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Rating Action:

Moody's affirms Convergint's B3 CFR, revises outlook to stable, from negative

12 Oct 2020

Nearly $1.1 billion of rated debt affected

New York, October 12, 2020 -- Moody's Investors Service ("Moody's") affirmed DG Investment Intermediate Holdings 2, Inc.'s (dba "Convergint") credit ratings, including a B3 corporate family rating ("CFR"), a B3-PD probability of default rating, and respective B2 and Caa2 instrument ratings on the security-systems integrator's first- and second-lien credit facilities. However, given the anticipated strength of the company's performance through 2020 in the face of the COVID-19 epidemic, Moody's has revised Convergint's outlook to stable, from negative.

Affirmations:

..Issuer: DG Investment Intermediate Holdings 2, Inc. ("Convergint")

.... Probability of default rating, affirmed B3-PD

.... Corporate family rating, affirmed B3

.... $814 million senior secured first-lien term loan maturing 2025, affirmed B2 (LGD3)

.. $75 million senior secured first-lien revolving credit facility, expiring 2023, affirmed B2 (LGD3)

.... $186 million senior secured second-lien bank credit facility maturing 2026, affirmed Caa2 (LGD5)

Outlook action

....Outlook, changed to stable, from negative

RATINGS RATIONALE

The outlook change to stable, from negative, takes into account only minimally reduced demand for Convergint's commercial security systems, even in the face of the COVID-19 pandemic, enabling the company to continue to deleverage and improve its liquidity. Instead of the revenue shortfall Moody's had expected at the start of the pandemic, we anticipate mid-single-digit-percentage revenue growth in 2020, while leverage will fall below 6.5 times, as compared with close to 7.0 times at year-end 2019. By taking advantage of a highly variable cost structure and focusing on the DSO cash conversion cycle, the company will maintain profitability and generate free cash flows that are strong for its B3 CFR.

Convergint's operating model has proven unexpectedly resilient through 2020. Although it has had to delay work at some client sites because of quarantine restrictions, other end-markets such as government and education have experienced accelerated demand as those customers seek to take advantage of empty facilities. Most of Convergint's installation projects continue as planned, as its services are deemed mission critical for many customers. Ratings are supported by Convergint's strong market presence in the design, installation, and contractual service and maintenance of electronic and physical commercial security systems, with ancillary capabilities in fire alarm/notification and life safety. Even against the backdrop of a possibly strong resurgence in COVID cases through the end of 2020, Moody's expects demand for the integration of security systems to remain relatively robust, as commercial reliance on crucial but increasingly sophisticated and innovative technologies grows. A dynamic technology environment allows for periodic upgrades and retrofits, supporting the re-occurring nature of Convergint's revenues. And security and surveillance are becoming more of a core business process, regardless of industry, and as such Convergint has minimal customer or end market concentration. Convergint's ratings are supported by a sizable, better than $1.3 billion revenue base (up from approximately $800 million when we originally rated the company, in early 2018).

The sectors most exposed to the COVID-19 shock are those that are most sensitive to consumer demand and sentiment. Convergint serves a diversified base of customers across industries primarily in the U.S. and Canada. Its exposure is relatively limited to the sectors hardest hit by the crisis, such as retail, transportation, and energy. Nevertheless, some of the smaller companies among Convergint's base of 3,500 customers will face financial hardship, and particularly challenged sectors such as oil and gas and airlines may see an outright cessation in demand for projects. Convergint is at risk due to the project-based nature of security installation projects and the related lack of recurring, subscription-based revenues that would otherwise provide cushion against job delays and cancellations.

Moody's views Convergint's liquidity as very good. A full, preemptive drawdown under the company's $75 million revolver in March has been paid off completely, while cash has built to a very healthy $157 million as of June 30th. The company acted quickly to reduce variable costs and suspended discretionary travel and marketing expenses, thus preserving its modest, very-low-double-digit EBITDA margins. Moody's expects free cash flow in excess of $100 million in 2020. In an effort to conserve funds, it has also reined in its historically active acquisition program, and Moody's expects minimal acquisition activity for the remainder of 2020. However, the revised outlook also takes into account the expectation that Convergint will resume acquisition activity in 2021.

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

A ratings upgrade may be considered upon the achievement of ongoing strong revenue gains, margin expansion, and significant, sustained deleveraging below 6.0 times. Also, given the aggressive financial strategy implied by private equity ownership and an active acquisition platform, a ratings upgrade would be considered upon demonstration of restrained financial strategy, as evidenced by minimal dividend distributions and balanced funding of acquisitions.

The ratings could be downgraded if Convergint experiences reversals in an anticipated favorable revenue and margin trends, such that Moody's expects debt-to-EBITDA leverage to drift up; if Moody's expects free cash flow to turn negative; or if compliance with debt covenants becomes challenged.

DG Investment Intermediate Holdings 2, Inc. (formerly Gopher Sub Inc.; dba Convergint) is a service-based organization that designs, installs, and maintains building systems, with a focus in the areas of security systems, and with ancillary services in fire alarm/notification and life safety. The corporate entity was formed to facilitate Ares Management's early 2018 acquisition of Convergint from another private equity sponsor. Moody's expects the company to generate 2020 revenues of approximately $1.35 billion.

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.

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.

Kevin Stuebe
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

Karen Nickerson
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

No Related Data.
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