Hong Kong, July 06, 2018 -- Moody's Investors Service has downgraded Pactera Technology International
Ltd.'s corporate family rating to Caa1 from B3.
Moody's has also downgraded to Caa1 from B3 the senior secured debt rating
on the notes issued by HNA Ecotech Panorama Cayman Co. Ltd and
guaranteed by Pactera.
The outlook on the ratings above remains negative.
RATINGS RATIONALE
"The downgrade reflects our concern over Pactera's increased probability
of default owing to its weak liquidity position, as underpinned
by the company's depressed operating cash flow, loans to shareholders
and limited financial flexibility," says Danny Chan, a Moody's
Analyst.
"Given the challenging operating environment, Pactera's financial
metrics will likely remain weak over the next 1-2 years,"
adds Chan, who is also Moody's Lead Analyst for Pactera.
"This situation, in combination with the company's weak
liquidity position and the tightened credit environment in China,
will heighten default risk on Pactera's debt obligations."
On Pactera's liquidity position — which Moody's considers
weak — Moody's points out that on 31 March 2018, Pactera
reported cash of USD55 million, including deposits and restricted
cash of USD14 million. This amount was insufficient to cover the
company's capital expenditure and short-term borrowings of
around USD75 million.
Pactera has reported negative cash flow from operations over the past
18 months, and Moody's expects the situation to remain much
the same in 2018 as the negative USD18 million in cash flow registered
in 2017, as the company continues to focus on the market in China,
which has longer payment cycles when compared to other markets.
Its accounts receivable days lengthened to 135 days in 2017 from 125-130
days in 2016.
Moody's notes that Pactera has provided interest-free loans
to HNA Group and its affiliates, resulting in a net cash outflow
of USD44 million in 2017. While HNA Group has a track record of
providing financial support to Pactera, the borrowings that Pactera
have provided to HNA group over the past 12 months reflect an increasing
risk of cash leakage and might further weaken the company's liquidity
position.
Moody's expects that Pactera's operations will remain challenging
— amid intense competition in major markets — as reflected
by the company's weak profitability, with adjusted EBITDA
margins remaining low at around 7% in 2017. As such,
its annual EBITDA should remain suppressed, despite modest revenue
growth over the next 12-18 months due to its China-based
customers.
Because of its weak operations, Moody's expects that Pactera's debt
leverage — as measured by adjusted debt/EBITDA, where Moody's
treats its loan from shareholders of USD170 million as adjusted debt —
will remain elevated at around 7.0x in the next 12 months compared
to 6.6x in 2017. This situation points to a weak debt servicing
capability.
The negative ratings outlook reflects Moody's concern over Pactera's
weak liquidity and deteriorating financial position, which could
reduce the recovery by bondholders in the event of a default.
Upward ratings pressure in the near term is limited, given the negative
outlook on the ratings. But the outlook could return to stable,
if the company demonstrates a meaningful improvement in its liquidity
position and financial metrics.
Downgrade ratings pressure could arise if Pactera fails to meet its payment
obligations.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Pactera Technology International Ltd. and its subsidiaries provide
IT services to multinational and Chinese corporations. The company
is wholly owned by HNA Ecotech Panorama Cayman Co. Ltd, which
is in turn 100% owned by HNA Group Co., Ltd.
For 2017, Pactera reported revenue of USD872 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.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Danny Chan
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077