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 leverage which remains elevated following
GEN is committed to having long-term net leverage (as defined by the company) of approximately 3.0x, down from 3.9x at the end of 2QFY24 and Fitch believes the company can achieve this by balancing debt reduction with its share repurchase plan. Failure to repay debt over the next few quarters to reduce leverage below 3.5x (as defined by Fitch) on a sustained basis would likely result in a one notch downgrade of the IDR to 'BB'.
Key Rating Drivers
Debt Repayment to Accelerate Deleveraging: Fitch defined leverage for the LTM ending
Capital Allocation Strategy: Fitch estimates Gen Digital will generate
For the LTM ending
High Interest Expense Burden: Given rising interest rates, Gen Digital 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 the company, of approximately 3.0x by fiscal YE 2027.
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
Derivation Summary
Gen Digital's 'BB+' rating reflects its significant size, strong brand recognition, operating profile and EBITDA margins in the mid-to upper 50% range. With a strong focus on the consumer market, the company had actively looked to grow and expand its international presence. The Avast acquisition helps Gen Digital achieve these goals.
The company's rating is the same as
Gen Digital is rated below other technology peers, including
Key Assumptions
Revenue grows by double digits in fiscal 2024, reflecting the Avast acquisition, and by strong single digits thereafter, reflecting Fitch's assumptions for consumer appetite for cybersecurity software, privacy and identity protection;
Gross margins are in the low 80%;
EBITDA margins in the mid- to upper 50% range, reflecting increased operating efficiencies longer term;
FCF is directed toward debt repayment, and shareholder returns continue through flat dividends and share repurchases;
The company may be acquisitive once leverage is reduced to its target net leverage, as defined by Gen Digital, of 3.0x.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, lead to a Stable Outlook
--(CFO-capex)/debt above 10% on a sustained basis;
EBITDA leverage, defined by Fitch, below 3.5x over the next several quarters.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--(CFO-capex)/debt above 17.5% on a sustained basis;
Fitch's expectation of leverage below 2.5x on a sustained basis.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--(CFO-capex)/debt below 10% on a sustained basis;
Fitch's expectation of leverage above 3.5x on a sustained basis;
Evidence of negative organic revenue growth 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.
Liquidity and Debt Structure
Liquidity Expected to Remain Solid: As of
Gen Digital has approximately 62% of its debt as floating-rate debt, and the remaining 38% is fixed-rate debt reflecting
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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