Frankfurt am Main, November 22, 2021 -- Moody's Investors Service ("Moody's") has today
downgraded the corporate family rating (CFR) to Caa2 from B3 rating under
review for downgrade and the probability of default rating (PDR) to Caa2-PD
from B3-PD rating under review for downgrade of NorthPole Newco
S.a r.l. (NSO or the company), the top entity
of the restricted group of Israeli-based cyber security and intelligence
software provider NSO Group. Concurrently, Moody's has downgraded
to Caa2 from B3 rating under review for downgrade of the $300 million
senior secured first lien term loan B1 (TLB1) and €177 million senior
secured first lien term loan B2 (TLB2) facilities both maturing in March
2025 and the $30 million senior secured revolving credit facility
(RCF) maturing in March 2024. The outlook on all ratings has been
changed to negative from ratings under review. This concludes the
review for downgrade initiated on July 30, 2021.
RATINGS RATIONALE
The downgrade to Caa2 with a negative outlook reflects the weakening liquidity
profile with an increased risk of a breach of the maintenance covenant
which might lead to an event of default if not cured or waived beforehand.
The recently announced trading restrictions will possibly lead to a further
revenue contraction in 2021 and beyond, resulting in rising leverage
metrics and a further weakening of the liquidity profile of NSO as well
an increasing refinancing risk. The company has a relatively low
share of recurring revenues and is, unlike many other software companies,
highly dependent on new license sales which we believe can become increasingly
difficult given the actions taken against NSO.
NSO's Caa2 CFR reflects its high Moody's-adjusted leverage of around
6.5x expected in 2021, its product and customer concentration,
and susceptibility to cyberattacks as well as ongoing lawsuits.
NSO's free cash flow generation was negative in 2020 driven by the lower
revenues as well as a shareholder distribution and we expect negative
FCF in 2021. In addition, the recurring revenue base is lower
than that of its enterprise software peers and remains dependent upon
the conversion to and renewal of maintenance contracts with a comparably
low duration of 12 months, although we acknowledge its high renewal
rates of over 90%.
NSO's Caa2 CFR reflects as positives the group's medium-term performance
potential from its unique product offering, evidenced in the solid
performance in the past few years and characterized by high EBITDA margins
despite business interruptions from the coronavirus pandemic in 2020.
The large addressable market in which the group operates, the limited
known competition and the material barriers to entry also support NSO's
credit quality.
RATING OUTLOOK
The negative outlook reflects the high risk that NSO might not be in compliance
with the maintenance covenant under the recent documentation and not receive
lenders consent to waive or amend the covenant levels or to adjust the
size of the current liquidity facility. In addition, it reflects
the high uncertainty of the company's ability to sell new licenses
amidst recent trading restrictions and a shortfall in liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
For a positive rating action NSO should demonstrate a solid operating
performance with significant new licence sales while maintaining solid
Moody's adjusted EBITDA-margins, positive free cash
flow as well as compliance with all covenants under the debt documentation.
In addition, a positive rating action would require a resolution
of the recent trading restrictions and an adequate liquidity profile.
Conversely, NSO's ratings could come under negative pressure if
Moody's adjusted gross debt to EBITDA remains sustainably above 6.5x,
ongoing negative FCF/debt and any sign of a weakening of the group's liquidity
position. Non-compliance with covenants under the debt documentation
would also lead to negative pressure.
LIQUIDITY ANALYSIS
We view NSO's liquidity as weak based on the risk of a covenant breach
in 2021. As of June 2021, unrestricted cash was $29
million while the $30 million RCF was fully drawn.
The group has one net leverage-based maintenance covenant,
with tight headroom as of June 2021. The sequential step down to
4.0x at year end 2021 creates significant pressure amidst the recent
performance. We therefore see a high risk of a covenant breach
that might lead to a default.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
NSO is facing allegations over the inappropriate use of its surveillance
software by certain customers and trade restrictions have been implemented
by public authorities which raises concerns over the company's control
mechanisms and sales approach which we consider a social consideration.
In addition, Governance considerations include the track record
of the company being owned by a private equity company with a tolerance
for high leverage.
STRUCTURAL CONSIDERATION
The TLB1, the TLB2 and RCF are the only financial debt instruments
in the capital structure; hence, they are rated in line with
the CFR. The temporary shareholder loan of $14 million that
has been granted in Q2 2020 is treated as 100% debt and ranks pari
passu with the TLB1, the TLB2 and RCF in the absence of the documentation.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Software Industry
published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
PROFILE
NorthPole Newco S.a r.l. is a provider of cybersecurity
and intelligence software solutions to government agencies. Its
offering is focused on mobile end point and location capabilities,
as well as tactical or field solutions and lawful interception for high-value
targets. NSO operates primarily out of Israel, Bulgaria and
Cyprus, with close to 750 employees who serve more than 60 customers
in over 35 countries. In 2020, NSO reported revenue of $243
million and Moody's-adjusted EBITDA of €99 million.
NSO is majority owned by funds ultimately controlled and managed by Berkeley
Research Group.
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.
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Dirk Goedde
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454