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Rating Action:

Moody's upgrades Allied Universal CFR and secured to B2 from B3, unsecured to Caa1 from Caa2; outlook stable

21 Apr 2021

Over $2 billion of newly rated debt

New York, April 21, 2021 -- Moody's Investors Service, ("Moody's") upgraded Allied Universal Holdco LLC's ("Allied Universal") corporate family rating ("CFR") to B2 from B3, probability of default rating ("PDR") to B2-PD from B3-PD, the senior secured to B2 from B3 and the senior unsecured to Caa1 from Caa2. In addition, Moody's assigned B2 ratings to its proposed senior secured US dollar term loan, Euro revolver and Euro term loan. The outlook is stable.

The proceeds of the newly rated debt, unrated debt, over $1 billion of equity from affiliates of Warburg Pincus, Caisse de Dépôt et Placement du Québec ("CDPQ") and others and cash were used to fund the acquisition of G4S plc ("G4S") for about $7 billion (excluding acquired cash) and pay related fees and expenses. Moody's expects the unrated debt will be refinanced. Total debt sources raised for the acquisition will be around $6 billion. The acquisition was announced earlier in 2021 and completed on April 6.

RATINGS RATIONALE

"A bigger and potentially more profitable Allied Universal in North America, plus the addition of the profitable and diverse non US G4S business portfolio, makes the acquisition a positive credit development despite over $6 billion of new debt incurred to complete the transaction," said Edmond DeForest, Moody's Vice President and Senior Credit Officer.

The upgrade of the CFR to B2 from B3 reflects the increased revenue size and geographic scope of Allied Universal following the acquisition of G4S. Both companies generated significant profits and free cash flow in 2020, despite the difficult operating environment in its uniformed guarding and other business services markets. That said, Allied Universal had not generated free cash flow before 2020. The integration of the two company's North American operations provides an opportunity to achieve scale efficiencies and cost reductions. North America represents about two-thirds of revenue and more of profits and free cash flow for the combined enterprise. Very high initial debt to EBITDA of 7.0 times as of December 31, 2020, pro forma for the acquisition of G4S and other 2021 acquisitions made in 2021, including of Secure America, LLC, should fall below 6.0 times by the end of 2022. Leverage declines will be driven by 2% to 4% organic revenue growth, expanding rates of profitability enabled by the anticipated achievement of over $150 million of annual cost reduction targets, as well as some debt repayment. However, cost reductions could take longer than planned or prove difficult to achieve. Allied Universal will roughly double in revenue size and increase its North American footprint by about 25%. Adding legacy G4S markets, notably in the UK, Belgium and The Netherlands in Europe, as well as many other global markets, leaves Allied Universal with a larger operating scale and greater geographic scope, but also non US dollar revenue and profits. Legacy G4S cash-in-transit business lines add market diversity, while G4S's retail and other technology integrated security solutions expand the scope of Allied Universal's technology-enhanced security offerings; these businesses have better profitability characteristics than the company's core uniformed guarding segment. Since about one third of revenue will be outside the US, the inclusion of Euro and Sterling-denominated debt among the acquisition financing sources helps balance Allied Universal's liabilities to its pro forma assets and profits. EBITA to interest expense expected around 2.5 times and free cash flow (before transaction expenses) to debt of at least 3% anticipated, as well as a very good liquidity profile, provide further support for the upgrade.

All financial metrics cited reflect Moody's standard adjustments.

Allied Universal's EBITDA margins, historically around 9%, are low relative to other essential business services companies. However, security services, which accounts for over 90% of revenues, features very low capital investment requirements, leading to good free cash flow despite the narrow profit margins. In addition, Moody's anticipates EBITDA margins will expand to above 10% over the next 12 to 18 months as scale benefits and planned cost reductions are achieved. An ongoing change in revenue mix towards larger but lower gross margin contracts could slow profit rate increases, but with the benefit of greater revenue certainty from its largest and highest quality customers. The company may face revenue pressure if pandemic-related lockdowns prevent it from operating parts of its business. Allied Universal benefits from its market position as the US's largest security services company, the recession resistant nature of the security services business and a track record of successfully integrating acquisitions and achieving targeted cost reductions.

Moody's considers demand for security services to be relatively stable through economic cycles, since customers generally view security as a non-discretionary spending item. The overall security services industry is relatively mature, with limited growth prospects. Allied Universal is the largest security services provider in North America with an estimated 35% market share (according to the company) of the over $25 billion outsourced manned guarding market. Moody's believes this scale brings benefits from both a revenue and a cost perspective, and provides a competitive advantage relative to smaller regional companies, particularly with regard to national accounts. The company's largest competitors include Securitas AB (unrated) and Garda World Security Corporation (B3 stable). The North American security services market is highly fragmented, with the top three companies representing about half of the market and the remaining 50% spread among thousands of local competitors. Historically, about 20% of Allied Universal's pro-forma revenue has been comprised of national accounts, which typically benefit from longer contracts and established relationships, as well as reportedly high customer retention rates of over 95%.

As a business service provider, Allied Universal does not have a material or unusual environmental impact. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The coronavirus outbreak, an uncertain global economic outlook and asset price volatility have created a severe and extensive credit shock across many sectors, regions and markets. The credit effects of these developments continue to pressure certain of Allied Universal's business segments, customers and regions. For instance, the cash-in-transit and secured logistics sectors have been significantly affected by the shock given their sensitivity to customer demand and sentiment. That said, we note that its cash-in-transit and secured logistics operations are outside the US, mostly in the UK, Europe and Africa.

