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Rating Action:

Moody's downgrades Pitney Bowes' CFR to Ba2; outlook changed to stable

17 Apr 2019

New York, April 17, 2019 -- Moody's Investors Service ("Moody's") downgraded the Corporate Family Rating ("CFR") of Pitney Bowes Inc. ("Pitney Bowes") to Ba2 from Ba1 and Probability of Default Rating to Ba2-PD from Ba1-PD. The senior unsecured note rating was downgraded to Ba2 and the speculative grade liquidity rating was downgraded to SGL-2. In addition, Moody's changed the outlook to stable from negative. These rating actions reflect the company's underperformance relative to Moody's prior expectation, increased business risks as the company expands its 3rd party equipment financing program, and an expectation that adjusted free cash flow to debt will remain modest as the company invests to build scale in its ecommerce/shipping business.

RATINGS RATIONALE

Pitney Bowes' underperformance since the negative outlook was assigned in November 2017 led to adjusted leverage of 4.4x as of December 31, 2018, well above our prior expectation. High leverage reflects mid single digit percentage revenue declines in the mature SMB mailing segment combined with ongoing investments to grow ecommerce/shipping operations, both of which pressure EBITDA margins and free cash flow generation. Moody's now expects adjusted debt to EBITDA to remain above 3.8x over the next 12 months, with deleveraging driven by modest EBITDA growth and debt reduction. Moody's believes Pitney Bowes is taking on additional business risk as it develops 3rd party equipment financing operations to supplement existing financing tied to Pitney Bowes meter leases and rentals. Although leverage is high, adjusted debt to EBITDA has improved consistently since peaking in 3q2017 as a result of the debt-financed Newgistics acquisition. Moody's expects continued debt reduction given the company has incentives to maintain a solid credit profile to ensure good access to the capital markets to develop 3rd party equipment financing while supporting existing equipment financing for meters.

In February 2019, the company announced a 73% reduction in its quarterly common dividend to 5 cents from 18.75 cents preserving roughly $100 million of cash annually. Moody's expects a majority of the savings to be directed towards the development of 3rd party equipment financing beyond 2019. Finance operations represent a good portion of the company's profit generation, but equipment financing revenue tied to Pitney's Bowes' meters have consistently declined in each of the last several years. This new effort aims to stem the financing revenue declines while leveraging existing knowledge of the client base. Developing 3rd party equipment financing will require incremental investment, additional controls to mitigate new credit risks, and eventual increases in debt balances to support long term growth in the financing portfolio of 3rd party equipment.

The Ba2 CFR recognizes Pitney Bowes' leading presence in the highly regulated mail metering market, despite ongoing competitive pressures and mature demand. Moody's continues to view the transition to higher growth shipping as strategically favorable over the long term given the growth potential in e-commerce fulfillment and shipping services, in contrast to the secular decline in mail; however, there are execution risks related to growing market share among established shipping providers. The company will need to maintain good financial flexibility as it navigates through a number of challenges including the secular pressures facing its core mail meter business, developing 3rd party equipment financing, and simultaneously growing its ecommerce/shipping businesses which require greater scale to achieve targeted top line growth and profit margins.

The SGL-2 liquidity rating reflects good liquidity supported by sizable cash balances exceeding $500 million and Moody's expectation that free cash flow will be positive over the next 12 months, but in line with 2016-2017 levels despite the recent dividend cut given (i) the majority of cash savings from dividend reductions will effectively be redirected to invest in the origination of 3rd party equipment leases, (ii) increased capital expenditures and interest expense, and (iii) ongoing investment to grow ecommerce/shipping operations. The downgrade to SGL-2 from SGL-1 reflects limited access to the undrawn $1 billion revolver due to the reduced EBITDA cushion to maintenance covenants under the credit agreement. In December 2018, the company amended its credit agreement to relax the required leverage ratio (as defined) to 4.25x for December 31, 2018 from 3.50x with step downs through the end of 2019. Moody's expects the company to manage within its covenants through a combination of EBITDA growth and debt reduction.

Ratings for the senior unsecured notes (Ba2) reflect the overall probability of default of the company given the PDR of Ba2-PD and expectation for an average family recovery in a default scenario. There would be downward pressure on current instrument ratings to the extent the company chooses to issue secured debt which would rank ahead of the company's unsecured notes and credit facilities unless collateral is shared.

The stable outlook reflects Moody's expectations for total revenues to grow in the low single digit percentage range over the next 12 months with adjusted EBITDA margins remaining at current levels. Ongoing investment to grow ecommerce/shipping operations and continued top line gains in the software segment are expected to offset revenue declines in the mature SMB mailing segment. Given Moody's belief that 3rd party equipment financing introduces incremental business risk, the outlook incorporates the need to maintain strong credit protection measures to support expansion of the customer finance business to 3rd party equipment.

Ratings could be upgraded if the company demonstrates a track record of consistent revenue and EBITDA growth with improving operating margins. Moody's would also need to be comfortable with the execution and financial policies related to developing 3rd party equipment financing. Adjusted debt/EBITDA would need to be maintained below 2.75x with consistent growth in free cash flow.

Ratings could be downgraded if Moody's expects consolidated revenues will decline from current levels reflecting greater than expected weakness in the SMB mailing segment or if we expect adjusted debt to EBITDA will be sustained above 3.5x after mid-2020. There would be downward pressure on ratings if EBITDA margins or free cash flow deteriorate from current levels reflecting underperformance in core operations or with development of 3rd party equipment financing. Ratings would also be pressured if the company divests cash flow generating assets without a compensating reduction in debt or otherwise favoring shareholder to the detriment of creditors.

Ratings Actions:

..Issuer: Pitney Bowes Inc.

Corporate Family Rating -- Downgraded to Ba2 from Ba1

Probability of Default Rating -- Downgraded to Ba2-PD from Ba1-PD

Speculative Grade Liquidity Rating -- Downgraded to SGL-2 from SGL-1

.Senior Unsecured Notes -- Downgraded to Ba2 (LGD4) from Ba1 (LGD4)

....Senior Unsecured Shelf, Downgraded to (P)Ba2 from (P)Ba1

....Subordinate Shelf, Downgraded to (P)Ba3 from (P)Ba2

....Preferred Shelf, Downgraded to (P)B1 from (P)Ba3

....Preference Shelf, Downgraded to (P)B1 from (P)Ba3

....Senior Unsecured Commercial Paper, Affirmed NP

Outlook Actions:

..Issuer: Pitney Bowes Inc.

....Outlook, Changed to Stable from Negative

The principal methodology used in these ratings was Diversified Technology published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Stamford, CT, Pitney Bowes Inc. is a global provider of ecommerce fulfillment, shipping and returns, office mailing and shipping, messaging and document management solutions that include postage meters, mailing equipment, as well as related software, services, and financing. We expect revenues to reach $3.6 billion over the next 12 months.

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.

Carl Salas
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

No Related Data.
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