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Rating Action:

Moody's rates Viavi's CFR and Senior Unsecured Notes at Ba2; outlook stable

23 Sep 2021

New York, September 23, 2021 -- Moody's Investors Service (Moody's) assigned the following first-time ratings to Viavi Solutions Inc (Viavi): a Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), and Ba2 rating to the new Senior Unsecured Notes (New Notes). In addition, Moody's assigned a Speculative Grade Liquidity (SGL) rating of SGL-1. The outlook is stable.

Net proceeds from the issuance of $400 million of New Notes will be used to replenish the $197 million of cash used to fund the repayment of $275 million face value of convertible notes agreed to in a privately-negotiated exchange transaction (Exchange Transaction) on September 2, 2021[1]. Viavi is repaying $93.8 million principal amount of Convertible Notes due 2023 and $181.2 million principal amount of Convertible Notes due 2024 (collectively, the Convertibles). As part of the Exchange Transaction, Viavi agreed to issue 10.6 million Viavi shares worth about $180.7 million (based on $17.00 closing share price on September 2, 2021) to certain holders of the Convertibles. Viavi intends to repurchase 10.6 million shares over the next 6 months to offset the shares issued as part of the Exchange Transaction[2]. Viavi is replacing the existing Senior Secured Revolver with a new ABL revolving credit facility due 2026 (ABL), which will have an asset-based borrowing base of up to $300 million.

Assignments:

..Issuer: Viavi Solutions Inc.

.Corporate Family Rating, Assigned Ba2

.Probability of Default Rating, Assigned Ba2-PD

.Senior Unsecured Rating, Assigned Ba2 (LGD4)

Outlook Actions:

..Issuer: Viavi Solutions Inc.

.Outlook, Assigned Stable

RATINGS RATIONALE

Viavi's Ba2 Corporate Family Rating (CFR) reflects the company's consistent free cash flow (FCF), supported by strong profit margins, limited capital intensity, and low financial leverage. The CFR also considers Viavi's strong market position in certain niche market segments, such as pigments used in anti-counterfeit features in currency notes and optical filters used in 3D sensing facial recognition modules in smartphones. Moreover, Moody's believes that the 3D sensing market provides an important secular growth driver as 3D sensing becomes more widely available across smartphones and other use cases, such as in the automotive market. Viavi's revenues and FCF are also supported by a steady base of software and services revenues, representing over 15% of revenues.

Still, Viavi's scale is small, with revenues of less than $2 billion, and the narrow focus of the underlying businesses can lead to revenue volatility over time. The field test instruments business and the anti-counterfeit coatings businesses are both cyclical, driven by the capital spending plans of the telecommunications service providers and by central bank currency redesign cycles, respectively. Although Viavi maintains strong niche market positions in 3D sensing filters and in field test instruments, these two segments are exposed to larger adjacent competitors in the broader market, such as II-VI Corp. and AMS AG in 3D sensing modules and Keysight Technologies Inc in electronic test measurement instruments and software.

The stable outlook reflects Moody's expectation that revenues will grow in the mid-single digits over the next 12 to 18 months driven by upper single digit percent revenue growth in the Network & Service Enablement (NSE) segment. Moody's expects that this strong NSE growth will be partially offset by a mid to mid-single digit percent decline in Optical Security & Performance Products (OSP) revenues, as Moody's expects some near term moderation in pigments demand following the large currency orders by global central banks in 2021. Moody's expects that through increasing EBITDA over the period, leverage will decline toward 3x debt to EBITDA (Moody's adjusted) over the next 12 to 18 months from about 3.6x debt to EBITDA (as of the twelve months ended July 3, 2021, proforma for the convertible notes repurchases and the issuance of the new Senior Notes due 2029, Moody's adjusted).

Viavi's ratings are supported by governance considerations. Viavi is a publicly-traded issuer, with a broad investor base and a largely independent board of directors. Following the issuance of the Senior Unsecured Notes due 2029 (New Notes), Moody's expects Viavi will refrain from significant debt issuance until leverage is reduced to under 3x debt to EBITDA (Moody's adjusted). Thereafter, Moody's expects that Viavi will maintain a conservative financial policy, balancing the interests of shareholders and creditors, maintaining leverage at or below 3x debt to EBITDA (Moody's adjusted).

The Ba2 rating of the Senior Unsecured Notes due 2029 (New Notes) reflects the largely unsecured capital structure, including the two tranches of Senior Convertible Notes. The new ABL revolving credit facility due 2026 (ABL) will be effectively senior to the New Notes. Though Moody's expects that the ABL will remain undrawn, usage under the ABL may pressure the Ba2 rating of the New Notes.

The SGL-1 rating reflects Viavi's very good liquidity, which is supported by consistent FCF and a large cash balance. Moody's expects that Viavi will generate annual FCF (Moody's adjusted) of at least $150 million over the next year. Given the strong FCF, Moody's expects that the $300 million ABL Revolver will remain undrawn. Moody's expects that Viavi will maintain a cash balance of at least $600 million, which should provide Viavi with very good liquidity given the consistent FCF levels.

FACTORS THAT COULD LEAD TO AN UPGRADE OR A DOWNGRADE OF THE RATINGS

The ratings could be upgraded if:

• increases scale and product diversity

• organic revenue growth is sustained above the mid-single digits percent level

• FCF to debt (Moody's adjusted) is sustained above 25%

• maintains a conservative financial policy

The ratings could be downgraded if:

• incurs sustained revenue declines

• the EBITDA margin (Moody's adjusted) decreases toward the mid teens percent level, or

• adopts more aggressive financial policies such that FCF to debt (Moody's adjusted) remains below 15%

• experiences a deterioration of liquidity, including a large reduction in the cash balance or a material weakening in free cash flow generation

Viavi Solutions Inc, based in Scottsdale, Arizona, makes network test, monitoring, and assurance instruments and software for communications services providers, enterprises, network equipment manufacturers, and the aerospace industry. Viavi also makes pigments used in currency notes to reduce counterfeiting risk and makes optical filters primarily used in 3D sensing modules for smartphones.

The principal methodology used in these ratings was Diversified Technology published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

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.

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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Form 8-K (SEC) 02-Sep-2021

[2] Form 8-K (SEC) 17-Sep-2021

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.

Terrence Dennehy, 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

Stephen Sohn
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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