Allied Universal has a very large global work force, so it faces a diverse set of worker safety and related rules and regulations. Both predecessor companies had a track record of complying with applicable laws and maintains job-appropriate training of its large employee base and board oversight of its risk management practices. Potential reputational risks could arise from the mismanagement or improper actions of its large employee base of uniformed guards, or from the unauthorized use of the company's weapons, vehicles and secured facilities by its employees or others. However, its track record and reputation for prudent management and controls provides support that any future issues will be handled safely and without incurring reputational damage.

As a private company owned by financial sponsors, Allied Universal's financial strategies are expected to remain aggressive and opportunistic. Its track record of debt-financed acquisitions and history of operating with high financial leverage and limited free cash flow reflect its opportunistic policies typical of financial sponsor ownership. Moody's considers the amount of equity sources provided for the G4S purchase modest compared to the debt sources. The board of directors is controlled by Warburg Pincus and CDPQ. Among Allied Universal's expected near term capital allocation priorities are investing in the business, completing acquisitions, financial leverage reduction and cash returns to shareholders. Financial reporting is delivered much later than is typical for publicly-traded services companies, limiting timeliness and transparency into its operations and financial results.

Moody's considers Allied Universal's liquidity profile as very good. The company expects to close the G4S acquisition with over $600 million of cash. Free cash flow (before transaction-related expenses) should be at least $300 million in 2021 and $400 million in 2022. Moody's anticipates full availability under its existing $300 million senior secured first lien revolving credit facility expiring 2024, proposed Eu300 million senior secured revolver due 2026 and unrated $1,00 million senior secured asset based revolving credit facility ("ABL") expiring 2024. Moody's anticipates that Allied Universal will increase the ABL size to $1,500 million.

The $300 million and Eu300 million revolvers are subject to a maximum first lien net leverage ratio when utilization exceeds 30% of total capacity. Moody's does not anticipate that the covenant will be tested over the next year. If it were tested, Moody's believes that the company would remain compliant.

The ratings assigned to the individual instruments are based on the probability of default of the company, reflected in the B2-PD PDR, as well as a family recovery of 50% of debt obligations assumed at default.

The upgrade to B2 (LGD3) from B3 (LGD3) of the ratings assigned to the senior secured debts reflects the upgrade of the PDR to B2-PD from B3-PD and their ranking junior to the ABL and senior to the unsecured claims. The rated senior secured debts are secured on by substantially all assets and by the stock of the company's material domestic and international subsidiaries. The secured debts are further supported by upstream guarantees from the material domestic subsidiaries. Collateral sharing arrangements and other structural features of the debt documents render all secured debts (other than the ABL) equal in Moody's waterfall of claims at default. The ABL is considered senior to the rated secured debts due to its first priority claim on the most liquid current US assets of the company.

The senior secured debt documents include provisions permitting incremental debt capacity up to the sum of: 1) the greater of: a) $1,800 million; and b) pro forma adjusted EBITDA for the most recent trailing 12 month period; 2) in the case of debt secured pari passu with the existing secured debt, the maximum amount that can be incurred without causing the Senior Secured First Lien Net Leverage Ratio to exceed 4.75 times. No portion of the incremental capacity may be incurred with an earlier maturity than the initial term loans. Subject to certain limitations, Allied Universal will be permitted to designate any existing or subsequently acquired or organized non-borrower subsidiary as an "unrestricted subsidiary", subject to carve-out capacity and other conditions. There are no express "blocker" provisions which prohibit the transfer of material or specified assets to unrestricted subsidiaries. Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, with a protective provision requiring majority lender consent for any guarantee releases, if required under the credit agreement. There are no express protective provisions prohibiting an up-tiering transaction.

The upgrade to Caa1 (LGD6) from Caa2 (LGD6) of the ratings assigned to the senior unsecured debts reflects the upgrade of the PDR to B2-PD from B3-PD and their ranking within the capital structure junior to the secured debts.

The stable outlook reflects Moody's expectations for low single digit revenue increases, EBITDA margins of over 10% and debt to EBITDA to fall below 6 times over the next 12 to 18 months. The stable outlook also incorporates Moody's expectation for periodic debt-funded acquisitions that could result in debt to EBITDA temporarily rising toward 7 times.

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

The ratings could be upgraded if Moody's expects 1) debt to remain around 5.0 times; 2) free cash flow above 6.0% of total debt; 3) balanced financial policies; and 4) good liquidity.

The ratings could be downgraded if 1) revenue growth rates decline toward break even; 2) expected profitability rate increases are not achieved; 3) debt to EBITDA is expected to remain above 6.5 times; or 4) free cash flow to debt is anticipated to remain below 3.0%.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

..Issuer: Allied Universal Holdco LLC

.... Corporate Family Rating, Upgraded to B2 from B3

.... Probability of Default Rating, Upgraded to B2-PD from B3-PD

....Senior Secured 1st Lien Bank Credit Facility, Upgraded to B2 (LGD3) from B3 (LGD3)

....Senior Secured Regular Bond/Debenture, Upgraded to B2 (LGD3) from B3 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Caa1 (LGD6) from Caa2 (LGD6)

....Senior Secured Revolving Credit Facility, Assigned B2 (LGD3)

....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)

....Outlook, Remains Stable

Allied Universal, headquartered in Conshohocken, Pennsylvania and Santa Ana, California and controlled by affiliates of private equity sponsors Warburg Pincus and CDPQ, is one of the world's largest security and related services company. Moody's expects 2021 revenue (including a full year of G4S results) of around $19 billion.

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.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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.

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.
© 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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