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Rating Action:

Moody's downgrades 4L Technologies ratings (CFR to Caa3); outlook negative

11 Jul 2019

New York, July 11, 2019 -- Moody's Investors Service ("Moody's") downgraded its ratings for 4L Technologies Inc. (4L Tech), including the company's Corporate Family Rating (CFR) to Caa3 from B3 and the Probability of Default Rating to Caa3-PD from B3-PD, and the rating for 4L Tech's senior secured first lien term loan to Caa3 from B3. The outlook has been revised to negative from stable.

"The downgrade reflects the likelihood of a default is high given the recent downward revision in earnings guidance following the loss of business and pricing pressure in both the imaging and wireless segments combined with the maturity of the first lien term loan in May 2020 that will put pressure on the business. The company's hiring of restructuring advisors, request to meet with lenders in a few weeks, and challenges refinancing the term loan indicate a restructuring will occur soon ," said Moody's analyst Andrew MacDonald. "We also remain concerned about the longer-term business viability as a result of more limited visibility into forward financial performance and related uncertainties given the unexpected operating developments," added MacDonald.

Concurrently, the ratings on the senior secured first lien credit facilities due 2022 will be withdrawn as the proposed transaction was not completed.

Downgrades:

..Issuer: 4L Technologies Inc.

....Probability of Default Rating, Downgraded to Caa3-PD from B3-PD

....Corporate Family Rating, Downgraded to Caa3 from B3

....Gtd Senior Secured 1st Lien Term Loan due May 2020, Downgraded to Caa3 (LGD4) from B3 (LGD4)

Outlook Actions:

..Issuer: 4L Technologies Inc.

....Outlook, Changed To Negative From Stable

Withdrawals:

..Issuer: 4L Technologies Inc.

....Gtd Senior Secured 1st Lien Revolving Credit Facility due 2022, Withdrawn , previously rated B3 (LGD4)

....Gtd Senior Secured 1st Lien Term Loan due 2022, Withdrawn , previously rated B3 (LGD4)

RATINGS RATIONALE

4L Tech's Caa3 CFR largely reflects the high balance sheet restructuring risk because of a levered balance sheet and near term debt maturities, and the ongoing business and execution risk as management evaluates its strategic options following the loss of customers and elevated pricing pressure. High business risk is inherent in the mature printing market and highly competitive nature of the company's wireless segment, both of which experienced revenue declines in recent years. The rating is also constrained by the company's small revenue size, high customer concentration and limited end market diversification. While the company has shown considerable margin improvement after recovering from operational challenges in 2017, the wireless segment remains intensely competitive due to high supplier fragmentation. Also, the company's imaging segment faces a secular decline because of the steady reduction in print volumes that will generally require market share gains to stem revenue erosion. 4L Tech's aggressive financial policies, evidenced by its private equity ownership and history of shareholder distributions and large debt-funded acquisitions, serves to further constrain the rating.

The company has made headway in operational improvements within the wireless business and cost reduction initiatives in its imaging business should help partially mitigate margin pressure. Also lending support to the rating is the company's leading market position in print cartridge collection and remanufacturing. However, the operating challenges driving the company's downward earnings guidance for 2019 creates high uncertainty that the company can stem margin erosion. The company's large cash balance of $189 million as of March 31, 2019, which excludes an expected $44.6 million excess cash flow sweep payment, is not sufficient to address the term loan maturity but nonetheless provides some liquidity to support operations until the debt matures next year or a restructuring is executed. Moody's currently expects a family recovery in the 50% range given the cash balance and a modest multiple of the anticipated earnings base.

The negative outlook reflects that the expected erosion of the company's earnings and cash flow as its customers move business away could result in a reduction in the recovery rate assumption or further increase in default risk.

The ratings could be downgraded if Moody's expects sustained negative free cash flow, the company loses or experiences additional significant volume loss at another major customer, or liquidity deteriorates. Ratings could also be downgraded if the default risk increases further or recovery estimates decline. An upgrade is unlikely but could if the company is able to stabilize and improve its revenue and earnings, address its debt maturity and reduce its debt burden.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

4L Technologies Inc. ("4L Tech") collects, remanufactures and distributes laser and inkjet printer cartridges and wireless devices through manufacturing facilities in the United States, Mexico, Europe, and Asia regions. The company's main customers include leading office product retailers and wireless carriers in the United States. 4L Tech has been majority-owned by Golden Gate Private Equity, Inc. ("Golden Gate") since 2010. For the twelve months ended March 31, 2019, the company's reported revenue was $800 million.

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.

Andrew MacDonald
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

John E. Puchalla, CFA
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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