April 3, 2019
Moody’s Investors Service has affirmed its B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) for 4L Technologies Inc., the parent company of Clover.
Following Moody’s decision to upgrade 4L Technologies (4L Tech) from negative to stable in September last year, the agency has announced its affirmation of B3 CFR and B3-P PDR for the company.
Moody’s has concurrently assigned B3 ratings to the company’s proposed reduced, amended, extended, and re-priced senior secured first lien term loan due 2022 and first lien revolving credit facility due 2022. The ratings outlook is stable.
4L Tech, Clover’s parent company, collects, remanufactures and distributes laser and inkjet printer cartridges and wireless devices through manufacturing facilities in the United States, Mexico, Europe, and Asia regions. The company’s main customers include leading office product retailers and wireless carriers in the United States. 4L Tech has been majority-owned by Golden Gate Private Equity, Inc. (“Golden Gate”) since 2010. For the twelve months ended 31 December 2018, the company’s pro forma revenue (excluding the telecom business) was $820 million, reveals Moody’s (€729.1 million).
According to Moody’s lead analyst Andrew MacDonald, “Moody’s is affirming the B3 CFR because although we view the proposed transaction favourably as it deleverages the balance sheet and modestly extends debt maturities, we believe there will be continued headwinds in the print cartridge business. Leverage will be set at a modest level at close, but we anticipate it will increase slightly in 2019 from a wider-than-average variety of product mix in 2019 that will initially weigh on margins before stabilising thereafter. Longer term, we expect leverage to improve primarily driven by free cash flow generation that will be used for debt repayment and mitigate earnings pressure.”
As Moody’s explains, 4L Tech’s B3 CFR largely reflects the business risks inherent in the mature printing market and highly competitive nature of the company’s wireless segment, both of which experienced revenue declines in 2017 and 2018. Moody’s says the rating also incorporates the company’s small revenue size, high customer concentration and limited end market diversification.
Nonetheless, the rating incorporates Moody’s expectation that operational improvements within 4L Tech’s wireless business and cost reduction initiatives in its imaging business will mitigate margin pressure as the company’s revenue mix shifts in the wireless business.
The stable outlook reflects Moody’s expectation that the company’s operational improvements will be sustained, adds the agency, and that the company will generate positive free cash flows at stable margins during the next 12-18 months. The outlook also incorporates Moody’s expectation that 4L Tech will maintain good liquidity.
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