Newfold Digital's ratings downgraded by Moody's due to refinancing risk
Investing.com -- Moody's (NYSE: MCO ) Ratings has downgraded the Corporate Family Rating (CFR) and Probability of Default Rating (PDR) of Newfold Digital Holdings Group, Inc., a provider of internet domain name registrations, web hosting, and website building tools. The downgrade, announced on February 14, 2025, sees the CFR drop to Caa1 from B3 and the PDR to Caa1-PD from B3-PD. The outlook for the company has also been revised from stable to negative.
Instrument ratings have been affected as well, with the backed senior secured first lien notes and backed senior secured first lien bank credit facility rating now down to B3 from B2. The senior unsecured rating has been revised to Caa3 from Caa2.
The downgrade is a result of increased refinancing risk for Newfold's $380 million revolver that matures in February 2026 and lower than expected revenue growth. The revolver is majorly drawn and the company is not expected to generate enough cash flow or use its cash on hand to pay down the drawn amount. This situation heightens the risk of a restructuring event if the company fails to term out the revolver debt.
The Caa1 CFR reflects Newfold's high financial leverage and stagnant revenue growth, which is unlikely to see significant improvement over the next 12 to 18 months. The company's exposure to the small and medium business (SMB) market, characterized by low resilience to economic cycles and a highly competitive market with low entry barriers, also factors into the rating.
However, Newfold's ratings benefit from its position as a leading global provider of web presence solutions, a diversified revenue base with over 7 million paid-subscribers, and the mission-critical nature of its offerings. The company's revenue is largely recurring and predictable, underpinned by annual contracts with auto-renew options, and it boasts good customer retention rates.
Newfold's liquidity profile is weakened by moderate cash flow generation and a largely drawn revolver. As of 30 September 2024, $223 million of the company's $380 million revolver was drawn. The revolver matures on 10 February 2026. If the company fails to address the maturity of the revolver, the ratings could face further downgrades.
Newfold's debt capital structure includes the senior secured first lien credit facilities, which comprise the $380 million revolver due February 2026 and a $2.3 billion term loan due February 2028. It also includes the $515 million 11.75% senior secured first lien notes due October 2028, and $500 million 6% senior unsecured notes due February 2029. The company's senior secured first lien credit facility is rated B3, one notch higher than the Caa1 CFR.
The negative outlook reflects concerns that if Newfold fails to refinance the current revolver, the company may have to restructure its capital structure. As of 30 September 2024, the revolver had $223 million drawn. The company has limited options to repay the debt under the revolver, as it had approximately $89 million of cash on hand at the end of September 2024, and cash flow generation will not be sufficient.
The outlook could stabilize if Newfold manages to extend the maturity of the revolver and stabilize earnings. However, the ratings could be downgraded if refinancing uncertainty rises, liquidity weakens faster than anticipated due to lower than expected cash flow generation, or if the likelihood of a distressed exchange or other default event increases.
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