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Realogy Group LLC -- Moody's upgrades Realogy's senior secured 2nd lien notes to B2, affirms B2 CFR, Caa1 unsecured and other ratings; outlook remains stable

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Rating Action: Moody's upgrades Realogy's senior secured 2nd lien notes to B2, affirms B2 CFR, Caa1 unsecured and other ratings; outlook remains stableGlobal Credit Research - 02 Feb 2021Over $4.5 billion of rated debtNew York, February 02, 2021 -- Moody's Investors Service, ("Moody's") upgraded Realogy Group LLC's ("Realogy") senior secured 2nd lien notes due 2025 to B2 from B3. Moody's also affirmed the B2 corporate family rating ("CFR"), B2-PD probability of default rating, Ba2 senior secured 1st lien and Caa1 senior unsecured ratings. The speculative grade liquidity rating remains SGL-2. The outlook is stable.Today, Realogy announced it would sell an incremental $200 million of its 5.75% senior unsecured notes due 2029 and use the net proceeds to repay a portion of its senior secured 1st lien term loan B due 2025.RATINGS RATIONALEThe upgrade of the senior secured 2nd lien notes to B2 from B3 reflects both the reduction in the amount of senior secured 1st lien debt, which ranks ahead of the 2nd lien notes in Moody's hierarchy of claims at default, and increase in the amount of junior-ranking unsecured notes, which provide loss-absorption to the 2nd lien notes, following the announced transaction."Using incremental unsecured debt to repay a portion of the term loan B facility is a positive liquidity development because the transaction extends Realogy's debt maturity profile, but since the move is leverage neutral, the B2 CFR remains unchanged at this time," said Edmond DeForest, Moody's Vice President and Senior Credit Officer.The B2 CFR reflects Moody's expectations for a low single digit revenue growth rate, at least $200 million free cash flow and debt to EBITDA of 6.3 times as of September 30, 2020 to decline and remain below 6 times in 2021. Moody's anticipates strong recovery in the existing home sales market nationally, including the New York City suburbs, although not the city itself, fueled in part by historically low interest rates and high interest in existing homes from consumers is expected to continue in 2021. The substantial rebound in Realogy's operating and financial results depends in part on adverse coronavirus-related impacts continuing to wane in 2021. Moody's notes that strong tailwinds supporting Realogy's business in late 2020 could reverse quickly if coronavirus-related disruption forces real estate brokerages to cease operations again. Profitability rates may not recover from historically low EBITA margins around 7.5% in the 12 months ended September 30, 2020 in 2021 due to the return of around $150 million of expenses (largely compensation and investment) temporarily eliminated during the pandemic in 2020. Over the longer term, expected revenue growth, operating leverage in its owned brokerage unit and permanent cost reduction initiatives should help EBITA rates rebound toward their historical range between 10% and 13%.All financial metrics cited reflect Moody's standard adjustments.Additional support is provided by a strong portfolio of brands and leading existing homes sale brokerage market position. Realogy's owned brokerage operations are concentrated in the largest US markets, including most large suburban markets experiencing an existing home sale market boom, but also in New York City, where Realogy has a large, multi-brand owned brokerage presence and existing home sales conditions are not as robust as elsewhere in the country. Moody's considers the residential real estate brokerage market volatile, cyclical and seasonal. Although commission costs are variable, Realogy's owned brokerages have a high degree of fixed operating costs. A high proportion of its profits reflect home sale market activity as opposed to less-transactional franchise fees. Realogy's leading position in the residential real estate brokerage market positions the company well to improve financial metrics steadily if existing home sale volume and price growth is sustained.Moody's expects that the residential real estate brokerage industry will remain subject to severe financial and operating consequences if coronavirus impacts rise further. Realogy is also under competitive pressure from other traditional brokers that have sought to recruit Realogy's best-performing sales people. Competition from non-traditional technology-enabled competitors including RedFin and Zillow, own-to-rent buyers and home flippers has grown. Additionally, Realogy's high operating and financial leverage could limit its flexibility if the negative impacts of the pandemic on the existing home sale market linger for an extended period. