SYBIL SOFTWARE LLC -- Moody's upgrades Avast to Ba1 from Ba2, outlook stable
Rating Action: Moody's upgrades Avast to Ba1 from Ba2, outlook stableGlobal Credit Research - 03 Mar 2021NOTE: On March 04, 2021, the press release was corrected as follows: In the first paragraph of the press release, the second and third sentences were changed to At the same time Moodys has assigned Ba1 instrument ratings to the new $837 million equivalent senior secured term loan B maturing 2028 as well the new $40 million senior secured revolving credit facility (RCF) maturing in 2026. The outlook changed to stable from positive. Revised release follows.Frankfurt am Main, March 03, 2021 -- Moody's Investors Service ("Moody's") has today upgraded the corporate family rating (CFR) of Avast Holding B.V. (Avast) to Ba1 from Ba2 and the probability of default rating (PDR) to Ba1-PD from Ba2-PD. At the same time Moodys has assigned Ba1 instrument ratings to the new $837 million equivalent senior secured term loan B maturing 2028 as well the new $40 million senior secured revolving credit facility (RCF) maturing in 2026. The outlook changed to stable from positive.RATINGS RATIONALEWe have upgraded Avast to Ba1 with a stable outlook following a strong performance in 2020 with continued high profitability levels and our expectation that the trajectory will continue into 2021 which will provide good deleveraging potential that the company has constantly used to voluntarily repay outstanding debt in the past. We furthermore expect credit metrics to remain at levels required for the Ba1 rating on a sustained basis. Additionally, the company reduces the refinancing risk and likely reduces interest costs with the proposed refinancing of its existing term loan and the RCF, which where maturing in 2023 and 2022 respectively.Avast's Ba1 CFR is generally supported by (1) the group's large base of more than 435 million users across desktop and mobile, (2) high Moody's adjusted EBITDA margin above 50% in the last twelve months ended in June 2020 and strong free cash flow generation, (3) a moderate leverage moving towards 1.5x in the next 12-18 months (4) a track record of revenue and EBITDA growth, (5) large scale in emerging growth areas such as mobile and (6) good revenue visibility with an average contract tenor of 14 months and a an increasingly sticky customer base.Conversely, Avast's CFR is constrained by (1) the group's relatively small percentage of paid users (4% in desktop) and some focus on the US, (2) the overall limited scale with low diversification in terms of end-products and customer segments (3) the intense industry competition and inherent technology risks in security software markets, (4) relatively low customer switching costs and (5) lower deleveraging capacity because of dividend payments.Moody's views Avast's liquidity profile as strong. It is supported by a cash balance of approximately $175 million as of year-end 2020, forecasted FCF generation above $200 million in 2020 and full availability under the $40 million revolving credit facility (RCF). The credit facilities are covenant-lite, with only a springing net first lien leverage covenant on the RCF.RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects our expectation that Avast will continue to grow its paying user base organically and maintain its high margins while preserving its financial policy including moderate leverage and no elevated shareholder distributions.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSPositive pressure is unlikely at this point in time due to Avast's limited scale and its business profile which are not in line with the requirements for an investment grade rating. We would require the company to (1) meaningfully expand and diversify its revenue and profit streams, (2) maintain Moody's adjusted EBITDA margins well above 50%, (3) maintain Moody's adjusted debt to EBITDA sustainably around 1.0x (4) maintain free cash flow/debt (after dividend) above 25% and (5) pursue a conservative financial policy in line with an investment grade rating.Conversely, negative ratings pressure could materialise if (1) Avast's paid user base declines on a continued basis, (2) adjusted leverage rises sustainably above 2.0x, (3) FCF/debt is consistently lower than 15% or (4) the liquidity profile weakens. We also might reassess the rating in case of any major debt-funded acquisitions or shareholder distributions.ESG CONSIDERATIONSCorporate governance at Avast is centred around a well-established governance structure and consists of an audit committee, a compensation committee and a nominations committee, supplemented by a series of codes of conducts and policies covering a number of areas relating to operational and managerial practices. Avast's governance also balances its financial policies of moderate leverage and strong liquidity.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.CORPORATE PROFILEAvast was founded in 1988 in the Czech Republic, and has grown to become a global provider of security software and related solutions primarily focused on the consumer market (including mobile), with small business clients as well. The company is one of the world's largest online service companies in terms of installed user base, with more than 435 million users worldwide.In the last twelve months ended in June 2020 Avast reported revenue of $879 million and Moody's adjusted EBITDA of $465 million.The founders of Avast still own 35% in the company with the remainder being free float.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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