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Rating Action:

Moody's upgrades Resideo's CFR to Ba3 and unsecured notes rating to B1; assigns Ba2 ratings to proposed secured debt

28 Jan 2021

Approximately $1.3 billion of debt securities rated

New York, January 28, 2021 -- Moody's Investors Service (Moody's) upgraded Resideo Funding Inc.'s (Resideo) Corporate Family Rating to Ba3 from B1, Probability of Default Rating to Ba3-PD from B1-PD, and senior unsecured notes rating to B1 from B3. Moody's also assigned Ba2 ratings to the company's proposed amended $800 million first lien senior secured term loan B due 2028 and upsized and extended $500 million revolving credit facility expiring in 2026, and affirmed its existing senior secured credit facility ratings at Ba2. Resideo's Speculative Grade Liquidity Rating was upgraded to SGL-2 from SGL-3. The outlook remains stable.

The ratings upgrades reflect Resideo's improving operating trends that began during second half of 2020, resulting in increasing revenue and earnings, and are expected to continue in 2021; Moody's expected strengthening of Resideo's credit ratios given favorable market conditions, the company's restructuring efforts that drive cost efficiencies and improve profitability, and planned debt repayments utilizing proceeds of its recent equity raise; and Resideo's improving liquidity profile. Moody's expects Resideo to operate with conservative financial policies and leverage around 3.0x over the next 12 to 18 months.

As a part of the proposed transaction Resideo's amended $800 million term loan B due 2028 will replace $780 million of term loan A and B, while revolving credit facility capacity will be increased to $500 million from $350 million and maturity extended to 2026. The company plans to repay approximately $140 million of its unsecured senior notes utilizing part of the proceeds from its recent $280 million equity raise. Pro forma debt to EBITDA and EBITA to interest coverage are estimated to strengthen to 3.3x and 5.5x, respectively, as of December 31, 2020 from approximately 3.6x and 4.0x levels prior to the transaction.

The upgrade of Resideo's Speculative Grade Liquidity rating to SGL-2 from SGL-3 reflects Moody's expectation that the company will maintain good liquidity over the next 12 to 18 months, supported by expanded capacity under its revolving credit facility, anticipated increased room under financial covenants given the planned credit agreement amendment, its solid pro forma cash balance of approximately $400 million, and modest positive free cash flow expected in 2021 benefiting from working capital controls.

The following rating actions were taken:

Upgrades:

..Issuer: Resideo Funding Inc.

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

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

.... Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)

.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

Affirmations:

..Issuer: Resideo Funding Inc.

....Senior Secured Bank Credit Facility (including term loan and revolver), Affirmed Ba2 (LGD2), to be withdrawn upon repayment

Assignments:

..Issuer: Resideo Funding Inc.

....Proposed Senior Secured Bank Credit Facility (including term loan and revolver), Assigned Ba2 (LGD2)

Outlook Actions:

..Issuer: Resideo Funding Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

Resideo's Ba3 Corporate Family Rating is supported by: 1) its significant revenue scale and global footprint; 2) its strong market position as a provider of products and solutions in residential HVAC markets and a distributor of security and fire protection products in the professional installation channel; 3) the value of the Honeywell brand, which will be maintained by Resideo for 40 years post spin-off, and the technological expertise in manufacturing integrated home and security products; 4) governance considerations, including financial strategy that focuses on deleveraging and willingness to issue equity; 5) the majority of revenue coming from the retrofit market, which is generally less volatile than new construction; 6) the variety of distribution channels, including the proprietary ADI Global Distribution business, an extensive professional contractor base, and a diverse product offering.

At the same time, our credit profile is constrained by: 1) moderately high debt leverage, and significant sensitivity of earnings and cash flows to variations in demand; 2) significant reimbursement payments for Honeywell's environmental obligations (of up to $140 million annually) constraining free cash flow; 3) intense competition within the company's product categories and the necessity of rapid technological innovation; 4) risks related to the establishment of standalone operations following the spin; 5) the inherent low margin profile of the distribution business; and 6) the cyclicality of residential end markets.

Stable outlook reflects Moody's expectations that end market trends will continue to be favorable and that the company will operate with conservative financial leverage, generate positive free cash flow and continue to improve its operating margin, while maintaining good liquidity.

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

The ratings could be upgraded if the company demonstrates a track record of successful operation on a stand-alone basis, improves its operating margin, and maintains disciplined financial policies. Free cash flow to debt above the 10% level, leverage sustained comfortably below 3.0x, while liquidity position is good and the end market conditions are favorable would be important considerations for a higher rating.

The ratings could be downgraded if weakness in the end markets causes revenue and operating margin to contract significantly, or if the company experiences additional challenges with the separation from the legacy business, or adopts aggressive financial policies. Additionally, leverage sustained above 4.0x, EBITA to interest coverage below 3.0x, or negative free cash flow and liquidity deterioration could also result in a ratings downgrade.

The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Resideo is a provider of thermal, security and energy efficiency products, software solutions and technologies for a connected home. The company's Products and Solutions division supplies comfort, residential thermal solutions and security products, and its ADI Global Distribution business (ADI) distributes security, AV and low-voltage products. The company's home solutions products are installed in 15 million homes annually, as the business operates through a network of over 110,000 professional contractors, 3,000 distributors and 1,200 original equipment manufacturers. ADI distributes in excess of 330,000 stock keeping units through over 200 locations globally. The company was spun off as the Homes business from Honeywell International, Inc. in October 2018. In the LTM period ended September 30, 2020, Resideo generated approximately $4.87 billion in revenue.

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.

Natalia Gluschuk
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

Dean Diaz
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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