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Infinite Bidco LLC — Moody’s assigns B3 CFR to Infinite Electronics; outlook stable

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Rating Action: Moody’s assigns B3 CFR to Infinite Electronics; outlook stableGlobal Credit Research – 17 Feb 2021New York, February 17, 2021 — Moody’s Investors Service, (“Moody’s”) assigned a first-time B3 Corporate Family Rating (CFR) and a B3-PD Probability of Default Rating (PDR) to Infinite Bidco LLC (dba Infinite Electronics; “Infinite”). Moody’s also assigned a B2 rating to the proposed $740 million first lien credit facilities ($100 million revolver and $640 million term loan) and a Caa2 rating to the proposed $240 million second lien term loan. The outlook is stable.Net proceeds from the proposed credit facilities, rollover equity, and new sponsor equity will be used to fund the acquisition of Infinite Electronics by Warburg Pincus LLC. In addition, Infinite will be provided with a privately-placed $55 million delayed draw, first lien term loan and a privately-placed $20 million delayed draw, second lien term loan. The assigned ratings are subject to review of final documentation and no material change in the terms and conditions of the transaction as advised to Moody’s. Today’s rating actions are summarized below:Assignments:..Issuer: Infinite Bidco LLC…. Corporate Family Rating, Assigned B3…. Probability of Default Rating, Assigned B3-PD….Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)….Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)….Senior Secured Delayed Draw 1st Lien Term Loan, Assigned B2 (LGD3)….Senior Secured 2nd Lien Term Loan, Assigned Caa2 (LGD5)….Senior Secured Delayed Draw 2nd Lien Term Loan, Assigned Caa2 (LGD5) ..Issuer: Infinite Bidco LLC ….Outlook, Assigned Stable RATINGS RATIONALE Infinite’s B3 CFR reflects very high debt to EBITDA of 8.2x (including Moody’s standard adjustments) at closing and a track record for maintaining adjusted leverage above 7x reflecting historical debt funded acquisitions or growth investments. High leverage leaves Infinite with limited financial flexibility in the event heightened competition or other factors lead to unexpected revenue declines or pressure on profit margins. Ratings are supported, however, by Infinite’s solid position as a global supplier of electronic components and assemblies to the “availability” subsegment of the production market. This availability subsegment meets the urgent, unplanned, and low volume demands which are non-discretionary and mission critical to customers, primarily engineers. The essential nature supports Infinite’s pricing power, which paired with the absence of manufacturing operations, sustains EBITDA margins (including Moody’s standard adjustments) above 30%, compared to 2% to 9% adjusted EBITDA margins for typical technology distributors. Despite macroeconomic headwinds caused by ongoing trade disputes and COVID-19 since the beginning of 2020, Infinite achieved 4%-5% topline gains in each of 2019 and 2020.Moody’s expects Infinite will grow revenues in the mid-single digit percentage range with stable to improving gross margins supported by customary price increases. As a result, Infinite should be able to maintain adjusted free cash flow to debt in the mid singled digit percentage range with debt to EBITDA (including Moody’s standard adjustments) improving below the mid 7x range within one year. Ratings are also supported by secular trends in the availability segment including the ongoing 5G rollout, increased demand for IoT-connected devices, and growth in automation, all of which will drive R&D spend by Infinite’s engineer-base of customers.Governance risk and financial policies are key considerations given that financial sponsors typically look to enhance equity returns through debt funded acquisitions or distributions. Moody’s views Infinite’s financial policies to be somewhat aggressive given private-equity ownership, the potential for debt funded transactions, and proposed adjusted leverage in the low 8x range at closing. Lack of public financial disclosure and the absence of board independence are also incorporated in the B3 CFR.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Liquidity is good reflecting our expectation for the proposed $100 million revolver being largely undrawn and annual adjusted free cash flow to debt in the mid-single digit percentage range over the next year. Liquidity is supported by Infinite’s asset-lite business model with minimal seasonality.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody’s expectation for mid-single digit percentage topline gains over the next year, stable adjusted EBITDA margins, and improving free cash flow generation. Moody’s expects adjusted leverage and free cash flow will improve as excess cash is applied to reduce debt balances. The outlook also incorporates organic growth investments and future tuck-in acquisitions being funded primarily with excess cash. To the extent a portion or all of the delayed draw term loans are funded (up to $75 million available) or other additional debt is issued, Moody’s expects adjusted debt to EBITDA will remain below 8x upon funding and key credit metrics, including adjusted debt to EBITDA and free cash flow to debt, will return to levels prior to the new funding within two fiscal quarters.Ratings could be upgraded if revenues grow consistently with stable adjusted EBITDA margins and debt to EBITDA (Moody’s adjusted) being sustained below 6x. Good liquidity would need to be maintained including adjusted free cash flow to debt above the mid-single digit percentage range. Infinite’s ratings could be downgraded if adjusted debt to EBITDA is expected to be sustained above 7.5x or if adjusted free cash flow to debt were to fall below 2%. There could be downward pressure on ratings if organic revenue growth decelerates to the low-single digit percentage range or if adjusted EBITDA margins were to fall below 27% reflecting market pressure, poor execution, or other challenges. Deterioration in liquidity could also cause downward rating pressure.As proposed, the new first lien term loan is expected to provide covenant flexibility for transactions that could adversely affect creditors including a privately placed $55 million first lien delayed draw facility; a privately placed $20 million delayed draw second lien term loan; as well as incremental facility capacity equal to (i) the greater of $120 million and (ii) 100% of Consolidated EBITDA, plus additional pari passu credit facilities so long as the first lien net leverage ratio does not exceed 5.25x. Additional debt is permitted for incremental facilities that are secured on a junior lien basis (subject to a 7.25x senior secured leverage ratio limit and 1.75x interest coverage) or are unsecured (subject to a 7.5x total leverage ratio limit and 1.75x interest coverage). Proposed terms related to the release of subsidiary guarantees and collateral leakage through transfers to unrestricted subsidiaries have not been disclosed. Summary term sheet indicates a 100% net asset sale prepayment requirement stepping down to 50% when the first lien net leverage ratio is 4.75x, and then 0% when ratio is 4.25x, subject to a 540-day reinvestment window.Infinite Electronics, Inc., with headquarters in Irvine, CA, is a global supplier of electronic components and assemblies for the urgent, unplanned, and last-minute demand of engineers during their R&D, repair, and design activities. Infinite will be majority owned by funds associated with Warburg Pincus upon closing of the transaction.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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 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. 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Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.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 www.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 www.moodys.com.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. Carl Salas VP – Senior Credit Officer Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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