Moody's downgrades INNOVATE's CFR to Caa1; outlook stable

Rating Action

26 Oct 2022  Moody's Investors Service

New York, October 26, 2022 -- Moody's Investors Service ("Moody's") downgraded INNOVATE Corp.'s ("INNOVATE") corporate family rating ("CFR") to Caa1 from B3, its probability of default rating to Caa1-PD from B3-PD, its senior secured notes rating to Caa2 from Caa1, and its Speculative Grade Liquidity ("SGL") Rating to SGL-4 from SGL-3. The rating outlook remains stable.

"The downgrade reflects weakness in INNOVATE's credit metrics – at the holding company level as well as on a consolidated basis – which we expect will continue for the next 12-18 months, combined with tight liquidity" said Sandeep Sama, Moody's Vice President – Senior Analyst and lead analyst for INNOVATE.

Governance considerations under Moody's ESG framework –  including financial strategy & risk management, and management track record – were key drivers of the rating action. Moody's has revised INNOVATE's Governance Issuer Profile Score (IPS) to G-5 from G-4, and its Credit Impact Score (CIS) to CIS-5 from CIS-4.

Downgrades:

..Issuer: INNOVATE Corp.

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3

....Senior Secured Regular Bond/Debenture, Downgraded to Caa2 (LGD4) from Caa1 (LGD4)

Outlook Actions:

..Issuer: INNOVATE Corp.

....Outlook, Remains Stable

RATINGS RATIONALE

INNOVATE's Caa1 CFR reflects its holding company status, with a high degree of reliance on dividends, and tax sharing payments from its operating subsidiaries. While INNOVATE has three main operating subsidiaries across diverse businesses and end markets, it largely depends on its infrastructure subsidiary – DBM Global – for dividend and tax sharing payments, which it uses to service its holding company cash needs. The limited scale and lack of profitability of its other operating subsidiaries – Life Sciences and Spectrum – and the company's acquisitive history along with the risk of additional debt funded acquisitions are also factored into the rating. Historically, the payments from its various subsidiaries have not been sufficient to cover INNOVATE's holding company cash needs (debt service, preferred dividends, corporate overhead etc.), with the company relying on asset sales and external financing to bridge the gap. However, INNOVATE's rating is supported by the collateral value of the assets and the diversity and monetization potential of its subsidiaries.

We expect underlying performance of INNOVATE's infrastructure subsidiary – DBM Global – to improve over the next 12-18 months driven by an order backlog that has remained stable over the last few quarters, with embedded margins that are higher than in recent periods. This, combined with improved working capital, should result in better EBITDA and free cash flow at the subsidiary in 2023. However, amount that can be paid in the form of dividends to INNOVATE remains constrained, and tied to financial performance over the prior two year period. Separately, we do not expect INNOVATE's other subsidiaries to make any dividend payments in the near-term, even though some of them provide upside optionality in the future. As a result, we expect overall dividend and tax sharing payments from its subsidiaries to fall short of its annual cash needs – which are typically around $50 million – consistent with recent years.

INNOVATE expects to receive nearly $32 million from the sale of the remaining 19% stake in HMN International Co. Ltd., following on from the first leg of the transaction which closed in 2020. However, the transaction has been experiencing delays. INNOVATE has no near-term debt maturities at the holding company level, although its Spectrum subsidiary has nearly $52 million of debt maturing on November 30, 2022.

INNOVATE's rating receives support from the collateral value of the assets of its operating subsidiaries in relation to its holding company and subsidiary debt. The collateral coverage ratio of these assets was greater than 1.5x as of June 30, 2022 according to independent appraisals.

INNOVATE's SGL-4 rating reflects its weak liquidity. As of June 30 2022, INNOVATE had only $3.6 million of cash at the corporate level, with $15 million available under the corporate revolver. Subsequent to quarter-end however, INNOVATE drew down the remaining balance on the corporate revolver to meet its interest payment and other obligations, due to a delay in the expected dividend payment from DBM resulting from increased working capital requirements at the subsidiary. While the $32 million of expected asset sale proceeds can somewhat ease the  liquidity tightness, uncertainty around the timing of those proceeds, as well as continued shortfall of subsidiary dividend and other payments relative to holding company cash needs are reflected in our SGL-4 rating.

The stable outlook reflects (1) our expectation for improved operating performance at the infrastructure subsidiary; (2) our expectation that the company will be able to roll forward the debt at its Spectrum operating subsidiary, which currently matures on November 30, 2022.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of the company's ratings could be considered if it lowers its leverage ratio below 6.5x (Debt/Dividends), strengthens its liquidity profile and consistently receives dividends from its operating subsidiaries that cover its holding company cash obligations.

A downgrade could occur if INNOVATE's leverage ratio (Debt/Dividends) is sustained above 10.0x or if it makes additional debt financed acquisitions of companies with limited cash generating capabilities. Further reduction in liquidity could also result in a downgrade. Additionally, the inability of INNOVATE's Spectrum operating subsidiary to roll forward its upcoming debt maturity could also result in a downgrade.

Headquartered in New York, New York, INNOVATE Corp. 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 Inc., a North American engineering, modeling, steel fabrication and erection company and through its GrayWolf subsidiary provides maintenance, repair, installation, outage and turnaround services. In addition to DBM Global (Infrastructure), the company owns or has investments in other businesses, including in life sciences (Pansend, R2, MediBeacon) and over-the-air broadcast television (Spectrum). INNOVATE generated $1.6 billion in revenues during the trailing 12 months ended June 30, 2022.

The principal methodology used in these ratings was Construction published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74957. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Sandeep Sama, CFA
Vice President - Senior Analyst
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
 

Karen Nickerson
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
 

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