Sorenson Communications, LLC — Moody’s downgrades Sorenson’s CFR to B3, affirms credit facility at B2; outlook stable


Rating Action: Moody’s downgrades Sorenson’s CFR to B3, affirms credit facility at B2; outlook stableGlobal Credit Research – 13 Jan 2022New York, January 13, 2022 — Moody’s Investors Service (“Moody’s”) downgraded Sorenson Communications, LLC’s (Sorenson) corporate family rating (CFR) to B3 from B2, affirmed the company’s senior secured credit facility rating at B2, and affirmed its probability of default rating at B3-PD. The outlook remains stable. The rating actions follow Sorenson’s announcement on 7 January 2022 that it plans to issue approximately $589 million Holdco PIK notes (unrated) to help fund the sale of majority ownership of the company to Ariel Alternative Investments, LLC (Ariel) [1].Moody’s views governance considerations as integral to the rating action. The company’s decision to fund the proposed Ariel transaction with debt, doubling the amount of consolidated debt at the parent level, reflects a more aggressive financial strategy compared to Sorenson’s previous target of operating with moderate leverage of under 2x (company definition). The company believes that its status as a minority business enterprise (MBE) following the majority ownership sale to Ariel will allow the company to accelerate growth in non-FCC, “business-to-business” services. This portion of the business is relatively modest in size today, but growth opportunities may be significant over the coming years.The proposed 8-year $166 million Series A promissory notes and $423 million of Series B promissory notes (together “PIK Holdco” notes) are unrated and will be issued by Sorenson Holdings, LLC, an indirect parent of Sorenson Communications, LLC, the borrower on the credit facility. The proposed notes will be unsecured, have no guarantees from the opcos, provide a payment-in-kind optionality to maturity in 2030, and will have have tenure outside the first lien credit facility. Moody’s considers the PIK notes in its adjusted leverage calculation for Sorenson.Downgrades:..Issuer: Sorenson Communications, LLC…. Corporate Family Rating, Downgraded to B3 from B2Affirmations:..Issuer: Sorenson Communications, LLC…. Probability of Default Rating, Affirmed B3-PD….Senior Secured Bank Credit Facility, Affirmed B2 (LGD3)Outlook Actions:..Issuer: Sorenson Communications, LLC….Outlook, Remains StableRATINGS RATIONALESorenson’s B3 CFR reflects its narrow business focus, reliance on compensation rates set by the FCC, uncertainty around future rates and the prospect for further rate decreases that pose meaningful risk to the credit profile. Advances in automated speech recognition technologies support the company’s captioning agents though it could also be potentially disruptive to the business over time, particularly as word accuracy increases. Sorenson’s leverage as measured by Debt/EBITDA will increase to approximately 4.7x from an estimated 2.5x at the end of FY2021 (both metrics including Moody’s standard adjustments). Moody’s estimates that leverage will remain above 4x (as adjusted) by the end of 2023. The company’s delevering will be limited given earnings pressure due to the potential for declining reimbursement rates and PIK notes’ principal growth that will not be fully offset by the term loan’s mandatory amortization and excess cash flow sweep. Moody’s views this leverage level as high given the company’s high business risk from regulatory actions.These credit challenges are counterbalanced by the Sorenson’s strong market position within its niche business and steady demand for the company’s services. The company’s double-digit EBITDA margins and volume growth provide cushion to absorb known rate declines. Moody’s expectation that Sorenson will generate strong free cash flow with any excess cash flow being used to pay down debt also supports the rating.The instrument ratings reflect the probability of default of the company, as reflected in the B3-PD PDR, and an average expected family recovery rate of 50% at default given a mix of first lien secured and unsecured debt proforma for the planned PIK notes issuance.The B2 rating on the first lien credit facility is two notches lower than the loss given default (LGD) model outcome of Ba3, reflecting Moody’s expectation for limited loss absorption support by the proposed junior debt (Holdco PIK notes) which will be held by certain equity holders with board representation.Moody’s expects that Sorenson will maintain good liquidity over the next twelve months supported largely by strong free cash flow in the $100-$150 million range. The $25 million undrawn revolver adds support though it is relatively small for a company of Sorenson’s size. The revolver expires in December 2025. Cash balances will be minimal due to a cash flow sweep that requires that 75% of quarterly excess cash flows be applied towards first lien term loan repayment, with step downs if certain leverage levels are met. The first lien credit facilities (both the term loan and the revolver) are governed by a maximum first lien net leverage covenant of 3x. Moody’s expects that Sorenson will have comfortable cushion of more than 30% over the requirement in the next 12-18 months.The stable outlook reflects Moody’s expectations that the company will continue to generate positive free cash flow and maintain good liquidity despite declining revenue trends in its FCC-regulated business.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Sorenson increases business diversity by substantially expanding its unregulated service lines with improving visibility into future compensation rates in its regulated businesses. The maintenance of low leverage, strong interest coverage and good liquidity could also lead to an upgrade.The ratings could be downgraded if liquidity deteriorates or future compensation rates are expected to decline materially, such that free cash flow is expected to turn negative, or profitability is expected to be pressured.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Sorenson Communications, LLC, headquartered in Salt Lake City, Utah, is a provider of IP-based video communication technology and services to the deaf and hard of hearing. Proforma for the proposed transaction, Sorenson will be majority owned (52%) by Ariel Alternaves, LLC, with significant minority ownership stakes held by affiliates of GSO Capital Partners, Franklin Mutual Advisors, and FS Investments. Sorenson generated revenues of $837 million for LTM 9/2021.REGULATORY DISCLOSURESFor 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_79004For 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. 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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_1288235.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] Company’s public lender call and presentation, 07-Jan-2022Please 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. 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