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Rating Action:

Moody's downgrades Realogy CFR to B1, sr sec to Ba2, sr uns to B3; outlook remains negative

14 Aug 2019

Over $4.8 billion of rated debt impacted

New York, August 14, 2019 -- Moody's Investors Service ("Moody's") downgraded Realogy Group LLC's ("Realogy") Corporate Family rating ("CFR") to B1 from Ba3, Probability of Default rating ("PDR") to B1-PD from Ba3-PD, senior secured bank credit facility to Ba2 from Ba1 and senior unsecured notes to B3 from B2. The Speculative Grade Liquidity rating ("SGL") was affirmed at SGL-2. The rating outlook remains negative.

RATINGS RATIONALE

"The rating downgrades are driven by Moody's expectations for debt to EBITDA to remain elevated while economic conditions remain uncertain and competitive pressures continue to rise," said Edmond DeForest, Moody's Senior Credit Officer.

The B1 CFR reflects Realogy's leading position in the residential real estate brokerage market, good liquidity and ability to generate free cash flow and reduce its financial leverage. Realogy is very highly leveraged at 6.8 times debt to EBITDA, with free cash flow to debt only around 5%, as of June 30, 2019. Moody's considers these weak financial metrics for the B1 rating category. However, Moody's anticipates leverage should decline around to 6 times by the end of 2019 and 5.5 times by the end of 2020, mostly through over $200 million of annual debt repayment from free cash flow.

All financial metrics cited reflect Moody's standard adjustments.

Moody's considers the residential real estate brokerage market volatile, cyclical and seasonal. Competitive pressures on Realogy's brokerage operations have increased over the last two years. Competing traditional brokers have sought to recruit Realogy's best-performing sales people by offering them a greater share of fees earned, forcing Realogy to raise sales compensation to retain talent. As a result, profit margins are under pressure. There are also threats from non-traditional technology-enabled competitors including RedFin and Zillow, Inc, own-to-rent buyers and home flippers. Moody's expects Realogy to maintain conservative financial strategies including repaying debt with its free cash flow and eschewing large share repurchase activity until financial leverage is reduced.

Moody's expects stable or declining interest rates and improving existing home sale volume and average sales prices in 2020, following two years of rising rates and declining home sale volumes and prices, especially in Realogy's largest East and West Coast markets. Solid performance in 2020 will be required to generate enough free cash flow for substantial debt repayment. A weakening U.S. economy could pressure the existing home sale market and Realogy's financial performance.

The Ba2 rating on the senior secured obligations reflects their priority position in the capital structure and a Loss Given Default ("LGD") assessment of LGD2. The debt is secured by a pledge of substantially all of the company's domestic assets (excluding accounts receivable pledged for the securitization facility) and 65% of the stock of foreign subsidiaries. The Ba2 rating, one notch above the CFR, benefits from loss absorption provided by the junior ranking debt and non-debt obligations. A large increase in the proportion of secured to total debt could lead to a downgrade of the secured rating to Ba3.

The B3 rating on the senior unsecured notes reflects the B1-PD PDR and an LGD assessment of LGD5. The LGD assessment reflects effective subordination to all the secured debt. The senior notes are guaranteed by substantially all of the domestic subsidiaries of the company (excluding the securitization subsidiaries).

The SGL-2 SGL rating reflects Realogy's good liquidity profile. Moody's expects at least $250 million of cash on the balance sheet and over $200 million of free cash flow. Realogy's cash flow is seasonal, with negative cash flow typically in the 1st fiscal quarter. The $1.4 billion senior secured revolving credit facility due 2023 may be used to support opportunistic debt repurchases, acquisitions and seasonal working capital needs; around $1 billion is anticipated to remain available at all times. Moody's expects ample headroom under financial maintenance covenants over the next year as leverage is calculated on a senior secured basis and net of balance sheet cash.

The negative rating outlook reflects Moody's concerns that pressure from elevated competition and ongoing existing home sale market weakness could delay Realogy's path to lower financial leverage and greater free cash flow. The outlook could be stabilized if Moody's anticipates debt to EBITDA at around 5.5 times and free cash flow to debt of about 8%.

Given the negative rating outlook, an upgrade is not anticipated in the near term. Over the longer term, the ratings could be upgraded if Moody's comes to expect debt to EBITDA will be sustained below 4.5 times and free cash flow to debt will remain at least 10%. This could be driven by some combination of abated competitive threats, rising existing unit home sales and average prices or accelerated debt repayments. Expectations for balanced financial strategies and strong liquidity, as well as a longer debt maturity profile, are also important considerations for higher ratings.

The ratings could be downgraded if Moody's anticipates prolonged existing home sale market weakness, loss of market share will drive revenue declines, debt to EBITDA will remain above 5.5 times, free cash flow to debt will stay around 5% or the company will adopt aggressive financial policies, including large debt financed shareholder returns or acquisitions.

Moody's took the following actions on Realogy Group LLC:

.... Corporate Family Rating, Downgraded to B1 from Ba3

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

....Senior Secured Credit Facilities, Downgraded to Ba2 (LGD2) from Ba1 (LGD2)

....Senior Unsecured Notes, Downgraded to B3 (LGD5) from B2 (LGD5)

.... Speculative Grade Liquidity Rating, Affirmed at SGL-2

....Outlook, Remains Negative

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.

Realogy is a global provider of real estate and relocation services. The company operates in four segments: real estate franchise services, company owned real estate brokerage services, relocation services and title and settlement services. The franchise brand portfolio includes Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA, Sotheby's International Realty and Better Homes and Gardens Real Estate. Moody's expects 2019 revenues of over $6 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.

Edmond DeForest
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

Karen Nickerson
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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