Electronics for Imaging, Inc. -- Moody's upgrades EFI's CFR to B3; outlook stable

Moody's
·19 min read

Rating Action: Moody's upgrades EFI's CFR to B3; outlook stableGlobal Credit Research - 28 Jan 2022New York, January 28, 2022 -- Moody's Investors Service ("Moody's") upgraded Electronics for Imaging, Inc.'s ("EFI") Corporate Family Rating (CFR) to B3 from Caa1, Probability of Default Rating (PDR) to B3-PD from Caa1-PD, and the second lien debt instrument rating on the second lien term loan due July 2027 to Caa2 from Caa3. Concurrently, Moody's affirmed the B3 debt instrument rating on the existing first lien term loan due July 2026 and first lien revolving credit facility due July 2024. The outlook is changed to stable from positive.The CFR upgrade to B3 reflects EFI's improving operating profile, increased financial flexibility following the expected debt pay down from the proceeds of the eProductivity Segment ("EPS") sale, and willingness to deploy excess capital towards voluntarily debt reduction. The company is entering FY 2022 from a position of relative strength and will benefit from its lean cost structure and new product introductions over the next 12-18 months. Continued growth in the higher margin Ink and Parts & Services subsegments improve operating stability and provides avenues for EFI to take more meaningful pricing actions amid an inflationary environment.The affirmation of the B3 first lien debt instrument ratings reflect the uncertainty of how the remaining $167 million of proceeds from the sale of EPS will be allocated across the capital structure. The company is in negotiations with its first-lien lender group to allow a partial or full paydown of the second lien facilities. If EFI is allowed to repay most or all of the $161 million second lien term loan outstanding, the first lien debt instrument ratings will not be downgraded, while the CFR remains B3. Conversely, there would be positive rating pressure on the B3 first lien debt instrument ratings should there be minimal repayment of the second lien term loan.Moody's views the legal and operational separation of Fiery, LLC ("Fiery") from the credit group as credit negative. The Inkjet segment cannot support the full debt burden of the pro forma capital structure and will not generate enough free-cash-flow (FCF) to service its mandatory debt amortization through FY 2024. This shortfall in cash flow is expected to be plugged by the receipt of preferred dividends and proceeds from the redemption of preferred shares issued by Fiery in exchange for the structural separation. However, there are no legal requirements mandating the timing or magnitude of cash transfers from Fiery to the credit group. The preferred dividend can PIK at will and Fiery can build cash outside the credit group should it choose to do so. Moody's believes the increased optionality of the pro forma organizational structure can facilitate new avenues for collateral leakage not contemplated in the original 2019 LBO. In addition, Moody's believes lenders would be disadvantaged should the proceeds from divesting Fiery fail to exceed the remaining preferred share balance owed to the credit group.Moody's notes removing Fiery from the credit group can be viewed akin to a stock pledge on a foreign subsidiary. Fiery remains EFI's restricted subsidiary and will be bound by existing restricted payment and incremental debt incurrence covenants outlined in the July 2019 credit agreement. Moody's understands the removal of Fiery could reduce debt maturity risk by improving sale opportunities as individual entities.The potential break-up of Inkjet and Fiery by owner Siris Capital Group ("Siris") is not unexpected and both segments have benefited from stable operating performance over the last six months. Moody's projects both entities will continue growing revenue and expanding EBITDA margins on a standalone basis over the next 12-18 months. Nevertheless, both Inkjet and Fiery operate in difficult industries and achieving desired valuations in a potential sale could be challenging. Siris could also look to enhance equity returns by utilizing Fiery's position beyond the credit group to deploy a more aggressive financial policy.As a result of the added complexity within the organizational structure, Moody's will represent two approaches when calculating EFI's financial metrics: 1) consolidating Inkjet and Fiery financial results as they would appear in the financial statements ("Consolidated") and 2) calculating standalone Inkjet financial results and including all cash preferred dividend payments received from Fiery in the EBITDA and FFO calculations ("Credit Group"). The Consolidated metrics assess EFI's performance as if Fiery is a foreign subsidiary, while the Credit Group metrics assess performance relative to actual cash flow available to the credit group for debt repayment.Pro forma for the divestiture of EPS and $387 million paydown of debt, LTM Q3 2021 Consolidated Debt/EBITDA and Credit Group Debt/EBITDA was 6.3x and 7.4x, respectively. Moody's projects Consolidated Debt/EBITDA and Credit Group Debt/EBITDA will approach 5.1x and 6.4x, respectively, over the next 12-18 months. All metrics reflect Moody's adjustments.Upgrades:..Issuer: Electronics for Imaging, Inc..... Corporate Family