Fitch Ratings has affirmed
Fitch has also affirmed GEN's senior secured term loans and the secured revolver at 'BBB-'/'RR1' and its senior unsecured notes at 'BB+'/'RR4'. The Rating Outlook remains Negative.
The Negative Outlook reflects GEN's elevated leverage following the acquisition of
Key Rating Drivers
FCF to Lower Debt: Following the acquisition of Avast, GEN has significantly increased its leverage, and Fitch now forecasts leverage (defined as EBITDA Leverage) to be approximately 4.0x at the end of FY24, higher than previously anticipated. With growth in EBITDA, mandatory amortization payments, and expectations for the early repayment of debt, Fitch expects leverage to fall to below 3.5x at the end of FY25. GEN has publicly stated that it has a long-term net leverage target (as defined by GEN) to be approximately 3.0x.
Avast Merger Increases Leverage: In
Capital Allocation Strategy: GEN intends to utilize its FCF for both debt repayment and share repurchases. Fitch believes the company will reduce debt and over the past four fiscal years, it has repaid
Share Repurchase Program: GEN has stated that its long-term target is to reduce its diluted share count to pre-Avast merger levels and for the merger, 94 million shares were issued. During 3QFY23, GEN spent
High Interest Expense: With rising interest rates, GEN will have a significant amount of cash directed toward interest expense. Prepayment of debt will reduce the interest expense burden and help the company reach its publicly stated target of having net leverage (as defined by GEN) of approximately 3.0x by the end of FY25.
Somewhat Diverse Offerings: For the quarter ending
Avast Acquisition Strategy: Avast's focus was more on cyber privacy, and it did not have a strong presence in
Negative Outlook: The Negative Outlook reflects Fitch's concern that leverage may be above the negative rating sensitivity of 3.5x for a sustained period of time. GEN has the ability to generate significant FCF, which may be directed toward share repurchases, acquisitions, debt reduction and dividends.
Should the company prioritize debt paydowns over the next several quarters, Fitch would expect leverage to fall below 3.5x and the Outlook could return to Stable. On the other hand, if GEN prioritizes returns to shareholders and debt funded acquisitions, Fitch would expect leverage to remain over 3.5x for an extended amount of time, which could result in a one-notch downgrade to 'BB'.
Derivation Summary
GEN's 'BB+' rating reflects its significant size, strong brand recognition, its operating profile and EBITDA margins in the mid-50's. With a strong focus on the consumer market, the company had actively been looking to grow and expanded its international presence. The Avast acquisition helps GEN achieve these goals.
The company's rating is two notches above
GEN is rated below other technology peers including
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue growth in the double digits in FY24 reflecting the Avast acquisition and strong single digit beyond then, reflecting Fitch's assumptions for the consumer's appetite for cybersecurity software, privacy and identity protection;
Gross margins are in the range of low 80's to nearly 85%;
EBITDA margins of in the mid-50's reflecting increased operating efficiencies longer-term;
FCF is directed toward debt repayment and shareholder returns continue through flat dividends and share repurchases;
Fitch assumes that GEN may be acquisitive once leverage is reduced to its net leverage (as defined by GEN) target of 3.0x.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a Stable Outlook:
Should Fitch anticipate that GEN will reduce leverage (defined by Fitch as EBITDA Leverage) to below 3.5x over the next several quarters, the Outlook could be revised to Stable from Negative.
Factors that could, individually or collectively, lead to Positive rating action/upgrade:
Fitch's expectation of leverage below 2.5x on a sustained basis;
Debt/FCF ratio below 5x on a sustained basis.
Factors that could, individually or collectively, lead to Negative rating action/downgrade:
Fitch's expectation of leverage above 3.5x on a sustained basis;
Debt/FCF ratio above 7.5x on a sustained basis;
Evidence of negative organic revenue growth and/or erosion of EBITDA and FCF margins;
Significant debt-financed acquisitions or share repurchases that significantly weaken the company's credit profile for a prolonged period of time.
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 '
Liquidity and Debt Structure
Liquidity Expected to Remain Solid: As of
GEN has approximately 74% of its debt as floating rate debt and the remaining 26% is fixed rate debt. GEN's Term Loan A2 amortizes at 5% per annum while Term Loan B amortizes at 1% per annum. The nearest debt maturity is in 2025 when
Issuer Profile
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means 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
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