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QualTek LLC -- De-SPAC transaction improves QualTek's liquidity, but debt leverage remains high

Announcement: De-SPAC transaction improves QualTek's liquidity, but debt leverage remains highGlobal Credit Research - 17 Feb 2022New York, February 17, 2022 -- Moody's Investors Service said that the completed combination of QualTek LLC (B3 negative) with Roth CH Acquisition III Co. ("ROCR"), a publicly-traded special purpose acquisition company ("SPAC"), strengthens QualTek's liquidity and equity base. However, the issuance of convertible notes to compensate for the equity redemption by public shareholders will keep QualTek's debt leverage high and constrain its ability to generate free cash flow. QualTek's B3 rating with a negative outlook continues to reflect its small business scale, high gross debt leverage and business execution risks including bolt-on acquisitions.On February 16, 2022, QualTek Services Inc. (QualTek LLC's parent company) began trading on NASDAQ, after completing a de-SPAC transaction with ROCR. QualTek's equity based improved by about $80 million with the additional PIPE money and remaining ROCR's equity capital. In addition, the company issued $125 million convertible notes to institutional investors.The total $171 million proceeds (excluding money already deployed for acquisitions) from the de-SPAC transaction and convertible notes issuance have improved QualTek's liquidity by boosting its cash balance and freeing up capacity under its asset-based revolving credit facility. Liquidity is critical for the company's daily business operations and project execution. Prior to these transactions, QualTek had de minimis cash balance and most of its revolver was already drawn.The improved liquidity will allow the company to focus on the execution of its $1.7 billion order backlog and earnings improvement. The company had to incur additional spending for a large fixed price contract and experienced COVID-19 induced project interruptions over the last two years. Recent earnings have recovered from trough, but earnings profile remains volatile due to seasonality and project milestones. As QualTek's customers in the telecom and renewables sectors are in the early stages of a multi-year cycle of capital deployment, there is still uncertainty with regard to the scope and timing of their capital spending in the near term. Moreover, delivering quality projects on time and within budget will be key to more consistent earnings at QualTek.QualTek's rating remains constrained by its high debt leverage, with adjusted debt/EBITDA close to 7x, after its convertible notes issuance. The newly issued convertible notes carry a high coupon rate and result in weak interest coverage of below 2x. Additionally, the improvement in QualTek's equity base from the de-SPAC transaction is less than the original expectation, as the majority of the ROCR's public shareholders have exercised their rights to redeem shares since the transaction was announced in Jun 2021.QualTek management and Brightstar Capital Partners, which have rolled 100% of their equity as part of the transaction and hold about 59% in QualTek at transaction closing, will continue to have a strong influence on business strategy and financial policy. QualTek continues to pursue bolt-on acquisitions that will increase the company's scale and diversity, but also keep its execution risks high. The company has completed a number of acquisitions in the last 12 to 18 months and will continue to do so with the proceeds from the transactions. Although business acquisition is consistent with QualTek's strategy to meet the growing demand for infrastructure services to the 5G wireless, telecom, and renewable energy sectors across North America, the company's ability to achieve target earnings remains to be seen given the short business track record and limited disclosure of the newly acquired businesses.QualTek LLC, headquartered in Blue Bell, PA, provides engineering, infrastructure assessment, installation, project management, fulfillment, business continuity and disaster recovery services to the North American telecommunications and power sectors. The company generated revenues of about $675 million in 2020. Brightstar Capital Partners is the majority owner of QualTek.This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. Jiming Zou, CFA 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 Glenn B. Eckert 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 © 2022 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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