Alorica Inc. Downgraded To 'B' On Weaker-Than Anticipated-Performance; Outlook Negative

  • Irvine, Calif.-based customer service outsourcing provider Alorica Inc.'s revenues and margins have contracted meaningfully beyond our expectations, causing leverage to increase beyond the mid-4x area, where we expect it to remain through the rest of the year.
  • As a result, we are lowering our issuer credit rating on the company to 'B' from 'B+'. The outlook is negative. We are also lowering our senior secured issue-level ratings to 'B+' from 'BB-'. The recovery ratings remain unchanged.
  • The negative outlook reflects continued concerns surrounding limited covenant cushion as well as potential execution risk surrounding Alorica's restructuring initiatives and related weakening cash flow.
NEW YORK (S&P Global Ratings) Aug. 15, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade reflects weaker-than-anticipated operational performance in the first half of 2019, which caused earnings to contract and adjusted leverage to surpass 5x at the end of the second quarter. Performance obstacles included a recent malware incident, off-shoring related top-line contraction, and slower than anticipated margin improvement. Alorica incurred faster-than-anticipated declines in its revenue due to its shift of customer contracts from the U.S. to off-shore, which carry lower bill rates (but higher gross margins). At the same time, call volumes have continued to decline due to both changes in consumer behavior as well as growth in automated customer service. We now expect margins to remain in the single-digits in 2019 and only expand to 11% in 2020, which is a one year delay relative to our previous expectations, thereby impeding the pace of deleveraging.
The negative outlook reflects continued concerns around covenant headroom as well as potential execution risk around Alorica's restructuring initiatives and related weakening cash flow generation.
We could lower the rating should Alorica fail to address covenant headroom and 2021 debt maturities in a timely fashion. A downgrade could also occur should the company underperform expectations, such that EBITDA fails to sequentially expand through the latter part of 2019 and 2020, causing leverage to be sustained above 4.5x.
We could revise the outlook to stable over the next year should Alorica refinance its 2021 debt maturities, while alleviating covenant concerns. Additionally, an outlook revision would also be contingent on evidence of revenue stabilization and EBITDA growth, which would indicate progress toward a return to operating growth, coupled with adjusted leverage remaining below 4.5x and positive free operating cash flow.
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