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Investing.com -- Moody’s Ratings has announced a downgrade in Viavi Solutions (NASDAQ:VIAV) Inc.’s (Viavi) corporate family rating (CFR) from Ba2 to Ba3. The downgrade also affects the company’s probability of default rating, which has been lowered to Ba3-PD from Ba2-PD, and its senior unsecured notes, which have been downgraded to B1 from Ba2. Viavi’s speculative grade liquidity (SGL) rating has also been revised downward to SGL-2 from SGL-1. Furthermore, the outlook for Viavi has been changed to negative from ratings under review.
This decision by Moody’s marks the end of a review for downgrade that began on March 6, 2025, following Viavi’s announcement of its acquisition of Spirent (LON:SPT) Communications plc’s High-Speed Ethernet and Network Security Business. Viavi plans to use the net proceeds from the proposed $600 million term loan B to finance this acquisition and to replenish cash used to fund the $150 million acquisition of Inertial Labs in January 2025. The Spirent acquisition is expected to be finalized by the end of July 2025, pending regulatory approvals and other customary closing conditions.
Justin Remsen, Vice President at Moody’s Ratings, stated that the downgrade and negative outlook are reflective of Viavi’s high leverage and its inclination to make debt-funded acquisitions in an improving but still challenging operating environment. He further noted that gross leverage, including stock compensation as an expense, is over 8x, and while end markets are expected to improve, there is uncertainty about the timing and degree of recovery.
The Ba3 CFR assigned to Viavi is indicative of the company’s history of free cash flow (FCF) generation, solid but declining profitability, and limited capital intensity. Despite its small revenue scale and narrowly focused businesses, which can lead to revenue volatility, Viavi holds a strong market position in certain niche markets. The company’s acquisition of Spirent’s High-Speed Ethernet and Network Security Business is expected to enhance its Ethernet testing solutions.
The SGL-2 rating reflects Viavi’s good liquidity, supported by consistent FCF and a large cash balance. The company is expected to produce an annual FCF of at least $50 million and maintain a cash balance of at least $400 million. The $600 million senior secured term loan B has been rated Ba1, two notches above the CFR.
The negative outlook is based on the expectation that revenues will increase in the low single digit percentage range over the next 12 to 18 months. Leverage is estimated to decline from over 8x to the low 6x range in fiscal year 2027, driven by increased profitability and debt repayment.
Moody’s has identified factors that could lead to an upgrade or downgrade of Viavi’s ratings in the future. An upgrade could be possible if the company demonstrates organic revenue growth above the mid-single digit percent level, FCF to debt above 15%, and debt to EBITDA is sustained below 5.0x. A downgrade could occur if the company fails to reduce debt to EBITDA toward 6x in the next 12 to 18 months, FCF to debt is below the high single digits percentages, or there is a deterioration of liquidity.
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