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Rating Action:

Moody's affirms Verisure's B2 CFR following refinance and dividend recapitalisation; stable outlook

08 Jan 2021

NOTE: On January 13, 2021, the press release was corrected as follows: in the debt list, under Affirmations for Verisure Holding AB, the second item was removed. Revised release follows.

London, 08 January 2021 -- Moody's Investors Service (Moody's) has today affirmed the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) of Verisure Midholding AB (Verisure), a leading provider of residential monitored alarm solutions.

At the same time, Moody's affirmed Verisure Holding AB's B1 senior secured notes rating and the B1 ratings of certain debt instruments that will not be refinanced as part of this transaction including the B1 ratings of senior secured term loans facilities and the B1 rating of the senior secured notes.

Finally, Moody's has assigned B1 ratings to the new EUR2 billion senior secured term loan due January 2028, new EUR1.15 billion senior secured notes due January 2027 and the new EUR700 million senior secured revolving credit facility (RCF) due July 2027 all issued by Verisure Holding AB. Furthermore, Moody's assigned a Caa1 rating to the new EUR1.27 billion equivalent senior unsecured notes due January 2029 issued by Verisure Midholding AB. The outlook on all ratings is stable.

The list of affected ratings is shown towards the end of this press release.

Today's action follows the company's announcement [1]that it plans to (1) raise EUR4.42 billion of new secured and unsecured debt (2) extend the maturity and upsize the current EUR300 million RCF to EUR700 million (3) repay EUR2.73 billion of existing debt which includes the EUR1.49 billion term loan B due October 2022 and all the currently outstanding EUR1.24 billion equivalent senior unsecured notes due December 2023 (4) pay EUR1.6 billion to shareholders.

The refinance and return of funds to shareholders is being undertaken as part of a new buyout of the company by funds managed by the current majority owner private equity firm Hellman & Friedman that values Verisure at more than EUR14 billion enterprise value.

RATINGS RATIONALE

The rating affirmation and maintaining the stable outlook balances the short-term increase in leverage as a result of continuing aggressive financial policies including a substantial payment to shareholders against (1) a resilient business model with recurring revenues from a sticky 3.7 million subscriber base that has performed well during the coronavirus pandemic to date with low cancellation rates around the 6.5% level and (2) Moody's expectation of good deleveraging prospects driven by a continuing track record of solid organic growth and cost efficiencies and (3) reduced refinance risk with an increase in the weighted average debt maturity to 6.3 years from 3.5 years alongside a better staggered maturity profile and (4) stronger liquidity with a larger RCF that is better suited for the company's scale.

Moody's-adjusted debt/EBITDA will increase to around 8.1x pro forma for the refinance from 6.2x for the last twelve months (LTM) to September 2020 but is expected to decrease below 7x in the next 18 months. The high leverage is in part due to customer acquisition costs associated with the company's growth. However, on a steady-state basis (excluding the costs of growing the subscriber base but including costs of replacing customer contract cancellations), Moody's-adjusted debt/steady-state EBITDA will increase to 6.3x pro forma for the refinance from 4.9x LTM to September 2020 but is expected to decrease towards 5.5x in the next 18 months.

The affirmation of Verisure's B2 CFR reflects the company's (1) leading position in the European residential home and small business monitored alarms (RHSB) market, which has a lower rate of adoption compared to the US providing a high organic revenue growth potential (2) a solid track record of continuous growth in average revenue per user (ARPU) and good deleveraging prospects (3) Moody's expectation of a gradual cash flow improvement supported by customer portfolio growth, low churn rate and at least stable or improving payback period.

The company has performed well through the coronavirus pandemic with good liquidity, a stable customer base and limited impact on cancellation rates.

The B2 CFR is constrained by (1) a temporarily elevated Moody's-adjusted leverage pro forma for the transaction (2) free cash flow after new subscriber cost remaining negative for at least the next 12 months as a result of significant investment to capture new subscribers (3) high but decreasing geographic revenue concentration in Spain (around one-third of revenues) (4) the potential long term threat from new entrants and existing players and (5) a pattern of additional debt raises to finance dividends and support customer acquisition growth.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety.

