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Rating Action: Moody's affirms Steelcase's senior unsecured ratings at Baa2; outlook is changed to negativeGlobal Credit Research - 29 Jan 2021New York, January 29, 2021 -- Moody's Investors Service, ("Moody's") today affirmed Steelcase Inc.'s ("Steelcase") senior unsecured ratings at Baa2. The outlook was changed to negative from stable.The affirmation of the Baa2 reflects Steelcase's good market position in the office furniture sector and leading global brands. Despite a very challenging operating environment brought on by the global pandemic and its effects on the office space, Steelcase has taken swift action to right size its expense structure and minimize operating losses. Moody's expects that the office space will undergo changes to reverse densification in order to ensure social distancing following resolution of the coronavirus pandemic. Steelcase is well positioned to benefit from these trends given their product offerings of functional and versatile office furniture. Additionally, the company's strong liquidity position gives it time to manage through the weak cycle.The outlook was changed to negative because the level of investment by corporations and the ability for employees to continue to work from home will bring uncertainty to the office space market and permanent structural changes could prolong the timing and weaken the level of the recovery. Moody's believes Steelcase's recovery may take an extended period of time to overcome as office markets shift. These factors relate to health and safety concerns and demographic and societal trends that create social risk. Moody's expects Steelcase's operating performance will remain weak over the next 12-18 months as corporations take longer to upgrade office spaces and employees take longer to return to the office. Both of these drivers will depend on the success of the rollout of the vaccine. The disruption that the coronavirus outbreak has caused in employees working from home and the continued uncertainty of when it would be safe to return to the office and at what scale will continue to bring high uncertainty to Steelcase's business and its ability to recover from this downturn in a timely manner. A prolonged weak environment could place downward pressure on Steelcase's ratings if demand does not recover meaningfully over the next 12-18 months such that credit metrics are restored to pre-pandemic levels.Moody's expects Steelcase businesses to generate around $250 million of Moody's-adjusted EBITDA in FY 2022 (ending February 2022) compared to $390 million in FY 2020 prior to the pandemic. Moody's further expect the company to have relatively break-even free cash flow during FY 2022 as swift cost saving actions will continue to offset weaker sales and preserve liquidity. Debt to EBITDA will also remain elevated at around 3.0x during this period. Moody's expects the company to maintain excellent liquidity with cash balances at approximately $450 million and full availability under the revolver of $250 million. Better than typical credit metrics are needed because of the cyclical nature of Steelcase's business and the potential long-term pressures on the office furniture market.The following ratings/assessments are affected by today's action:Ratings Affirmed:..Issuer: Steelcase Inc.....Senior Unsecured Notes, Affirmed Baa2....Senior Unsecured Shelf, Affirmed (P)Baa2Outlook Actions:..Issuer: Steelcase Inc.....Outlook, Changed To Negative From StableRATINGS RATIONALESteelcase's credit profile reflects its leading market share and strong brand recognition in office furniture, strong end market diversification, and good geographic reach throughout the U.S., Europe and Asia, making it the most global firm among its competitors. The credit profile also incorporates Steelcase's moderate financial policies. Steelcase's susceptibility to revenue cyclicality in economic downturns as well as its moderate size relative to similarly rated companies constrain the credit profile.The level of future investment by corporations amid a re-evaluation of office space needs in the aftermath of the pandemic create risk of permanent structural changes that could prolong the timing and weaken the level of the recovery in the office products market. Moody's views these as social risks.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of Steelcase from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The consumer durables industry is one of the sectors most meaningfully affected by the coronavirus because of exposure to discretionary spending.From a governance perspective, the company has a moderate financial policy which is balanced with reinvestment in the business through acquisitions, a stable dividend which grows commensurate with earnings, and opportunistic share repurchases (largely offsetting dilution). Like many companies with significant family ownership and influence, Moody's believes that Steelcase will continue to pursue strategies that preserve value for the long run, including a cautious approach to leveraging transactions. Moderate leverage and strong liquidity provide flexibility to manage through economic cycles.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Steelcase's scale meaningfully increases, market fundamentals improve, and the company's operating performance and operating margins meaningfully improve. Credit metrics would also need to be sustained at strong levels, with debt to EBITDA maintained below 1.5x.The ratings could be downgraded if office furniture market fundaments weaken resulting from shifting workplace needs that are not fully offset by growth initiatives. Additionally, persistent weak EBITDA performance or weak or negative free cash flow could also lead to a downgrade. A downgrade could also occur if debt to EBITDA remains above 3.0x for a prolonged period of time.The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Grand Rapids, Michigan, Steelcase is a designer, manufacturer, and marketer of office furniture, primarily in North America (approximately 72% of sales) and Europe. The company sells its products through various channels including independent dealers, company-owned dealers and directly to end users and government units. The company is publicly traded with roughly 48% of the voting rights and approximately 18% of the economic interest held by members of the founding families. Revenues are approximately $2.9 billion as of LTM November 27, 2020.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.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. Maria Iarriccio 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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