Moody’s Investors Service, one of the top global credit and bond rating agencies, announced last week that it has raised the credit rating on Wirepath LLC (dba Snap One) based on its successful completion of an initial public offering of shares of the company’s stock. This is good news for Snap One and potential investors.
Learn more about the new Snap One credit rating by Moody’s
Moody’s has not always been kind to Snap One (formerly SnapAV), principally due to the fact that the company has relied very heavily on debt to finance its many acquisitions. As debt levels increase, the company can see its credit rating decline as it becomes a riskier bond or stock purchase.
Now Moody’s says that it has raised the company’s rating from a previous B3 to a new B2. This is one notch higher and in the eyes of Moody’s a step in the right direction. And the go-forward outlook for Snap One is “stable” according to the new report.
Reasons Why Snap One Saw Its Rating Upgraded
The credit rater says that there were multiple reasons for the upgrade. First, the company took $215 million of the proceeds from its public offering and used it to pay down its first-lien term loan. This act alone caused a meaningful drop in leverage (the ratio of debt-to-EBITDA or earnings) from a very high 7.2x to a still high but more manageable 4.6x – a quite positive development.
Other factors considered by Moody’s include “expectations of a balanced financial policy and still significant sponsor ownership” after the IPO. What the credit agency is saying is that now Snap One is a public company – that will have to report their financial results – they assume there will be more of a balanced approach to how they manage their finances.
Moody’s believes that smart home industry has a favorable long-term outlook as consumers embrace new technologies that improve connectivity and quality of life.”
Moody’s Investors Services, Rating Action: Moody’s Upgrades Wirepath LLc’s CFR
A ‘Strong Market Presence’ With a ‘Fully Integrated Platform’
The report also says the agency expects Snap One to continue to address its leverage, dropping it further to 4.1x by the end of 2022. How will that happen? Moody’s says it expects strong revenue and EBITDA growth from Snap One.
The credit agency also notes Snap One’s “strong market presence” as well as its “enhancement of scale, global distribution and market share via acquisitions and organic revenue growth in the 10% area.” Another positive the report noted includes the company’s strategy of replacing the traditional design, manufacture, and distribution system with “a fully integrated platform based on an efficient e-commerce platform.”
But Keep This One Thing in Mind
Wow…that all sounds great! However, the report was not all “wine and roses.” There were definitely factors that “constrained” Snap One’s ratings from being any higher. Keep in mind that a B2 rating is a step better than a B3 rating, but it still means that, in Moody’s words, “Obligations rated B are considered speculative and are subject to high credit risk.”
So what are these factors that are constraining Snap One’s rating from being “investment grade?” The credit agency boils it down to essentially two factors – exposure to volatility and majority ownership (control) by Hellman and Friedman.
Snap One is Subject to ‘Volatility’ and Remains Controlled by Hellman and Friedman
In the first instance, Moody’s says Snap One is exposed to volatility in the “economic environment” related to housing market strength and consumer discretionary spending. Saying that Snap One products are sold in the “high end of the home AV market” demand for the company’s products are “elastic” and “susceptible to decline during recessionary conditions.” The company, the report advises, should consider penetration into the mid-tier of the market to reduce their economic risk.
In regards to the second constraining factor, the report notes that although Snap One is now a public company, it remains “sponsor-controlled” by Hellman and Friedman. Why does this matter? Well, Moody’s suggests that this fact “elevates the risk of aggressive growth or shareholder return strategies.” In other words, majority owners Hellman and Friedman could decide to engage in actions designed to feed their own interests, rather than those of all shareholders.
At the End of the Day
Still, at the end of the day, the fact that the credit agency elevated Snap One’s credit standing is a positive for the company and a pat on the back. The company needs to elevate its rating at least two more steps to get to investment grade, but clearly, this report says they are moving in the right direction.
Learn more about Snap One by visiting: snapone.com.
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