Rating, Upgraded to B3 from Caa1.... Probability of Default Rating, Upgraded to B3-PD from Caa1-PD....Gtd Senior Secured 2nd Lien Term Loan, Upgraded to Caa2 (LGD5) from Caa3 (LGD5)Affirmations:..Issuer: Electronics for Imaging, Inc.....Gtd Senior Secured 1st Lien Revolving Credit Facility, Affirmed B3 (LGD3)....Gtd Senior Secured 1st Lien Term Loan, Affirmed B3 (LGD3)Outlook Actions:..Issuer: Electronics for Imaging, Inc.....Outlook, Changed To Stable From PositiveRATINGS RATIONALEThe B3 CFR reflects EFI's high financial leverage, the challenges of operating in the print solutions industry, and the continued reliance on cost reductions to offset organic revenue declines from pre-COVID levels. EFI benefits from its diversified geographic revenue base, increasing focus on the Ink and Parts & Services product segments, which provides greater stability to the revenue base, and Moody's expectation for Consolidated FCF/Debt and Credit Group FCF/Debt to approach 8% and 5%, respectively, over the next 12-18 months.EFI's Credit Group Debt/EBITDA would likely rise to an unacceptable level should Fiery opt for PIK preferred dividends in lieu of cash dividend payments. Additionally, EFI's credit rating would be pressured if Fiery begins hoarding cash and EFI's financial flexibility is materially impeded, and voluntary debt repayments are no longer a viable option for financial leverage reduction.EFI maintains adequate liquidity in the near term with just over $100 million of cash as of December 31, 2021 (pro forma for $387 million debt repayment). Moody's expects annual Credit Group FCF generation around $35 million through 2023, of which approximately $20 million is earmarked for mandatory debt amortization each year. EFI's ability to generate $35 million of Credit Group FCF is dependent on receiving over $27 million of preferred dividends in cash each year from the Fiery segment. Moody's anticipates the company will remain opportunistic with voluntary debt repayments when cash balances exceed the minimum operating requirement of around $50 million. .EFI maintains a $100 million first lien cash flow revolver to further support liquidity; however, availability is constrained by the requirement to hold $39.8 million of letters of credit as collateral for its manufacturing facility through May 2024. The available revolver was undrawn as of December 31, 2021. Access to the revolver is governed by springing net first lien leverage ratio of 6.6x through maturity. The revolver springs when 40% of the revolver or letters of credit are outstanding and is expected to test each period going forward due to the aforementioned letter of credit requirement. Moody's does not expect the covenant will impede EFI's ability to draw over the next 12-15 months but notes the continued repayment of the second lien term loan will constrict EFI's cushion under the covenant.The stable outlook reflects Moody's expectation of organic revenue growth in the mid-to-high- single digit range though FY 2023. Over the next two years, Moody's projects Consolidated Debt/EBITDA and Consolidated FCF-less-mandatory-debt-amortization/Debt approaching 5.1x and 5%, respectively, while Credit Group Debt/EBITDA and Credit Group FCF-less-mandatory-debt-amortization/Debt approach 6.4x and 2%.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if EFI maintains consistent top line growth and sustains Credit Group Debt/EBITDA below 6.0x (with limited addbacks to EBITDA). EFI will also need to maintain good liquidity with a largely undrawn revolver and Credit Group FCF/Debt sustained above 7.0%.Ratings could be downgraded if liquidity deteriorates, Credit Group Debt/EBITDA is sustained above 7.0x (with limited addbacks to EBITDA) after 2022, or if Credit Group FCF/Debt is sustained below 3%.ESG CONSIDERATIONSGovernance risk is a key consideration given EFI's ownership by a financial sponsor. Moody's views the legal and operational separation of Fiery as a significant governance risk given the increased potential for aggressive financial policies to impair lender collateral packages. In addition, private equity ownership often leads to debt financed distributions or M&A to enhance equity returns. Lack of public financial disclosure and the absence of board independence are also incorporated in EFI's credit profile.Electronics for Imaging, Inc., based in Fremont, CA, is a global technology platform providing digital imaging solutions for the printing, packaging, and imaging industries. The company's offerings include industrial printers, proprietary ink, production software and digital front ends. In July 2019, Siris Capital Group, LLC took EFI private in a transaction valued at roughly $1.7 billion. Consolidated revenue for the twelve months ending December 31, 2021 was approximately $670 million.The principal methodology used in these ratings was Diversified Technology published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.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_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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Eric Kozlowski 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 Stephen Sohn 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 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​