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
