Polaris Newco ratings downgraded by Moody’s to Caa1 with stable outlook

Investing.com -- Moody’s Ratings has downgraded the ratings of Polaris (NYSE:PII) Newco, LLC, including the corporate family rating, to Caa1 from B3. The probability of default rating has also been downgraded to Caa1-PD from B3-PD. The ratings on the company’s senior secured multicurrency revolving credit facility and the senior secured first lien term loan B were also downgraded to B1 from Ba3 and B3 from B2 respectively. Despite these changes, the outlook for Polaris remains stable.

The downgrade is a reflection of Polaris’ very high leverage and Moody’s expectations for weak liquidity, which includes negative free cash flow. The company’s significant interest burden from its debt is anticipated to result in negative free cash flow over the rating horizon, despite expectations for modest EBITDA growth.

Governance was a crucial consideration for this rating action. Aggressive financial strategies and risk management practices resulted in high financial leverage and weak liquidity. The credit impact score was revised to CIS-5 from CIS-4 to reflect these risks. A CIS-5 indicates that the rating is lower than it would have been if ESG risk exposures did not exist and that the negative impact is more pronounced than for issuers scored CIS-4.

The ratings also reflect the company’s very high leverage, weak interest coverage, and weak liquidity, including ongoing negative free cash flow. While Debt-to-EBITDA has been improving, it is forecasted to be 7.6x at the end of FY25 and below 7.5x at the end of FY26. This improvement is due to modest revenue growth and the company’s ability to successfully expand EBITDA margin. Revenue growth is expected to come from pricing improvements and margin expansion will be driven by the company’s ongoing efforts to improve operating efficiencies. Polaris benefits from having approximately three quarters of its revenue from subscriptions, which provides some stability to the top line since switching costs for its solutions are high.

However, liquidity is expected to remain weak due to negative free cash flow over the rating horizon as the company’s ongoing interest expense burden negatively impacts cash flow. Polaris has limited options to further enhance liquidity and will remain heavily reliant on its revolver.

The company is expected to generate negative free cash flow of over $100 million in FY25 and slightly negative to breakeven free cash flow in FY26. Interest expense is forecasted to be approximately $950 million in FY26. As of Dec. 31, 2024, Polaris had $134 million of cash and approximately $332 million of available capacity under its $500 million revolving credit facility expiring June 2026. The company is expected to extend the expiration date in the near term. In addition, the company has a $100 million promissory note due to an affiliate of Vista due April 5, 2025 which is also expected to be extended as it has been done historically. There are no other material maturities until 2028.

The revolver is subject to a maximum springing first lien net total leverage ratio of 7.0x, which is applicable if the drawn amount exceeds 35% of the revolving capacity. If triggered, the company is not expected to breach the financial covenant.

The stable outlook reflects Moody’s expectation that Polaris will continue to have modest revenue growth. The company benefits from having 76% of revenue from recurring revenue. Earnings are expected to grow modestly even as economic concerns mount.

The ratings could be downgraded if the company fails to generate positive free cash flow or if it does not address near term maturities in a timely manner. A downgrade could also occur if EBITDA to interest expense is below 1.0x. The ratings could also be downgraded if the likelihood of default or debt restructuring increases or the estimate of recovery rates declines.

The ratings could be upgraded if the company materially improves its liquidity and generates positive free cash flow on a sustained basis. Demonstrating a trajectory of reducing debt-to-EBITDA to more sustainable levels could also support an upgrade.

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