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. 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