Moody's Investors Service, October 23, 2018 rating action: "Moody's affirms HC2 Holdings, Inc.'s B3 CFR; assigns Caa1 rating to senior secured notes" [Credit rating of Caa1 for proposed HC2 refinancing "based on the expected near term dividends and tax sharing payments" from DBM]

Source: Moody's Investors Service, October 23, 2018 rating action

Rating Action: Moody's affirms HC2 Holdings, Inc.'s B3 CFR; assigns Caa1 rating to senior secured notes

23 Oct 2018

About $535 million of debt securities affected

New York, October 23, 2018 -- Moody's Investors Service, ("Moody's") affirmed HC2 Holdings, Inc.'s (HC2) B3 corporate family rating, B3-PD probability of default rating, and it's Speculative Grade Liquidity Rating of SGL-3. At the same time, Moody's assigned a Caa1 rating to the company's proposed $535 million senior secured notes. The ratings outlook remains stable. The company plans to use the proceeds from the notes offering to redeem its existing $510 million senior secured notes and to pay accrued interest and transaction fees. The Caa1 rating on the existing senior secured notes will be withdrawn when they are redeemed.

"HC2's credit metrics remain weak for its B3 corporate family rating based on the expected near term dividends and tax sharing payments from its operating subsidiaries. However, its rating is supported by the cash generating potential of its subsidiaries in relation to its holding company cash obligations as well as the collateral value of the assets in relation to the principal amount of its outstanding senior secured notes," said Michael Corelli, Moody's Vice President -- Senior Credit Officer and lead analyst for HC2 Holdings, Inc.

Assignments:

..Issuer: HC2 Holdings, Inc.

.... Senior Secured Notes due 2023, Assigned Caa1 (LGD4)

Outlook Actions:

..Issuer: HC2 Holdings, Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: HC2 Holdings, Inc.

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

.... Senior Secured Notes, Affirmed Caa1 (LGD4)

RATINGS RATIONALE

HC2's B3 corporate family rating reflects its holding company status and the structural subordination of its debt to the direct claims on the assets and cash flows of its key operating subsidiaries, which do not guarantee the debt of HC2. HC2's sole source of internal cash flow is the dividends and tax sharing payments it receives from its operating subsidiaries since it has no cash generating assets at the holding company. HC2's rating also incorporates its high consolidated financial leverage, low interest coverage and the small size, limited geographic and end market diversity and weak profitability of several of its operating subsidiaries. The likelihood of HC2 making additional acquisitions also factors into the rating. HC2's rating is supported by the collateral value of the assets and the cash generating potential of its operating subsidiaries, the diversity and potential monetization of those subsidiaries and the potential for further diversification from future acquisitions.

HC2 announced that it plans to issue $535 million of senior secured notes and to use the proceeds to redeem its existing $510 million of senior secured notes. This refinancing is expected to lower the company's interest costs and extend its debt maturity. The company also announced its intention to pursue strategic alternatives for its Global Marine subsidiary with the goal of reducing its debt cost of capital. The proposed senior notes will include the option to redeem a portion of the notes in case the company decides to use any potential cash proceeds to pay down debt. If the company retires a material amount of debt then it could create upside pressure on its rating, but an upgrade would be contingent on its ability to generate consistent cash flows that meet or exceed its cash obligations. Upward rating pressure could be tempered by the reduced diversity and cash flow generating potential of its operating subs excluding Global Marine.

Moody's expects HC2 to incur a moderate decline in its adjusted EBITDA in 2018 versus the $65 million it reported in 2017 due to losses in its recently established broadcasting segment and a difficult comparison in its insurance segment, which benefitted from a reduction in reserves related to long term care rate increases last year. This will be tempered by improved results in its construction and energy segments. Its operating performance should strengthen in 2019 due to the acquisition of GrayWolf, additional asset management fees from its insurance subsidiary and possible growth in its other operating subsidiaries.

