Ivanti's ratings under watch due to liquidity concerns, says Fitch
Investing.com -- Fitch Ratings has placed all ratings for Ivanti Software (ETR: SOWGn ), Inc. and Icon (NASDAQ: ICLR ) Software, Inc. on Rating Watch Negative (RWN). This includes the 'B' Long-Term Issuer Default Rating (IDR) for both Ivanti and Icon Software Holdings, Inc., Ivanti's $175 million secured revolver, and $2.2 billion first lien term loan which are both rated 'BB-' with a Recovery Rating of 'RR2'. Ivanti's $545 million second lien term loan, rated 'CCC+', also shares the same recovery rating of 'RR6'.
The rating watch comes as a result of liquidity concerns, given the upcoming maturity of the company's revolving credit facility (RCF) in December 2025. Ivanti's limited cash and expected free cash flow (FCF) in 2025 may not be sufficient to cover the RCF balance and first lien term loan amortization. Ivanti's leverage and interest coverage currently exceed negative sensitivities. Yet, Fitch expects the company to return within these parameters by 2026, contingent on extending its RCF and resolving the Rating Watch.
Ivanti faces near-term liquidity and refinancing risks, with a reported cash balance of $8 million as of September 2024 and an outstanding balance of $76 million on its $175 million RCF. Fitch anticipates that Ivanti will generate approximately $67 million in FCF in 2025, but this amount, combined with the current cash balance, is insufficient to fully repay the revolver. Consequently, Ivanti will need to seek an extension or refinancing of the revolver to meet its debt servicing obligations and avoid liquidity issues.
In 2024, Ivanti transitioned from perpetual licenses to subscription revenues, which temporarily impacted its revenue, EBITDA, and FCF. Fitch anticipates stabilization in 2025, with Ivanti achieving positive FCF through cost-cutting measures and cross-selling strategies. In the medium to long term, Fitch projects that Ivanti will generate FCF margins in the teens starting in 2026, supported by stable EBITDA margins and an increased focus on subscription-based revenue streams with high visibility.
Fitch expects Ivanti's gross leverage to have exceeded 7x in 2024 due to reduced EBITDA and increased RCF utilization. Leverage is expected to improve to around 7x in 2025, aligning with peers in the 'B' rating category. It is projected to remain above 6.0x over the rating horizon as Ivanti invests in technologies and products to remain competitive in the rapidly evolving industry.
Ivanti has a strong base of recurring revenues, representing nearly 90% of total revenues, with net retention rates in the high 90s. The company has approximately 34,000 customers and no meaningful end-market concentration. Fitch considers the shift to a subscription-based model a credit positive, as recurring revenue and retention rates provide more visibility and consistency for revenue and FCF streams.
The digital transformation of customers' technology infrastructure has created strong demand for Ivanti's products. Fitch expects these industry trends to support Ivanti's medium-term growth in the mid-single digits, as demand stabilizes after pandemic and post-pandemic fluctuations.
Ivanti operates in highly fragmented markets for each of its products. Fitch expects Ivanti to face intense competition from large players like Microsoft (NASDAQ: MSFT ), Citrix, and VMWare. These competitors offer solutions in the same market and can bundle and up-sell to customers at competitive prices.
Ivanti generates a portion of its revenue in currencies other than the U.S. dollar, exposing it to fluctuations in FX rates. Although the company can adjust local currency prices to address these fluctuations and remain competitive, short-term impacts are likely in a swiftly changing FX landscape.
The recovery analysis assumes that Ivanti would be reorganized as a going concern in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim. Fitch estimates strong recovery prospects for the first lien credit facilities and rates them 'BB-'/'RR2', or two notches above Ivanti's 'B' IDR. Fitch estimates limited recovery prospects for the second lien term loan and rates it 'CCC+'/'RR6', two notches below Ivanti's IDR.
As of September 2024, Ivanti reported a cash balance of $8 million. The outstanding balance on the RCF, due to mature in December 2025, was $76 million out of a total capacity of $175 million in September 2024. Ivanti's debt structure is comprised of a $175 million RCF, first lien term loan debt of $2.2 billion, and a second lien $545 million term loan. The revolver, first lien term loan, and second lien term loan have maturities of 2025, 2027, and 2028, respectively.
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