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Rating Action:

Moody's affirms VeriSign's Ba2 CFR; downgrades unsecured notes to Ba2 following convertible notes redemption

21 Feb 2018

Approximately $1.8 billion of rated debt affected

New York, February 21, 2018 -- Moody's Investors Service ("Moody's") affirmed VeriSign, Inc.'s ("Verisign") Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR) and its SGL-1 Speculative Grade Liquidity Rating. At the same time, Moody's downgraded Verisign's senior unsecured notes to Ba2 from Ba1 following the company's announcement that it called for redemption all of its outstanding 3.25% junior subordinated debentures due 2037 (unrated by Moody's). The rating outlook is stable.

On February 15, 2018, Verisign announced that it had called for redemption all of its 3.25% junior subordinated debentures due 2037, with a redemption date of May 1, 2018. The notes may be converted at any time prior to April 30, 2018. Verisign will fund the $1.25 billion principal on the debentures with balance sheet cash, while the balance of the conversion value will be settled in stock, plus cash in lieu of fractional shares. The company plans to repatriate approximately $1.1 billion of cash held by foreign subsidiaries in the second quarter of 2018 to fund the principal redemption of the subordinated debentures. Verisign had approximately $2.4 billion of cash, cash equivalents and marketable securities at December 31, 2017.

When Verisign completes the redemption, the face value of debt will have been reduced by about $1.25 billion or approximately 40% since fiscal year end December 31, 2017. Moody's estimates that pro forma for the notes redemption, the company's debt-to-EBITDA leverage will decline to around 2.2 times from around 3.9 times as of December 31, 2017. While the debt redemption is credit positive in the short term as it will reduce gross leverage and cash interest expense, Moody's expects the company's financial policy to remain aggressive, with excess cash and free cash flow to be used primarily for share repurchases and debt-to-EBITDA leverage to increase over time and be sustained in the 3.0 to 4.0 times range.

The downgrade of Verisign's senior unsecured notes to Ba2 from Ba1 reflects the change in Moody's expectation of recovery given the decreased debt cushion in the capital structure in a default scenario following the expected redemption of $1.25 billion of junior subordinated debt. The Ba2 rating on the unsecured notes is in line with the CFR since it represents the preponderance of debt in Verisign's capital structure, along with the senior unsecured revolving credit facility (unrated by Moody's).

Moody's took the following rating actions on Verisign, Inc.:

Ratings affirmed:

---Corporate Family Rating, affirmed at Ba2

---Probability of Default Rating, affirmed at Ba2-PD

---Speculative Grade Liquidity Rating, affirmed at SGL-1

Ratings downgraded:

---$750 million senior unsecured notes due 2023, downgraded to Ba2 (LGD4) from Ba1 (LGD2)

---$500 million senior unsecured notes due 2025, downgraded to Ba2 (LGD4) from Ba1 (LGD2)

---$550 million senior unsecured notes due 2027, downgraded to Ba2 (LGD4) from Ba1 (LGD2)

---Outlook is stable

All ratings are subject to the execution of the notes redemption as currently proposed. The instrument ratings are subject to change if the proposed capital structure is modified.

RATINGS RATIONALE

The Ba2 CFR reflects Verisign's strong market position as the exclusive global registry operator for the .com top level domain (TLD), its strong profitability and the recurring revenues in its registry operations. Verisign maintains very good liquidity and Moody's expects the company to generate over $600 million in free cash flow over the next 12 months (approximately 34% of total debt). But the company faces strong competition from alternative TLDs and other online platforms, and the increasingly mature demand for .com domains will constrain its organic growth. Verisign will remain the sole registry operator of .com and .net TLDs through 2024 and 2023, respectively, under its registry agreements with Internet Corporation for Assigned Names and Numbers (ICANN). The .com registry agreement with ICANN restricts Verisign's ability to raise prices for .com domains and expand into certain related businesses. The U.S. Department of Commerce (DoC) maintains oversight of Verisign's .com registry operations through the Cooperative Agreement with between the two parties. The Cooperative Agreement is due to expire in November 2018, unless extended or terminated. Verisign has renewal rights under its agreements with ICANN and DoC and a track record of renewing these agreements. Although the agreements with ICANN and DoC ensure Verisign's exclusivity in providing domain services for the .com and .net brands, the dependence on the agreements and uncertainty about potential revisions in the terms of the agreements upon renewal increase Verisign's long-term business risks.

Verisign's SGL-1 liquidity rating is based on Moody's view that the company will maintain very good liquidity relative to its funding requirements over the next 12 to 15 months. Moody's liquidity assessment is supported by solid cash balances of approximately $1.2 billion pro forma for the notes redemption, estimates of free cash of around $600 million in 2018 and full availability under the existing $200 million revolving credit facility expiring in 2020. Borrowings under the revolving credit agreement are subject to a maximum leverage ratio test of 2.5 times and a minimum consolidated EBITDA to cash interest ratios of 3.0 times (credit agreement leverage ratio excludes convertible debt from the definition of debt). Moody's estimates that the company's leverage under covenant is around 2.2 times at December 31, 2017, resulting in only moderate headroom under the covenant. Moody's does not expect the company to utilize its revolving credit facility over the next 12 to 15 months.

The stable outlook reflects Moody's expectation that Verisign will manage its capital structure towards a target debt-to-EBITDA of 3.0 to 4.0 times (Moody's adjusted) while maintaining free cash flow of about 20% of total debt.

Moody's could upgrade Verisign's ratings if (i) Verisign's revenues become more diversified, (ii) it generates strong earnings growth, (iii) management demonstrates a commitment to conservative financial policies, and (iv) Moody's expects total debt-to-EBITDA to remain below 3.0x (Moody's adjusted).

Moody's could downgrade Verisign's ratings if (i) changes in the terms of Cooperative Agreement adversely affect Verisign's business, (ii) aggressive financial policies or declining earnings result in a deterioration in liquidity or Moody's expects Verisign to sustain leverage above 4.0x and free cash flow falls to less than 15% of total debt.

Headquartered in Reston, VA, Verisign provides Internet infrastructure services. The company's core business consists of Registry Services under which Verisign operates the authoritative directory of and/or back-end systems for all .com, .net, .cc, .tv, .gov, .jobs, .edu and .name domain names among others.

The principal methodology used in these ratings was Software Industry published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Oleg Markin
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

Lenny J. Ajzenman
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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