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.As a public company, Realogy provides transparency into its governance and financial results and goals. The 10 person board of directors is controlled by independent directors. Moody's expects Realogy to maintain conservative financial strategies including building liquidity and eschewing large debt-funded M&A or any share repurchase activity until its financial leverage is reduced. Additionally, Realogy does not exhibit material environmental risks.The Ba2 rating on the senior secured obligations reflects their priority position in the capital structure and a Loss Given Default ("LGD") assessment of LGD2. The debt is secured by a pledge of substantially all of the company's domestic assets (other than excluded entities and excluding accounts receivable pledged for the securitization facility) and 65% of the stock of foreign subsidiaries. The Ba2 rating, three notches above the CFR, benefits from loss absorption provided by the junior ranking debt and non-debt obligations.The B2 rating on the senior secured second lien notes reflects their subordination to the existing first lien senior secured bank facilities, seniority to the senior unsecured notes, and a LGD assessment of LGD4. The second lien note is secured by a second lien on substantially all of the company's domestic assets (other than excluded entities and excluding accounts receivable pledged for the securitization facility) and 65% of the stock of foreign subsidiaries.The Caa1 rating on the senior unsecured notes reflects the B2-PD PDR and an LGD assessment of LGD5. The LGD assessment reflects effective subordination to all the secured debt. The senior notes are guaranteed by substantially all of the domestic subsidiaries of the company (excluding the securitization subsidiaries).The SGL-2 liquidity rating reflects Realogy's good liquidity profile. As of September 30, 2020, Realogy had a cash balance of $380 million. Moody's anticipates at least $200 million of free cash in 2021 and full availability under the company's $1.425 billion revolving credit facilities. A $477 million portion of the revolver matures in 2023 while $948 million matures in 2025 so long as Realogy repays or refinances its 4.875% senior notes due June 2023 before March 2023 and repays or refinances its senior secured 1st lien term loan B due February 2025 before November 2024. Realogy's cash flow is seasonal, with negative cash flow typically in the 1st fiscal quarter. Moody's expects Realogy will maintain a comfortable margin below the maximum senior secured net debt to EBITDA (as defined in the facility agreement) financial maintenance covenant applicable to the secured 1st lien debt over the 12 to 15 months. Realogy has around $15 million of required term loan principal payments in 2021.The stable outlook reflects Moody's expectations for debt to EBITDA below 6 times, good liquidity and creditor-friendly financial strategies emphasizing repayment of debt. The stable outlook also anticipates Realogy will repay or refinance its 2023 debt maturities well in advance of their due dates.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Moody's expects Realogy will sustain: 1) debt to EBITDA below 5.5 times, 2) free cash flow to debt of at least 5%, 3) good liquidity and 4) balanced financial strategies, including an emphasis upon repaying debt and extending its debt maturity profile.The ratings could be downgraded if Moody's anticipates: 1) debt to EBITDA will remain above 6.5 times, 2) diminished liquidity or 3) aggressive financial strategies featuring large, debt-financed acquisitions or shareholder returns...Issuer: Realogy Group LLC.... Corporate Family Rating, Affirmed B2.... Probability of Default Rating, Affirmed B2-PD....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD2)....Senior Secured Regular Bond/Debenture, Upgraded to B2 (LGD4) from B3 (LGD4)....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD5)....Outlook, Remains StableRealogy Holdings Corp. (NYSE: RLGY) provides residential real estate services, encompassing franchise, brokerage, relocation, and title and settlement businesses as well as a mortgage joint venture. Realogy's brand portfolio includes Better Homes and Gardens® Real Estate, CENTURY 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, and Sotheby's International Realty®. Moody's expects 2021 revenues of over $6 billion.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.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. Edmond DeForest VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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