Rating Action: Moody's assigns a Caa1 CFR to RGIS after its restructuring
Global Credit Research - 10 Jul 2020
New York, July 10, 2020 -- Moody's Investors Service (Moody's) assigned ratings to RGIS Services, LLC (New) (RGIS) following its debt restructuring, including a Caa1 corporate family rating (CFR), Caa1-PD probability of default rating (PDR) and Caa1 senior secured term loan rating. The outlook is negative.
As part of the June 25, 2020 debt restructuring, RGIS converted its $448 million outstanding debt (comprised of a term loan due 2023 and revolver borrowings) into a new $200 million term loan due 2025 and common equity.
Moody's assigned the following ratings to RGIS Services, LLC (NEW):
.... Corporate family rating, assigned Caa1
.... Probability of default rating, assigned Caa1-PD
.... Senior secured bank credit facility, assigned Caa1 (LGD4)
.... Outlook, assigned negative
RATINGS RATIONALE
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
RGIS' Caa1 CFR is constrained by the elevated business risk associated with the secular pressures facing the retail industry including ongoing store closures and bankruptcies, which will be accelerated as a result of COVID-19 disruption. In addition, the rating incorporates the near-term execution risks of resuming operations with adequate service levels, which necessitates rehiring and redeploying a significant number of workers. As of Q1 2020 and pro-forma for the transaction, Moody's-adjusted debt/EBITDA was approximately 4 times and EBIT/interest expense was 1.8 times. However, Moody's expects leverage to increase in 2020, as a result of earnings declines from lower volumes and pricing pressure. Earnings should recover in 2021 but remain below 2019 levels, reflecting intense competition and lower volumes due to retail store closures and inventory reductions.
The rating is supported by RGIS' long-standing relationships with its largest customers, leading market share, national footprint in the U.S., and meaningful international diversification. Physical inventory verification is a recurring activity necessary to comply with accounting standards for retailers, which have largely outsourced the service for store counts to third party providers such as RGIS. The rating is also supported by RGIS' adequate liquidity over the next 12-18 months. As of Q2 2020 and pro-forma for the transaction RGIS had approximately $60 million of unrestricted cash. Moody's projects negative free cash flow for the second half of 2020 mainly as a result of negative working capital, and positive cash generation in 2021. The company also expects to have access to a proposed asset-based revolver.
The negative outlook reflects the risk of greater than anticipated permanent store closures and bankruptcies among RGIS' customer base as well as the execution challenges in resuming a full scope of operations in the midst of COVID-19.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if liquidity is weaker than anticipated, or if operating performance does not materially recover in 2021.
The ratings could be upgraded if RGIS earnings recover on a sustained basis in both the US and internationally. An upgrade would also require good liquidity, including solid free cash flow generation, solid cash balances, and good revolver availability. Quantitatively, the ratings could be upgraded if Moody's-adjusted debt/EBITDA is sustained below 4 times and EBIT/interest expense above 1.75 times.
RGIS Services, LLC (RGIS), a wholly-owned subsidiary of RGIS Holdings, LLC, provides inventory counting services primarily to retailers throughout North America, South America, Asia, Australia, and Europe. Revenues for the twelve months ended March 31, 2020 were approximately $611 million, with about 43% of total revenues generated outside the US. The company is owned by its former lenders following the 2020 restructuring, including funds affiliated with HPS Investment Partners, LLC and Black Diamond Capital Management.
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 DISCLOSURES
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_1133569.
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.
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.
Raya Sokolyanska 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 Margaret Taylor 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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