Snap One Holdings Corp. -- Moody's assigns B2 CFR to Snap One Holdings Corp.; outlook stable

Rating Action: Moody's assigns B2 CFR to Snap One Holdings Corp.; outlook stableGlobal Credit Research - 25 Jan 2022New York, January 25, 2022 -- Moody's Investors Service ("Moody's") assigned a B2 corporate family rating (CFR) and B2-PD probability of default rating to Snap One Holdings Corp. ("Snap One") following the refinancing of credit facilities in December 2021. Moody's also assigned a B2 instrument level rating to the company's senior secured first lien credit facilities, which includes a $100 million revolver due December 2026 and a $465 million term loan due 2028. These ratings actions are a result of a change in the borrower of the company's credit facilities from Wirepath LLC to Snap One Holdings Corp. As a result, all ratings for Wirepath LLC will be withdrawn. The Speculative Grade Liquidity rating has been assigned as SGL-2. The outlook remains stable.RATINGS RATIONALESnap One's B2 CFR reflects the company's strong market presence and the enhancement of scale, global distribution and market share via acquisitions and organic revenue growth in the 10% area. The company is one of the most recognized names by professional installers in the home audio-visual ("AV") and automation markets and is one of the largest players in the space. Snap One's direct-to-integrator sales model is designed to eliminate the risk of intermediation by lower-cost retail providers by replacing traditional design, manufacturing, and distribution roles with a fully integrated platform based on an efficient e-commerce platform. Moody's believes that smart home industry has a favorable long-term outlook as consumers embrace new technologies that improve connectivity and quality of life. Moody's expects that the company will be able to expand into additional home equipment via organic growth or small acquisitions that could increase the revenue base and increase scale in the long term. In addition, the company's strategy of penetrating the technology-enabled smart home market can create opportunities for subscription-based revenue.Snap One's ratings are constrained by its exposure to volatility in the economic environment related to housing market strength and consumer discretionary spend. The company's products are concentrated in the very high end of the home AV market with average spend of $20,000 per project by the customer. Demand for the company's products are elastic and susceptible to decline during recessionary conditions when consumers suspend high ticket discretionary purchases. Without penetration into the mid-tier of home AV and automation installations, the risks of significantly declining demand in a recessionary environment will continue to be a feature of the credit. Despite public ownership, the company remains sponsor-controlled which, in Moody's view, elevates the risk of aggressive growth or shareholder return strategies.The stable outlook reflects the expectation that operating conditions will be favorable over the foreseeable future and the strong performance and resiliency of demand that the company has shown over the pandemic is expected to continue. Snap One has been able to expand its customer base to 16,000 integrators and 70% of its sales are from proprietary brands that have higher margins than third party brands. Demand for residential AV and automation equipment is supported by secular tailwinds as more consumers seek to make their homes connected and as homes become 'smarter'. The company's products are targeted towards the high end of the residential market and projects that are completed by the company's network of installers tend to be highly technical in nature. Going forward, leverage is expected to decline to around 4.7x by the end of 2022 and free cash flow to be positive for the year, driven by steady revenue growth and stable margins.The credit facilities provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following:(i) Incremental debt capacity up to the sum of the greater of $110,000,000 and 100.0% of Consolidated EBITDA, plus unused capacity reallocated from the general debt basket, plus unlimited amounts subject to pro forma net first lien leverage ratio of 4.5x. Amounts up to the greater of $55m and 50% of Consolidated EBITDA may be incurred with an earlier maturity than the initial term loans.(ii) The credit agreement permits the transfer of assets to unrestricted subsidiaries, up to the carve-out capacities, subject to "blocker" provisions which prohibit the transfer of material intellectual property to unrestricted subsidiaries.(iii) Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, subject to protective provisions limiting such guarantee releases in connection with a de minimis transfer of capital stock with no bona fide business purpose, intended solely to release the guarantee as determined by the borrower.(iv) There are no express protective provisions prohibiting an up-tiering transaction.The SGL-2 Speculative Grade Liquidity Rating reflects Moody's expectation that Snap One will maintain good liquidity. Liquidity is supported by about $60 million of cash on the balance sheet as of September 30, 2021 and expected $50 million in free cash flow for 2022, which together should cover the expected cash outflow through 2022, including a $4.7 million mandatory debt amortization and any working capital uses. Free cash flow to debt is expected to be in the 10% to 12% range for this year and next year, which is strong for the rating category. Liquidity is also supported by the company's $100 million revolver that has full availability other than around $5 million of letters of credit. The revolver is subject to a springing leverage covenant but Moody's does not expect the company to draw down on the revolver over the next 12 months and thus the revolver is not expected to be subject to the covenant.Assignments:..Issuer: Snap One Holdings Corp..... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD.... Speculative Grade Liquidity Rating, Assigned SGL-2....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)....Senior Secured 1st Lien Multicurrency Revolving Credit Facility, Assigned B2 (LGD3)Outlook Actions:..Issuer: Snap One Holdings Corp.....Outlook, Assigned StableFACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Moody's expects 1) sustained organic revenue growth and increasing scale and continued diversification of products sold; 2) debt to EBITDA (Moody's adjusted) to remain below 4.0x; and 4) the company will sustain good liquidity through cycles.The ratings could be downgraded if 1) revenue or profits do not grow as expected, evidencing increased competition or loss of market share; 2) Moody's expects debt to EBITDA will be sustained above 5.5x; 3) liquidity deteriorates; or 4) free cash flow approaches break--even (all metrics Moody's adjusted).Snap One Holdings Corp. is a technology-enabled, value-added wholesale supplier and distributor of products and services to integrators in, primarily, the home and small business audio visual equipment sector. Snap One, which generated $960 million of revenues for the LTM period ended September 30, 2021, is a publicly traded company, but still majority owned by funds affiliated with private equity sponsor Hellman & Friedman. The company is headquartered in Charlotte, NC.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. 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. 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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Farah Zakir Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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