Moody’s Downgrades Clover Technologies’ Debt Rating

On July 11th, Moody’s Investors Service downgraded its ratings for 4L Technologies Inc., the parent company of Clover Technologies, to Caa3 from B3 and the Probability of Default Rating to Caa3-PD from B3-PD, and the rating for 4L Tech’s senior secured first lien term loan to Caa3 from B3. The outlook has been revised to negative from stable.

Last week, Bloomberg had reported that Clover is considering strategic options that include the retaining of law firm Kirkland & Ellis LLP and investment bank Jefferies LLC to evaluate balance-sheet alternatives and strategic options.

According to Bloomberg, Clover informed its creditors of  cutbacks by two customers, one in the wireless market, the other in the imaging market. The company, which is headquartered in Hoffman Estates, Illinois, is said to be the world’s largest collector and remanufacturer of printer/copier imaging supplies.  The customer cutback in the imaging market is said to be a result of the  new expanded partnership announced in June between Xerox and HP. Under the new expanded partnership, Xerox will supply toner to HP for various A4 and A3 copier/MFPs, expanding production at Xerox toner manufacturing facilities, and cutting into Clover’s supplying of toner for these models.

Moody’s analyst Andrew MacDonald explained the downgrade: “The downgrade reflects the likelihood of a default is high given the recent downward revision in earnings guidance following the loss of business and pricing pressure in both the imaging and wireless segments combined with the maturity of the first lien term loan in May 2020 that will put pressure on the business. The company’s hiring of restructuring advisors, request to meet with lenders in a few weeks, and challenges refinancing the term loan indicate a restructuring will occur soon.  We also remain concerned about the longer-term business viability as a result of more limited visibility into forward financial performance and related uncertainties given the unexpected operating developments.”

Concurrently, the ratings on the senior secured first lien credit facilities due 2022 will be withdrawn as the proposed transaction was not completed.

According to Moody’s, Clover’s large cash balance of $189 million as of March 31, 2019, which excludes an expected $44.6 million excess cash flow sweep payment, is not sufficient to address the term loan maturity but nonetheless provides some liquidity to support operations until the debt matures next year or a restructuring is executed. Moody’s currently expects a company recovery in the 50-percent range given the cash balance and a modest multiple of the anticipated earnings base.

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