Moody's upgrades Shape Technologies Group, Inc.'s CFR to B3; stable outlook – Moody's
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New York, July 12, 2022 — Moody’s Investors Service ("Moody’s") upgraded the ratings for Shape Technologies Group, Inc. (“Shape”), including the company’s corporate family rating (CFR) to B3 from Caa1 and probability of default rating to B3-PD from Caa1-PD. Concurrently, Moody’s upgraded the company’s first lien senior secured ratings to B3 from Caa1. The outlook is stable.
The upgrade reflects continued improvement in revenue and earnings over the last year which has resulted in deleveraging and positive free cash flow. The company suffered several years of underperformance driven by softness in end markets such as automotive and expense management challenges that were then exacerbated by the pandemic. Moody’s expects growth to continue through 2022 and then slow in 2023 as pent-up demand stemming from the pandemic subsides. Moody’s expects free cash flow to be modestly positive despite higher interest rates and global supply chain constraints.
Upgrades:
..Issuer: Shape Technologies Group, Inc.
…. Corporate Family Rating, Upgraded to B3 from Caa1
…. Probability of Default Rating, Upgraded to B3-PD from Caa1-PD
…. Senior Secured Bank Credit Facility, Upgraded to B3 (LGD4) from Caa1 (LGD4)
Outlook Actions:
..Issuer: Shape Technologies Group, Inc.
….Outlook, Remains Stable
RATINGS RATIONALE
Shape’s B3 CFR reflects its modest scale with revenue under $500 million. The company remains subject to revenue and profit volatility given its niche market focus and exposure to cyclical end markets. Moody’s adjusted debt/EBITDA will continue to be high at around 6.0x in 2022.
The rating is supported by the company’s sizable aftermarket business, about two thirds of total revenue, supported by a large installed equipment base. Shape will continue to be a market leader in the waterjet cutting market because of its global footprint and patent-protected technology.
Assuming the two revolving credit facilities are extended in the near-term, liquidity is good with no expected draws on the revolvers and expected sufficient positive free cash flow to service mandatory debt amortization.
The stable outlook reflects continued revenue growth, albeit at a slower pace, deleveraging to around 5.5x and positive free cash flow over the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Shape’s revenue and earnings continue to grow with EBITA margin maintained in the mid-teens. Adjusted debt-to-EBITDA sustained below 5.5x as the company maintains good liquidity could support consideration for an upgrade.
The ratings could be downgraded if the company’s operating cash flow becomes insufficient to service debt and fund capital expenditures. Weakening interest coverage, defined as EBITDA less capital expenditures to interest coverage, that declines towards 1.0x or adjusted Debt/EBITDA sustained above 7.0x could prompt a rating downgrade.
Headquartered in Kent, Washington, Shape Technologies Group, Inc. is a manufacturer of ultra-high-pressure technology and advanced materials processing systems. Revenue for the twelve months ended March 31, 2022 was $409 million.
The principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74970. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
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