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Rating Action:

Moody's confirms Halo's CFR at B3; outlook changed to negative

20 Jul 2020

Approximately $515 million of rated debt affected

New York, July 20, 2020 -- Moody's Investors Service, ("Moody's") confirmed Halo Buyer, Inc.'s B3 corporate family rating (CFR), B3-PD probability of default rating (PDR), and the B2 and Caa2 ratings for the first lien and second lien credit facilities, respectively. At the same time, Moody's changed the outlook on Halo Buyer, Inc. ("Halo") to negative from ratings under review. The negative outlook reflects Moody's view that Halo's credit metrics will remain weak during the next 12 to 18 months amid headwinds from the coronavirus outbreak that will pressure the company's revenue growth and profitability. This action concludes the review for downgrade initiated on 13 April 2020.

"The change in Halo's outlook to negative reflects our expectation that the coronavirus pandemic will continue to pressure revenue and earnings growth such that leverage will be sustained above 7x for the next 12 to 18 months. Free cash flow has been consistently negative in recent quarters to fund growth initiatives, both organic and via acquisition, and recent cost savings initiatives will need to demonstrate traction in order for the company to preserve liquidity," said Moody's lead analyst Andrew MacDonald. "The risk of the continued spread of the coronavirus such that it causes retrenchment of businesses that have recently reopened is also a consideration. Nonetheless, the confirmation of the company's B3 CFR is driven by our view that liquidity provisions remain sufficient to operate the business, aided by a highly variable cost structure, until credit metrics can improve by mid-2021."

Confirmations:

..Issuer: Halo Buyer, Inc.

.... Corporate Family Rating, Confirmed at B3

.... Probability of Default Rating, Confirmed at B3-PD

....Senior Secured 1st Lien Bank Credit Facility, Confirmed at B2 (LGD3)

....Senior Secured 2nd Lien Bank Credit Facility, Confirmed at Caa2 (LGD5)

Outlook Actions:

..Issuer: Halo Buyer, Inc.

....Outlook, Changed To Negative From Ratings Under Review

RATINGS RATIONALE

The rapid and wide spread of the coronavirus outbreak, weak global economic outlook, low oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Sales of promotional products has been one of the sectors significantly affected by the shock given its sensitivity to consumer and business demand. More specifically, the weaknesses in Halo's credit profile, including its exposure to weak economic conditions and high unemployment, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Halo of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Halo Buyer, Inc.'s B3 CFR reflects Moody's expectation for lower revenue and earnings prospects in 2020 due to challenging industry conditions stemming from the coronavirus (COVID-19) pandemic including reduced spending by companies on promotional items. We note the potential for cash flow deficits and liquidity tightening throughout 2020 given the risk that customers could delay payments or become impaired and the uncertainty that management's recent cost savings initiatives will be sufficient to preserve liquidity. Free cash flow was negative in 2019 as the company invested heavily in acquisitions, working capital and capex to fund growth, including the implementation of a new ERP system and investing in several new management positions. Moody's adjusted debt-to-EBITDA as of 31 March 2020 is considered high at 7.7x (pro forma for a January 2020 add-on and full revolver draw) and is expected to remain above 7x until the mid-2021. Earnings quality is also weak and relies on the realization of significant add backs for ERP implementation and the treatment of recruiting, COVID-related, and other costs as one-time in nature. The CFR also considers the company's aggressive financial policy, a governance risk, evidenced by a debt funded acquisition based growth strategy and private equity ownership.

Positively, the initial negative impact of coronavirus on promotional spending in April 2020 has begun to gradually ease and is expected to improve sequentially in future quarters as lockdown restrictions ease. The Account Executive salespeople at Halo are also largely commission based giving the company a highly variable cost structure that should help offset any sales declines. The company has a good position as a distributor/sales and order management organization in the highly fragmented promotional products space with a diverse supplier and customer profile that includes large, well established companies across diverse end markets. Liquidity is supported by the company's roughly $20 million cash balance and approximately $40 million of revolver availability as of end of June 2020. The company also has no near term debt maturities.

The negative outlook reflects the revenue and profitability pressures in the promotional products sales industry amid the coronavirus pandemic and the uncertainty that Halo's cost savings measures will be sufficient to reverse negative free cash flow trends during the next 12 to 18 months. The negative outlook also reflects that operating pressures will lead to debt-to-EBITDA leverage sustained above 7x for the next 12 to 18 months.

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

While unlikely near term, ratings could be upgraded if debt-to-EBITDA is sustained below 6x and EBITA-to-interest climbs above 1.5x while maintaining adequate liquidity. Free cash flow-to-debt sustained above 2% could also lead to an upgrade. Alternatively, the ratings could be downgraded should revenue or earnings materially decline and EBITA-to-interest falls to 1x or below. An erosion in liquidity including negative free cash flow could also lead to a downgrade.

Headquartered in Sterling, Illinois, Halo Buyer, Inc. (dba as Halo Branded Solutions and Halo Recognition) is a provider of promotional products and employee recognition solutions services. Halo was acquired by TPG Growth in May 2018. Halo is private and does not publicly disclose its financials. The company generated pro forma revenue of more than $800 million for the twelve-month period ended 31 March 2020.

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.

Andrew MacDonald
Asst Vice President - 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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