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Announcement:

Moody's says Shift4's issuance of convertible notes is credit negative

21 Jul 2021

New York, July 21, 2021 -- Moody's Investors Service ("Moody's") said Shift4 Payments, LLC's proposed issuance of $500 million of convertible senior notes is credit negative but has no immediate effect on the Corporate Family Rating (CFR) of B2, Probability of Default Rating (PDR) of B2-PD, senior secured revolver rating of Ba2, senior unsecured notes rating of Ba3 or the stable rating outlook. The convertible notes are being issued in conjunction with an equity offering by the company and a sale of the remaining equity position by Searchlight Capital Partners, L.P.

"While we believe that Shift4 has strong EBITDA growth potential, pro forma total leverage as of June 2021 is very high at about 14x" said Peter Krukovsky, Moody's Senior Analyst. "The convertible notes' conversion structure contemplates payment in cash at minimum up to the principal amount. Available cash balances provide support, but there is meaningful event risk of a large high-multiple acquisition. A reduction in cash to debt ratio below 30% without a simultaneous reduction in total leverage below 6.5x could result in a downgrade of the ratings."

RATINGS RATIONALE

Shift4 is executing on an aggressive growth strategy which leverages differentiated vertical-specific integrated payments solutions focused largely on hospitality markets such as restaurants and hotels. Prior to the coronavirus pandemic (COVID), Shift4's organic growth rate of 14% in 2019 was meaningfully above average for the merchant acquiring industry. In 2020, the company was successful in gaining market share even as the pandemic caused a substantial decline in payment volumes in its target markets, and was able to limit revenue decline for the year to low single digits. In 2021, the building recovery in hospitality markets and continued share gains should result in strong revenue growth. However, Shift4's market share gain strategy requires significant investment in operating expenses and high capital spending, which constrain profit margins and free cash flow generation compared to merchant acquiring industry leaders.

Shift4 has raised a substantial amount of equity and debt capital over the course of 2020, and is now executing another large capital raise to support its growth strategy. Following the convertible notes and equity issuance, Moody's estimates adjusted total leverage as of LTM June 2021 at about 14x, net leverage at about 2.5x, and cash to debt of about 80%. Shift4 intends to use the cash to acquire assets in transactions of various sizes. Net leverage could increase substantially if Shift4 were to make a large acquisition at a high valuation multiple. The company has been successful historically in acquiring small assets that reinforced its franchise at moderate multiples net of synergies. However, at larger transaction sizes the required valuation multiples may be higher and synergies may be smaller relative to transaction values. Executing multiple acquisitions over a short period of time inherently involves execution and integration risks. Moody's expects organic growth and acquisitions to drive total leverage down over the coming years. Management does not plan to use the cash for capital returns. Reduction in cash balances that does not result in substantially lower total leverage would pressure the ratings.

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

The stable outlook reflects Moody's expectation of total leverage decline over the next 12-18 months driven by organic EBITDA growth and deployment of cash balances for acquisitions. The ratings could be upgraded if Shift4 generates consistent organic revenue and EBITDA growth, and if Moody's adjusted total leverage is sustained below 5.0x and FCF/debt is sustained in the mid-single digits. The ratings could be downgraded if Shift4 experiences a significant growth deceleration or a profitability decline, or if cash to debt ratio declines below 30% without a simultaneous reduction in total debt/EBITDA below 6.5x.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Peter Krukovsky
Vice President - Senior Analyst
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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