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Rating Action:

Moody's affirms Adecco's Baa1 ratings; assigns Baa3 rating to proposed hybrid notes

10 Sep 2021

London, 10 September 2021 -- Moody's Investors Service ("Moody's") has today assigned a Baa3 rating to Adecco International Financial Services B.V.'s ("Adecco" or "the company") proposed guaranteed subordinated fixed-to-reset rate securities (the junior subordinated "hybrid notes") and a Baa1 rating to the proposed new senior unsecured notes (SUNS) to be issued under the company's EMTN programme. Concurrently, Moody's has affirmed Adecco Group AG's Baa1 long term issuer rating and the existing Baa1 senior unsecured debt ratings of Adecco and its guaranteed subsidiaries. The outlook is stable.

The proceeds from the proposed issuance of hybrid notes and new SUNS will be used to partially finance Adecco's €2.2 billion proposed acquisition of AKKA Technologies (AKKA) which is expected to close in Q2 2022.

A full list of affected ratings is provided towards the end of the press release.

RATINGS RATIONALE

On 28 July 2021 Adecco announced its plan to acquire AKKA[1], a global leader in engineering R&D services, for €49 per share in a transaction valued at €2.2 billion enterprise value. The proposed financing package comprises a mix of approximately 18% cash, 25% equity (including equity portion of hybrid), and 57% debt (including debt portion of hybrid), resulting in an increase in Moody's leverage (Moody's adjusted gross debt/EBITDA) expectations to around 2.6x proforma for the transaction in December 2021, compared with Moody's previous forecast of 2.0x. Moody's expects a return to leverage levels commensurate for the Baa1 rating in 2022. Moody's views the transaction as credit neutral for Adecco because the pressure on financial metrics is counterbalanced by the enhanced business profile.

The acquisition of AKKA is in line with the company's strategy to continue diversifying into higher margin technology-driven segments. It would also increase exposure to the longer cycle present in R&D activities with multi-year projects. Adecco plans to combine AKKA with its digital subsidiary Modis, which would boost Modis' balanced industry profile with AKKA's strong position in mobility (automotive, aerospace, rail), gaining exposure to some of the most attractive and largest digital engineering sectors. The two companies also complement each other geographically, with Adecco gaining digital presence in Europe, particularly France. Due to the convergence of IT and engineering technologies, innovation is increasingly orientated toward digital and the company believes the Modis/AKKA combination will rank second globally in the engineering R&D market, a rapidly growing segment of the IT sector. However, Moody's notes the potential for integration risk which could delay the realization of synergies and increase implementation costs.

The Baa3 rating assigned to the proposed hybrid notes is two notches below Adecco's long-term issuer rating of Baa1, reflecting the deeply subordinated nature compared to the company's senior unsecured debt. The proposed hybrid notes will rank senior only to equity, will mature in 2082, and the company can opt to defer coupons on a cumulative basis. The proposed hybrid notes will qualify for a "basket C" and a 50% equity treatment of the borrowing for the calculation of the credit ratios by Moody's (please refer to Moody's Hybrid Equity Credit cross-sector rating methodology published in September 2018 for further details). A change in 1) Moody's relative notching practice; 2) the long-term issuer rating of Adecco, or; 3) Adecco's capital structure, could result in a change in the rating of the hybrid notes.

Adecco's Baa1 issuer rating also reflects 1) its leading position as the world's largest staffing business underpinned by favorable long-term industry trends. Although the industry is highly cyclical, downturns have proved to be short with early recoveries; 2) its solid operating performance underpinned by diversity of income across industries and geographies, with the proven ability to flex its cost base to maintain margins through downturns such as during the COVID period; 3) its ability to generate strong free cash flow and significant cash balances, and 4) the company's conservative financial structure which positions it well to withstand the effects of a downturn. The proposed hybrid bond issuance demonstrates Adecco's willingness to adhere to its financial policy to protect its balance sheet.

The company's rating is constrained by 1) the competitive and fragmented nature of the global staffing market with low barriers to entry; 2) opportunities and challenges from an evolving market with increasing automation and changes in employment models, and; 3) the risk of operating margin pressure.

LIQUIDITY PROFILE

Adecco's liquidity is expected to remain very good. As of 30 June 2021 Adecco had cash balances of EUR1.3 billion. Moody's expects the company to continue to generate significant positive free cash flow in the next 12-18 months, with liquidity further supported by access to an undrawn EUR600 million committed revolving credit facility maturing in 2025. The company's debt maturities are well distributed with only USD300 million due in 2021.

RATING OUTLOOK

The stable outlook reflects Moody's expectations that Adecco will generate solid free cash flow over the next 12-18 months and apply its discretionary cash flow to support credit metrics as earnings continue to recover from the coronavirus pandemic and the process of integrating AKKA is undertaken and completed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on the rating is not expected in the short term but could occur over time if Moody's-adjusted debt/EBITDA remained below 2.0x throughout the economic cycle, and retained cash flow/net debt moved towards 45% while maintaining a balanced financial policy.

Downward pressure on the rating could occur if Moody's-adjusted debt/EBITDA moved sustainably above 2.5x, retained cash flow/net debt fell sustainably below 30%, or if there was evidence of technological disruption eroding Adecco's market position.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: Adecco International Financial Services B.V.

....BACKED Subordinate Regular Bond/Debenture, Assigned Baa3

....BACKED Senior Unsecured Regular Bond/Debenture, Assigned Baa1

Affirmations:

..Issuer: ADECCO FINANCIAL SERVICES, NORTH AMERICA

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

..Issuer: Adecco Group AG

....LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Adecco International Financial Services B.V.

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: ADECCO FINANCIAL SERVICES, NORTH AMERICA

....Outlook, Remains Stable

..Issuer: Adecco Group AG

....Outlook, Remains Stable

..Issuer: Adecco International Financial Services B.V.

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

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.

COMPANY PROFILE

Switzerland-based Adecco has grown organically and through acquisitions to become the industry leader in personnel services, alongside Randstad Holding NV and ahead of ManpowerGroup Inc. Adecco operated around 4,800 branches in 60 countries as of the end of December 2020. The company's revenue is concentrated in temporary staffing (85% of 2020 revenue), with the balance in permanent staffing, career transition/outplacement, outsourcing and other services, although segments outside temporary staffing are more profitable and represented 38% of its 2020 gross profit. The company generated €19.6 billion of revenue in 2020.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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.

REFERENCES/CITATIONS

[1] Company announcement 28-Jul-2021

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.

Kristin Yeatman
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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