Curvature Inc. Issuer Credit Rating Raised To ‘CCC’ From 'SD' Following Distressed Debt Exchange; Outlook Negative

  • Curvature Inc. (Curvature) has completed a distressed debt exchange that temporarily reduces its cash interest by $18 million annually until the end of 2020. However, despite cost-cutting initiatives, we believe the company's ongoing operational challenges will continue to pressure free cash flow and weaken credit metrics.
  • Without a significant business turnaround, we believe there is a risk of another debt restructuring within the next 12 months, although the company may have the resources to service its debt within this period thanks to a $30 million incremental second-lien notes issuance from Partners Group, its financial sponsor and the temporary cash interest reduction.
  • We are thus raising our issuer credit rating on Curvature to 'CCC' from 'SD'.
  • We are also raising our issue-level ratings on the amended total $138.5 million of existing junior second-lien notes due October 2024 to 'CC' from 'D'. We are lowering our ratings on the $530 million first-lien term loan due October 2023 and $55 million revolving credit facility (RCF) due October 2022 to 'CCC' from 'CCC+'. In addition, we are assigning our 'CC' rating to the total $66.5 million of senior second-lien notes due October 2024.
  • The negative outlook reflects our view that Curvature's revenue declines and operating challenges will continue in 2019. This could pressure already negative free operating cash flow (FOCF) and weaken Curvature's liquidity position such that a near-term distressed debt restructuring is viewed as more likely.
NEW YORK (S&P Global Ratings) April 10, 2019—S&P Global Ratings today took the rating actions listed above. The rating action reflects our view that Curvature's capital structure is unsustainable. Given its recent weak operating performance, we believe the company faces significant risks in executing its revenue turnaround strategy after recent merger integration challenges that caused sales execution issues. This is in the context of significant headcount reductions in January 2019 that we believe could impair its ability to stabilize the business. In addition, we expect continued pressures in the company's hardware business unit over 2019-2020.
The negative outlook reflects our view that Curvature's revenue declines and operating challenges will continue in 2019, which could pressure already negative FOCF and weaken Curvature's liquidity position such that we view a near-term distressed debt restructuring as more likely. This is despite our expectation for a return to modest growth in its maintenance and services business lines, but offset by the company's high debt service requirement.
We could lower the rating within the next 12 months if Curvature has sustained revenue declines in its maintenance and services business lines due to insufficient new clients, despite ongoing investments in the sales function and the new integrated go-to-market strategy. This would lead to continued negative FOCF after debt service in 2019 and 2020, and weakened liquidity that we believe could increase the risk of further debt restructuring within a six month horizon.
While unlikely over the next 12 months, we could raise the rating after a track record of stable or increasing revenues and adjusted EBITDA margins of around 15% or more. This could be driven by slowing hardware revenue declines and strong growth in the maintenance and services business units from successful sales execution.
We would expect this to result in no more than $10 million of negative reported FOCF after debt service, and EBITDA cash interest coverage of at least 1x beyond 2020 on a sustained basis. This would lead us to believe that there is a low risk of a distressed debt restructuring or payment default within a 12 month horizon.
A considerable equity infusion to further bolster the company's liquidity position could also be sufficient for us to raise the ratings.
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