Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Buzz Finco L.L.C. at 'BB-' and upgraded the senior secured revolver and term loans to 'BB+'/'RR1' from 'BB/RR2'.
The upgrade resolves the Under Criteria Observation (UCO) designation placed on Buzz Finco L.L.C. in April 2021 related to the modification of Fitch's Recovery Ratings and Instrument Ratings criteria. Fitch believes the senior secured revolver and term loans satisfy the conditions of category 1 first lien debt and accordingly receive an RR1 recovery rating and 2-notch uplift from the IDR. Fitch has also assigned a 'BB-' IDR to Bumble Inc.
The Rating Outlook has been revised to Stable from Negative.
Key Rating Drivers
IPO and Organic Growth Drive Deleveraging: Bumble's leverage has quickly declined from a peak of 5.6x in Oct-2020 to 3.4x in the LTM period ended June 2021. Deleveraging has been driven by both strong organic EBITDA growth and a $200 million term loan repayment paid with proceeds of Bumble's February 2021 IPO. Fitch expects continued EBITDA growth to drive further deleveraging, but expects leverage to likely remain above Fitch's 3.0x positive ratings sensitivity.
Industry Growth Supported by Secular Tailwinds: Fitch expects the online dating industry, and freemium dating applications in particular, to experience strong user and revenue growth over the rating horizon. Fitch believes growth will be supported by increasing international smartphone penetration, declining marriage rates, lessening stigmas around online dating and an increasing proportion of Generation Z being eligible to use web-based dating services. Fitch believes Bumble is well positioned to benefit from this secular trend.
Bumble's revenue growth trajectory was not significantly affected by coronavirus-related restrictions on social gatherings, and the business has exhibited strong sequential revenue growth in each month since April 2020. Fitch expects that loosening pandemic-related restrictions globally will also drive additional user growth, as in-person dating becomes more accessible.
Limited Product Diversification: Bumble's portfolio consists of two main platforms, Bumble and Badoo, which represented 65% and 35% of revenue, respectively, in the LTM period ended June 2021. Fitch believes limited product diversification increases credit risk as any significant operational or reputational issues at either platform may have a significant impact on Bumble's consolidated financial profile. While the Bumble application has modes that extend beyond dating, including BFF and Bizz, Fitch does not believe these modes currently have a large enough user base to provide material product level diversification.
Significant Level of Competition: Bumble competes in the crowded and competitive online dating industry. Bumble's main competitor is Match Group, Inc. which owns the largest and highest grossing dating app in the world, Tinder, as well as a number of other competitive platforms such as Hinge, PlentyofFish, Match.com, eHarmony, etc. Fitch believes that multiple large competitors can exist in the dating app space, as users will frequently use and pay for multiple dating applications at once.
Fitch believes Match Group is better competitively positioned due to its large number of platforms with critical user mass, and relatively conservative capitalization and strong financial profile such. As a result, Match Group can deploy financial resources aggressively to acquire competitors and introduce features across its platforms aimed at competing with Bumble. Fitch believes Bumble's focus on female empowerment and safety provides important competitive differentiation, though Fitch questions the long-term sustainability of this advantage against competitors with significant financial resources and only modest barriers to entry for new dating applications.
Robust Cash Flow Generation: Fitch expects Bumble to generate strong FCF margins over the rating horizon. Cash flow generation will be supported by a strong EBITDA margin profile, limited working capital requirements, and low levels of capital intensity. Fitch believes strong FCF generation provides management with significant financial flexibility to pursue strategic investments with internally generated resources. However, consistently allocating FCF toward shareholder distributions will limit financial flexibility.
Concentrated Voting Power: Blackstone, Bumble's sponsor, and Whitney Wolfe Herd, Bumble's Founder and CEO, collectively hold 93% of Bumble Inc.'s voting power. Blackstone holds 72% of the voting power while Wolfe Herd holds 21%. Fitch believes the concentration of voting power between the sponsor and the founder increases the likelihood of shareholder friendly actions, which negatively affects the credit profile.
Bumble's 'BB-' IDR is supported by Bumble's competitive positioning as a safe and female-friendly dating application, relatively conservative leverage profile, strong FCF generation and Fitch's expectation for the company to achieve sustained strong revenue growth supported by a number of secular tailwinds. The credit profile's strengths are offset by material discretionary consumer spending exposure, limited product diversification and significant sector competition. The 'RR1' Recovery Rating on the senior secured debt reflects Fitch's expectation for a superior recovery based on the company's strong underlying cash flow generation, profitability and brand value.
Bumble builds and operates dating and social networking mobile applications, which most notably include Bumble and Badoo. Bumble does not have any direct peers within Fitch's corporates universe. Fitch believes Bumble's operational, financial and credit protection metrics position it well in the 'BB-' rating category compared with Fitch's rated TMT universe.
Fitch's Key Assumptions Within the Rating Case for the Issuer
Consolidated revenue expected to grow at a double-digit CAGR over the rating horizon, driven by both paying user growth and ARPPU growth, reflecting the strong secular tailwinds in the online dating industry and the company's new user monetization initiatives;
Fitch assumes a majority of revenue growth will be derived from Bumble subscription and transaction growth, as a majority of marketing spend is allocated toward Bumble user acquisition;
Fitch does not assume any acquisitions over the forecast period;
Gross profit margins assumed to be stable over the forecast horizon;
Fitch assumes EBITDA margins range between 27%-29%
Fitch assumes stable capital intensity over the rating horizon;
Fitch assumes Bumble repurchases $1.1 billion of shares, funded primarily with free cash flow as well as some incremental debt.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Bumble's consolidated revenue growth materially exceeding industry growth;
Total debt with equity credit/operating EBITDA sustained below 3.0x;
Sustained double-digit FCF margins.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Debt funded acquisitions or shareholder returns causing total debt with equity credit/operating EBITDA to exceed 4.0x without a credible plan for deleveraging;
Match Group, Facebook or other competitors taking material market share from Bumble, resulting in poor operating performance and depressed profitability. Fitch believes indicators would be flat to negative revenue growth and EBITDA margins sustained near or below 20%;
Sustained low single-digit FCF margins.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity Position: As of June 2021, Bumble's liquidity is supported by $252 million of readily available cash and an undrawn $50 million revolver. Fitch expects liquidity will be further supported by consistent FCF generation, due to strong profitability and limited capital requirements.
Bumble's debt structure is comprised of a $50 million senior secured revolver and $641.4 million of outstanding senior secured term loans. The revolver matures in January 2025, and the term loan matures January 2027. Bumble has no significant debt maturities over the rating horizon, and will only be required to make $1.4 million quarterly amortization payments over the life of the term loan. Fitch believes Bumble's liquidity is sufficient to support its debt service over the ratings horizon.
Bumble Inc. builds and operates dating and social networking mobile applications, which most notably include Bumble and Badoo. On a consolidated basis, Bumble has more than 40 million monthly active users across more than 150 countries.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Bumble has an ESG Relevance Score of '4' for social impacts due to Bumble's position as a female-friendly dating application seeking to mitigate harassment or abusive language frequently experienced by women on dating applications, which has a positive impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Fitch believes that Bumble's female friendly policies give Bumble a competitive advantage in the online dating industry, which bolsters the company's strong market position and supports user retention rates.
Bumble has an ESG Relevance Score of '4' for governance structure due to the sponsor and founder's collective control of all operational and financing decisions, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Bumble Inc. LT IDR BB- New Rating
Buzz Finco L.L.C. LT IDR BB- Affirmed BB-
LT BB+ Upgrade RR1 BB
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com