framework. Gambling addiction and elevated potential for crime (such as money laundering) are generally viewed as the main drivers of high social credit risk in the gaming sector. Another key risk area for the sector is security of the large amounts of customer data. The company has an established framework to manage cyber risk, including third-party security assessments and insurance coverage.In terms of governance, after closing of the SPAC transaction private equity funds CVC and Blackstone will be the largest shareholders in the company with a stake of approximately 46%. The remaining shareholders are largely represented by PIPE shareholders and Cannae Holdings, Inc.. Moody's understands that the current management team will remain in place with the sole change being the appointment of a new chairman.The financial policy of the company is expected to be more conservative, as evidenced by the long term leverage target of 3.5x. Paysafe's financial policy also reflects the company's intention to expand through acquisitions and its history of pursuing debt-funded growth. The company has, however, a well-defined acquisition strategy as well as a good track record of successfully integrating acquisitions and achieving operational efficiencies.LIQUIDITYMoody's views Paysafe's liquidity as good, based on the company's cash flow generation, available cash resources of $388 million as of December 2020 and an undrawn $225 million committed RCF, as well as a long-dated maturity profile. The rating agency expects the company to continue generating positive FCF through 2022, supporting the liquidity of the business.The RCF, due 2024, has a springing financial maintenance covenant (net senior leverage ratio) set at 9.0x, only tested on a quarterly basis when the RCF is drawn by more than 40%.STRUCTURAL CONSIDERATIONSThe B1-PD probability of default rating reflects Moody's assumption of a 50% family recovery rate given the covenant-lite structure of the term loan. The B1 instrument ratings of the senior secured first lien term loan and the RCF are in line with the corporate family rating, reflecting the pari passu capital structure of the company after the full repayment of the second lien debt.RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects Moody's view that operating performance over the next 12-18 months will improve from 2020 levels. The stable outlook also envisages Moody's-adjusted leverage in the 5x-5.5x range, as well as no transformational debt-funded acquisition or shareholder distribution.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFollowing today's upgrade the company is solidly positioned in the rating category. Positive pressure could arise if (1) the group maintains its Moody's-adjusted gross leverage sustainably below 5x; (2) Moody's-adjusted FCF/debt remains above 10% on a sustained basis; and (3) the company were to demonstrate a solid track-record of commitment to a conservative financial policy under the new structure.Moody's would consider a rating downgrade if Paysafe were to continue experiencing weaknesses in its core segments after 2020 or if it were to embark in transformational debt-funded acquisitions or shareholder distributions. Negative pressure would arise if (1) Moody's-adjusted leverage increases to over 6x on a sustainable basis; or (2) Moody's-adjusted FCF/Debt reduces to below 5%; or (3) liquidity weakens.PRINCIPAL METHODOLOGYThe 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.LIST OF AFFECTED RATINGSUpgrades:..Issuer: Paysafe Group Holdings II Limited.... Probability of Default Rating, Upgraded to B1-PD from B3-PD.... LT Corporate Family Rating, Upgraded to B1 from B3..Issuer: Paysafe Holdings (US) Corp..... Backed Senior Secured Bank Credit Facility, Upgraded to B1 from B3..Issuer: Pi Lux Finco S.a r.l..... Backed Senior Secured Bank Credit Facility, Upgraded to B1 from B3..Issuer: PI UK BidCo Limited.... Backed Senior Secured Bank Credit Facility, Upgraded to B1 from B3Outlook Actions:..Issuer: Paysafe Group Holdings II Limited....Outlook, Changed To Stable From Rating Under Review..Issuer: Paysafe Holdings (US) Corp.....Outlook, Changed To Stable From Rating Under Review..Issuer: Pi Lux Finco S.a r.l.....Outlook, Changed To Stable From Rating Under Review..Issuer: PI UK BidCo Limited....Outlook, Changed To Stable From Rating Under ReviewCOMPANY PROFILEHeadquartered in London (United Kingdom), Paysafe is a global provider of online payment solutions and stored-value products operating in the United States, Europe and Asia. Over 2020, Paysafe generated net revenues and company-adjusted EBITDA of $1.4 and $0.4 billion, respectively. Following the successful closing of the SPAC transaction, Paysafe is listed on the New York Stock Exchange.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.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.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. Luigi Bucci Analyst Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Richard Etheridge Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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