Approximately $10.4 billion in debt affected
NOTE: On January 30, 2019, the press release was corrected as follows: In the first sentence, the “PD” indicator was added to the Probability of Default ratings. Revised release follows.
New York, January 29, 2019 -- Moody's Investors Service ("Moody's") downgraded
CommScope Holding Company, Inc.'s ("CommScope") Corporate
Family Rating (CFR) to Ba3 from Ba2, Probability of Default Ratings
(PDR) to Ba3-PD from Ba2-PD, and existing unsecured notes to B1 from Ba3.
Moody's also assigned a Ba1 rating to the proposed secured term
loan and secured notes and a B1 to the proposed unsecured notes.
The speculative grade liquidity rating was downgraded to SGL-2
from SGL-1. The proposed debt will be used to finance a
portion of the $7.4 billion acquisition of ARRIS International
plc and to refinance existing debt. The company also plans to use
approximately $850 million of cash on hand and $1 billion
of convertible preferred stock from private equity firm Carlyle Group
to fund the transaction. Existing secured debt is expected to be
repaid at closing at which time their ratings will be withdrawn.
The downgrade is driven primarily by the increase in leverage and integration
risks associated with the ARRIS acquisition. Management expects
that the acquisition will close with the proposed capital structure over
the next two to four months. Closing is dependent on the affirmative
vote of ARRIS shareholders and regulatory approval. If the transaction
does not close, ratings on the proposed debt will likely be withdrawn
and existing ratings re-evaluated. This action concludes
the review for downgrade initiated on November 8, 2018 when CommScope
announced its plans to acquire ARRIS. The ratings outlook is stable.
RATINGS RATIONALE
The Ba3 corporate family rating reflects high financial leverage stemming
from the ARRIS acquisition, balanced by the combined companies'
scale and leading market positions supplying numerous telecom, broadband
and enterprise connectivity markets. Debt to EBITDA, pro
forma for the acquisition and adding back certain one-time expenses
is over 6x based on trailing September 2018 results. Moody's
expects leverage to approach 5x over the next 18-24 months based
on management's commitment to repay debt and the combined businesses'
strong cash generating potential. The combined companies are expected
to have modest organic growth over the next several years as 5G spending
ramps up offset by declines in ARRIS's set-top box business.
Performance can however vary significantly in any given period given the
volatile spending patterns of the combined businesses' large cable
and telco customers and evolving payTV architectures. Although
the combined business will be one of the largest suppliers of wireless
telco and cable industry equipment and connectivity solutions, it
will be small relative to the size of their main customers and will have
limited negotiating leverage.
Proceeds from the proposed debt will be held in escrow until the acquisition
closes. Post-closing, the unrated ABL will have a
first lien pledge on all domestic receivables and inventory; the
Ba1 rated secured term loan and secured notes will have a first lien pledge
on all other material domestic assets and two thirds of the stock of foreign
subsidiaries and a second lien pledge on domestic receivables and inventory.
The B1 rating on the unsecured debt reflects the its effective subordination
to the secured debt in the capital structure.
The stable outlook reflects our expectation that CommScope will pay down
over $1 billion of debt within 18 months of closing. The
ratings could be downgraded if performance deteriorates significantly
or leverage is not on track to get below 5.5x within the next 12-18
months. The ratings could be upgraded if leverage is expected to
remain under 4.5x and liquidity remains solid.
Post-acquisition, the combined company is expected to have
good liquidity based on an expected $400 million of cash on hand
and an undrawn $1 billion ABL facility as well as Moody's
expectation of free cash flow approaching $700 million over the
next year.
The following rating action was taken:
Downgrades:
..Issuer: CommScope Holding Company, Inc.
.... Corporate Family Rating, Downgraded
to Ba3 from Ba2
.... Probability of Default Rating,
Downgraded to Ba3-PD from Ba2-PD
.... Speculative Grade Liquidity Rating,
Downgraded to SGL-2 from SGL-1
..Issuer: CommScope Technologies LLC
....Senior Unsecured Global Notes, Downgraded
to B1 (LGD5) from Ba3 (LGD4)
....Senior Unsecured Gtd Global Notes,
Downgraded to B1 (LGD5) from Ba3 (LGD4)
..Issuer: Commscope, Inc.
....Senior Unsecured Global Notes, Downgraded
to B1 (LGD5) from Ba3 (LGD4)
Confirmations:
..Issuer: Commscope, Inc.
....Existing Senior Secured 1st Lien Term
Loan B, Confirmed at Baa3 (LGD2)
Assignments:
..Issuer: Commscope, Inc.
....Proposed Senior Secured Gtd Term Loan,
Assigned Ba1 (LGD2)
....Proposed Senior Secured Gtd Notes,
Assigned Ba1 (LGD2)
....Proposed Senior Unsecured Notes,
Assigned B1 (LGD5)
Outlook Actions:
..Issuer: CommScope Holding Company, Inc.
....Outlook, Changed To Stable From
Under Review
The principal methodology used in these ratings was Global Manufacturing
Companies published in June 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
CommScope Holding Company Inc. is the holding company for CommScope
Inc., a supplier of connectivity and infrastructure solutions
for the wireless industry, telecom service and cable service providers
as well as the enterprise market. ARRIS is one of the largest providers
of equipment to the cable television and broadband industries.
Pro forma combined revenues were approximately $11.3 billion
for the twelve months ended September 2018.
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.
Matthew B. Jones
VP - Senior Credit Officer
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
