Rating Action: Moody's affirms Shift4's B2 CFR, outlook changed to stable
Global Credit Research - 16 Dec 2020
New York, December 16, 2020 -- Moody's Investors Service, ("Moody's") affirmed Shift4 Payments, LLC's (Shift4) Corporate Family Rating (CFR) of B2, Probability of Default Rating (PDR) of B2-PD, and senior secured revolver rating of Ba2. The senior unsecured notes were upgraded to Ba3 from B2. The rating outlook was changed to stable from positive. The action follows Shift4's issuance of $690 million of convertible senior notes.
"Shift4 is likely to generate strong revenue and EBITDA growth in 2021" said Peter Krukovsky, Moody's Senior Analyst. "However, the substantial increase in funded debt and total leverage constrains the rating. Very strong cash liquidity provides support, and organic growth combined with use of cash for acquisitions will drive down the total leverage ratio over time."
The following rating actions were taken:
..Issuer: Shift4 Payments, LLC
.... Probability of Default Rating, Affirmed B2-PD
.... Corporate Family Rating, Affirmed B2
....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD1)
..Issuer: Shift4 Payments, LLC
....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 (LGD2) from B2 (LGD4)
..Issuer: Shift4 Payments, LLC
....Outlook, Changed To Stable From Positive
Shift4 is executing on an aggressive growth strategy which leverages differentiated vertical-specific integrated payments solutions focused largely on hospitality markets such as restaurants and hotels. Prior to the coronavirus pandemic (COVID), Shift4's organic growth rate of 14% in 2019 was meaningfully above average for the merchant acquiring industry. Moody's regards the coronavirus outbreak as a social risk under the ESG framework. In 2020, the company has been successful in gaining market share even as the pandemic has caused a substantial decline in payment volumes in its target markets, and has been able to limit revenue decline for the year to low single digits. In 2021, a partial recovery in hospitality markets and continued share gains should result in strong revenue growth. However, Shift4's market share gain strategy requires meaningful investment in operating expenses and capital spending, which constrain near-term profit margin growth and free cash flow generation compared to merchant acquiring industry leaders.
Shift4 has raised a substantial amount of equity and debt capital over the course of 2020 to support its growth. Following the issuance of the $690 million convertible notes in December 2020, Moody's estimates cash balances at about $940 million or over 80% of funded debt. Shift4 intends to use the cash to acquire assets in multiple transactions of various sizes. The convertible notes issuance has substantially increased Moody's adjusted total leverage to 13.6x. Net of the substantial cash balances the leverage is only 2.5x, but the net leverage ratio could increase materially if Shift4 were to execute a large acquisition at a high valuation multiple. The company has been successful historically in acquiring small assets that reinforced its franchise at moderate multiples net of synergies. However, at larger transaction sizes the required valuation multiples may be higher and synergies may be smaller relative to transaction values. Executing multiple acquisitions over a short period of time inherently involves execution and integration risks. Moody's expects organic growth and acquisitions to drive total leverage down over the coming years. Management does not plan to use the cash for capital returns. Reduction in cash that does not result in higher EBITDA would pressure the ratings.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation of total leverage decline over the next 12-18 months driven by organic EBITDA growth and deployment of cash balances for acquisitions. The ratings could be upgraded if Shift4 generates consistent organic revenue and EBITDA growth, and if Moody's adjusted total leverage is sustained below 5.0x and FCF/debt is sustained in the mid-single digits. The ratings could be downgraded if Shift4 experiences a significant growth deceleration or a profitability decline, or if cash liquidity is reduced meaningfully without a resulting increase in earnings.
The Ba2 facility rating for Shift4's secured revolving credit facility, three notches higher than the B2 CFR, reflects the benefit of security and the small size relative to the unsecured notes and convertible notes. The Ba3 facility rating for the unsecured notes, two notches higher than the B2 CFR, reflects the benefit of subsidiary guarantees. The convertible notes do not benefit from subsidiary guarantees. The instrument ratings reflect the uncertainty around the potential evolution of the capital structure over time.
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.
With estimated net revenues of $326 million in 2020, Shift4 is a provider of integrated payment processing and technology solutions.
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.
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.
Peter Krukovsky 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 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
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