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Rating Action:

Moody's downgrades Dycom's CFR to Ba3, outlook stable

26 Mar 2020

Approximately $485 million of rated debt affected

New York, March 26, 2020 -- Moody's Investors Service ("Moody's") downgraded Dycom Industries, Inc.'s (Dycom) Corporate Family Rating (CFR) to Ba3 from Ba2, its Probability of Default Rating to Ba3-PD from Ba2-PD, and its convertible unsecured notes rating to B2 from B1. Moody's maintained the company's Speculative Grade Liquidity (SGL) rating at SGL-3. The ratings outlook has been revised to stable from negative.

"The downgrade of Dycom's ratings reflects the recent deterioration in its operating performance and credit metrics and the expectation this trend will continue in 2020 due to project execution issues and potential work stoppages and delays related to the economic impact of the coronavirus." said Michael Corelli, Moody's Vice President -- Senior Credit Officer and lead analyst for Dycom Industries, Inc.

Downgrades:

..Issuer: Dycom Industries, Inc.

.... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD

.... Corporate Family Rating, Downgraded to Ba3 from Ba2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to B2 (LGD5) from B1 (LGD6)

Outlook Actions:

..Issuer: Dycom Industries, Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

Dycom's Ba3 corporate family rating is supported by the positive outlook for capital spending in the telecom sector due to growing demand for greater bandwidth and the deployment of fiber to enable video offerings and increase the speed at which data is transmitted over networks. Dycom's rating also reflects its long-standing customer relationships with large telecommunication service companies, which is reflected in its sizeable order backlog and provides some revenue visibility for services under contract. Dycom's rating is constrained by its negative free cash flow during the past two years which has led to a deterioration in its credit metrics. Its rating also incorporates its high customer concentration with its top four customers compromising 72% of total revenue for the quarter ended January 2020 and its dependence on the capital expenditure budgets of major telecommunications and cable television providers, which are subject to both seasonality and cyclicality.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard 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 potential impact on Dycom from the breadth and severity of the shock, including potential work stoppages and delays, and the broad deterioration in credit quality it has triggered.

Dycom experienced operational challenges during the fourth quarter of fiscal 2020 (ended January 2020) due to higher than anticipated complexity and costs, difficult soil conditions and adverse weather and these issues will continue to impact the company in fiscal 2021. In addition, the coronavirus is likely to impact its operating performance due to economic weakness and the potential for work stoppages and delays and reduced spending by its customers. Therefore, we anticipate the company's operating performance will deteriorate for the second consecutive year.

Dycom incurred cash outflows for the second consecutive year in fiscal 2020 due to increased unbilled revenues and accounts receivables. It will likely continue to experience cash outflows in the first half of fiscal 2021 due to seasonality while its operating performance weakens versus the prior year. This will lead to a deterioration in its credit metrics. We anticipated this would raise its adjusted leverage ratio (Debt/EBITDA) above 3.5x and reduce its interest coverage (EBITA/Interest) below 2.0x, which excluded the recent $650 million draw on its revolver. The company plans to use a portion of the borrowings to repurchase about $157 million principal amount of its convertible notes for around $138 million. The revolver draw and convertible debt paydown will enhance the company's liquidity and modestly reduce its net debt position, but it will raise its leverage ratio above 5.5x and reduce its interest coverage below 1.5x. These metrics could improve in the second half of the year if the company generates free cash flow and pays down debt, but this could be offset by potential project delays.

The speculative grade liquidity rating of SGL-3 reflects Dycom's adequate liquidity. The company had $54 million of cash and $287 million of availability under its undrawn $750 million revolving credit facility as of January 2020. On 18 March 2020, Dycom borrowed $650 million under the revolver to preserve financial flexibility in light of the economic and financial market uncertainty resulting from the coronavirus outbreak. Proceeds were placed in the company's bank accounts and its net debt was unchanged. The revolving credit facility had $22.7 million of capacity after the $650 million was borrowed.

The stable outlook reflects our expectation that Dycom's operating performance will moderately weaken in fiscal 2021, but that it will use its free cash flow to pay down debt and maintain credit metrics that support its rating. Dycom's credit metrics will be evaluated excluding the recent revolver draw as long as it maintains the cash on its balance sheet to pay off these borrowings when economic and credit market conditions stabilize.

Factors that could lead to a downgrade include debt-financed acquisitions, excessive share repurchases, a decline in earnings, or the loss of projects from key customers. A deterioration in liquidity or the expectation that its leverage ratio would be sustained above 4.0x, or interest coverage below 2.0x could also result in a downgrade.

A ratings upgrade is unlikely in the near term, but could occur if the company consistently generates free cash flow, maintains good liquidity and its leverage ratio is sustained below 3.0x and interest coverage above 3.5x.

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Dycom Industries, Inc. (Dycom), located in Palm Beach Gardens, Florida, is a leading provider of specialty contracting services in North America. Dycom provides engineering, construction and maintenance services that assist telecommunication and cable television providers expand and monitor their network infrastructure. To a lesser extent, Dycom provides underground locating services for telephone, cable, power, gas, water, and sewer utilities. Dycom generated contract revenues of $3.3 billion for the fiscal year ended January 25, 2020 and had a backlog of $7.3 billion.

REGULATORY DISCLOSURES

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.

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.

Michael Corelli, CFA
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

Glenn B. Eckert
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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