HC2's potential dividend and tax sharing payment capacity from its operating subs is only expected to be about $40 - $45 million in 2018, and the company is expected to recieve a much lower amount of cash from its subs due to asset sales and debt refinancings this year. This didivdend capcity continues to be insufficient to cover its holding company expenses, which are estimated at about $75 - $80 million. Since March 2015 HC2 has raised about $390 million through tack-on note offerings, preferred and common stock issuance and the sale of BeneVir to meet its holding company expenses and fund acquisitions, and it may have to raise additional funds in the future if it is not successful in selling assets or reducing its fixed costs. However, the company's cash obligations will moderately decline if it refinances its debt at a lower rate than the 11% interest it is currently paying on its existing senior notes, and dividends and tax sharing payments should rise in 2019 due to the acquisitions of GrayWolf and Humana's long term care insurance business. Therefore, its cash inflows could potentially cover its holding company obligations next year. However, HC2's credit metrics will remain very weak for its B3 corporate family rating with an adjusted leverage ratio (Debt/Dividends) above 10.0x and interest coverage (Dividends/Interest) below 1.0x in 2018 based on the expected dividends and tax sharing payments from its operating subsidiaries. These metrics should improve in 2019, but If HC2 is not able to reduce its leverage ratio below 6.5x then its outlook or ratings could be negatively impacted.

HC2's rating receives support from the collateral value of the assets of its operating subsidiaries in relation to the $510 million of outstanding senior secured notes. The collateral coverage ratio of these assets was greater than 2.0x as of June 30, 2018 according to an independent appraisal, and is expected to remain above 2.0x after the note offering and the acquisition of GrayWolf are completed.

HC2's speculative grade liquidity rating of SGL-3 reflects Moody's expectation that its liquidity will remain adequate in the near term following the proposed refinancing. The company is required to maintain unrestricted cash and equivalents equal to six months of interest on its senior secured notes and dividends on its convertible preferred stock if its collateral coverage ratio is greater than 2.0x. The current minimum liquidity requirement is about $30 million. HC2 had $54 million of unrestricted corporate cash as of June 30, 2018. The company has historically maintained a moderate buffer above the minimum liquidity requirement even though it continues to pursue acquisitions and has investments in development stage businesses that may require additional funding in the future.

HC2's senior secured notes are rated Caa1, which is one notch below the corporate family rating due to the structural subordination of the note holders' claims on the assets and cash flows of HC2's significant operating subsidiaries. The notes are structurally subordinated to any existing and future debt of the company's non-guarantor subsidiaries. Most of the operating subsidiaries including DBM and Global Marine do not provide guarantees on the senior secured notes. The notes are secured by substantially all other assets owned by HC2, but those assets have limited cash generating potential and a very modest asset value.

HC2's stable outlook reflects our expectation for continued positive cash flow from its operating subs and the use of those cash flows to pay dividends to HC2. The stable outlook also reflects our expectation that HC2 will maintain an adequate liquidity profile and will reduce its leverage ratio (Dividends/Debt) below 6.5x in the near term.

An upgrade of the company's ratings could be considered if it lowers its leverage ratio below 4.5x, strengthens its liquidity profile and consistently receives dividends from its operating subsidiaries that cover its holding company cash obligations.

A downgrade could occur if HC2 maintains a leverage ratio above 6.5x or makes additional debt financed acquisitions of companies with limited cash generating capabilities. A moderate reduction in liquidity could also result in a downgrade.

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in New York, New York, HC2 Holdings, Inc. is a holding company whose principal focus is on acquiring or entering into combinations with businesses in diverse segments. The company's principal holdings include controlling interests in DBM Global, a North American steel fabrication and erection company and Global Marine Systems Limited, a UK-based offshore engineering company, focused on subsea cable installation and maintenance. In addition to DBM and Global Marine, HC2 owns or has investments in other businesses, including in the telecommunications services (PTGi-International Carrier Services), life sciences (Pansend), energy (American Natural Gas), insurance (Continental Insurance Group), over-the-air broadcast television and gaming (704Games) sectors. HC2 generated $1.8 billion in revenues during the trailing 12 months ended June 30, 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael Corelli
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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