Governance risks taken into consideration in Verisure's credit profile include its ownership by private equity sponsors, who have pursued aggressive financial policies favouring high leverage and shareholder-friendly policies such as dividend recapitalisations and the pursuit of acquisitive growth.

LIQUIDITY

Moody's considers the company's liquidity to be adequate with a cash balance estimated at around EUR15 million as of 31 December 2020 and pro forma for the refinance and EUR625 million of drawing capacity under the new EUR700 million senior secured RCF.

Despite Moody's expectation of limited free cash flow generation in the near term, on a steady-state basis Moody's expects some significant improvements over the medium term supported by the company's low churn rate and cost saving measures. Moody's also recognises the company's ability to flex its customer acquisition capex to provide further liquidity if required. In addition, the company is expected to maintain good capacity under its single portfolio net leverage springing covenant, only applicable when the RCF is drawn above 40%. Following the refinance, there are no material upcoming debt maturities until a EUR500 million secured note issued by Verisure is due in May 2023.

STRUCTURAL CONSIDERATIONS

The new EUR2 billion senior secured term, the new EUR1.15 billion senior secured notes and the new EUR700 million senior secured RCF will rank pari passu with the existing senior secured debt and share the same security package, and will all be rated B1 which is one notch above Verisure's B2 CFR to reflect their ranking ahead of the new Caa1 rated EUR1.27 billion equivalent senior unsecured notes.

As of 31 December 2020, and pro forma for the refinancing, there will be EUR5.53 billion of outstanding senior secured debt, EUR75 million of drawings under the EUR700 million RCF, and EUR1.27 billion equivalent of unsecured debt.

RATING OUTLOOK

The stable outlook reflects Moody's expectation of sustained deleveraging through EBITDA growth whilst cancellation rates and customer acquisition costs remain stable. Moody's expects the subscriber base to grow leading to improved cash flow on a steady-state basis before growth in new subscribers. Moody's also anticipates no further material debt-financed dividends until the company has achieved further substantial deleveraging.

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

FACTORS THAT COULD LEAD TO AN UPGRADE

Positive rating pressure could develop if Verisure

• Demonstrates and commits to more balanced financial policies, and limits additional debt financing to fund growth and dividend payments

• sustains Moody's-adjusted gross debt/ EBITDA below 5.5x, and

• increases steady-state free cash flow (before growth spending) to debt to 10%, with free cash flow (after growth spending) becoming positive and

• maintains strong operating performance, including stable cancellation rates

FACTORS THAT COULD LEAD TO A DOWNGRADE

Downward rating pressure could develop if

• Moody's-adjusted gross debt/ EBITDA is sustained above 7x for a prolonged period or

• steady-state FCF generation trends towards zero, or if liquidity concerns were to arise or

• operating performance weakens materially

..Issuer: Verisure Holding AB

Affirmations:

....BACKED Senior Secured Bank Credit Facility, Affirmed B1

....BACKED Senior Secured Regular Bond/Debenture, Affirmed B1

....Senior Secured Regular Bond/Debenture, Affirmed B1

Assignments:

....Senior Secured Bank Credit Facility, Assigned B1

....Senior Secured Regular Bond/Debenture, Assigned B1

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Verisure Midholding AB

Affirmations:

.... Probability of Default Rating, Affirmed B2-PD

.... Corporate Family Rating, Affirmed B2

Assignments:

....Senior Unsecured Regular Bond/Debenture, Assigned Caa1

Outlook Actions:

....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

Headquartered in Versoix, Switzerland, Verisure Midholding AB (Verisure) is a leading provider of monitored alarm solutions operating under the Securitas Direct and Verisure brand names. It designs, sells and installs alarms, and provides ongoing monitoring services to residential and small businesses across 16 countries in Europe and Latin America. The company generates more than €2 billion in annual revenues from its 3.7 million subscribers, and employs more than 20,000 people. The company was founded in 1988 as a unit of Securitas AB and is majority owned by private equity firm Hellman & Friedman.

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_1243406.

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.

REFERENCES/CITATIONS

[1] Verisure Holding AB (publ) Launches Consent Solicitation in Relation to its Notes and Launches Syndication of New Senior Credit Facilities 07-Jan-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.

Ramzi Kattan
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

Richard Etheridge
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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