Sorenson Communications LLC's New $700 Million Term Loan Rated 'BB-'; Ratings On CreditWatch Developing

  • U.S.-based video relay service (VRS) and internet protocol caption telephone provider Sorenson Communications LLC plans to refinance most of its outstanding debt with a $700 million first-lien credit facility and $160 million second-lien payment-in-kind (PIK) notes.
  • The proposed transaction will address the company's near-term debt maturities in 2020 and improve cash flow generation.
  • We are assigning our 'BB-' issue-level rating and '1' recovery rating to the company's proposed $700 million first-lien term loan.
  • Our ratings are on CreditWatch with developing implications, which we revised from positive on Feb. 12, 2019, reflecting our expectation that we could raise the rating if Sorenson successfully refinance its debt. However, we could lower the rating if the company fails to refinance its capital structure over the next three months.
NEW YORK (S&P Global Ratings) March 13, 2019--S&P Global Ratings today took 
the rating actions listed above. Sorenson plans to refinance most of its debt 
with a $700 million first-lien credit facility due in 2024 and $160 million 
second-lien PIK notes due in 2025. The credit facility comprises a $25 million 
revolving credit facility (undrawn at closing) and a $675 million term loan B. 
The company will use the proceeds from the term loan, the notes, and about 
$140 million cash on the balance sheet to repay all of its existing first-lien 
loan and second-lien notes and a portion of its holding company unsecure notes 
due in 2021. Pro forma for the transaction, $70 million of the holding 
company's unsecured notes will remain outstanding. Based on our expectations 
for the company's operating performance over the next 12 months, we believe 
Sorenson can refinance the remaining amount ahead of maturity.

The proposed transaction will improve the company's maturity profile and lower 
the high annual cash interest expense associated with its current 
post-bankruptcy financing capital structure. Pro forma for the transaction as 
of Dec. 31, 2018, the company's adjusted debt to EBITDA is 2.6x and adjusted 
free operating cash flow (FOCF) to debt is 12%. We expect adjusted leverage to 
increase to the low-3x area because of declining CaptionCall and VRS rates in 
2019. We also forecast adjusted FOCF to debt will improve to the low- to 
mid-teens percent area over the next 12 months as interest savings offset 
EBITDA declines. The proposed term loan B will be subject to a high 10% 
amortization rate, which will help the company reduce debt faster than we 
previously expected, but could decrease liquidity if future rates decline 
faster than expected.

We believe the stable and growing demand for Sorenson's services and its 
current rate schedule provide good revenue and EBITDA visibility over the next 
12 months. Still, we expect Sorenson's business to remain under pressure due 
to its scheduled declining billing rates for both VRS and CaptionCall. We 
expect CaptionCall billable minutes to continue to increase by the mid-teens 
percent area annually as the company further increases its install base due to 
a low penetration rate and increasing popularity among those who are hard of 
hearing. We expect Sorenson's revenue and EBITDA to decline slightly in 2019 
from 2018 as pressure from the lower rates for CaptionCall and VRS will be 
partly offset by volume growth at CaptionCall and, to lesser extent, VRS. We 
expect the company's CaptionCall segment to continue to expand. 

The CreditWatch with developing implications reflects that we may take a 
positive or negative rating action depending on the company's ability to 
refinance its upcoming debt maturity, likely in the next 60 days, when the 
maturity on the term loan becomes current. If the refinancing closes as 
proposed, we expect to raise our issuer credit rating on Sorenson by one notch 
to 'B' from 'B-' and assign a stable outlook. If the company cannot accomplish 
the refinancing, we expect to lower the rating to 'CCC+'.
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