Pitney Bowes Inc. -- Moody's downgrades Pitney Bowes' CFR to B1; outlook stable

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Rating Action: Moody's downgrades Pitney Bowes' CFR to B1; outlook stableGlobal Credit Research - 16 Feb 2022New York, February 16, 2022 -- Moody's Investors Service ("Moody's") downgraded Pitney Bowes Inc.'s (Pitney Bowes) Corporate Family Rating (CFR) to B1 from Ba3 and the Probability of Default Rating (PDR) to B1-PD from Ba3-PD. As part of the rating actions, Moody's also downgraded the following instrument ratings: the senior secured revolver and term loans to Ba2 from Ba1, the guaranteed senior unsecured notes to B2 from B1, and the unguaranteed senior unsecured notes to B3 from B1. The Speculative Grade Liquidity (SGL) rating of SGL-2 is unchanged, and the outlook was revised to stable from negative.The downgrades reflect Moody's view that more time and investment will be needed for Pitney Bowes to bring shipping and ecommerce operations to profitability following weak results for the seasonally important 4Q21. As a result, Moody's expects the Global Ecommerce segment will report negative EBIT through most of 2022 with adjusted leverage remaining elevated.Rating actions are summarized below:Downgrades:..Issuer: Pitney Bowes Inc..... Corporate Family Rating, Downgraded to B1 from Ba3.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD....Senior Unsecured Shelf, Downgraded to (P)B2 from (P)B1....Senior Secured Revolving Credit Facility, Downgraded to Ba2 (LGD2) from Ba1 (LGD2)....Senior Secured Term Loan A, Downgraded to Ba2 (LGD2) from Ba1 (LGD2)....Senior Secured Term Loan B, Downgraded to Ba2 (LGD2) from Ba1 (LGD2)....Gtd Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD4) from B1 (LGD5)....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD5) from B1 (LGD5)Outlook Actions:..Issuer: Pitney Bowes Inc.....Outlook, Changed To Stable From NegativeRATINGS RATIONALEThe downgrade of Pitney Bowes' CFR to B1 is driven by Moody's expectation of further delays before the company produces positive and sustainable EBIT for the higher growth shipping and ecommerce operations. Accordingly, Moody's believes that debt to EBITDA will remain elevated above 4.5x (Moody's adjusted) for most of 2022. More time and financial investment by Pitney Bowes will be required to achieve operating efficiencies for shipping and ecommerce businesses and deliver the company's targeted profit margins for Global Ecommerce.Pitney Bowes has invested significantly over the last few years to build out shipping and ecommerce capabilities serving primarily middle market companies and indicated that its Global Ecommerce network is largely complete with the ability to handle over 200 million packages annually. In 4Q21, however, U.S. parcel volumes were approximately 20% below what the company had anticipated.Weak results for the Global Ecommerce segment in 4Q21 reversed positive reported segment EBITDA in 4Q20, and more than doubled reported segment EBIT losses to ($41 million) from ($15 million) in 4Q20. Underperformance for Global Ecommerce more than offset improved results for remaining segments for the year. Presort Services reported 10% growth in segment revenue and 22% growth in EBITDA in 2021, while SendTech performed better than prior years with a revenue decline of (1%) compared to (9%) and (7%) reductions in 2019 and 2020, respectively. Given underperformance during the seasonally important 4QQ21, Moody's expects cash flow and other credit metrics (Moody's adjusted) will remain under pressure for most of 2022. Although Moody's expects adjusted EBITDA margins will improve by 1% - 2% over the next year, free cash flow growth will be muted by ongoing investments, albeit at reduced levels, in shipping and ecommerce to achieve needed efficiencies.Pitney Bowes' B1 CFR is supported by the company's leading market presence, long standing customer relationships under multi-year contracts in the highly regulated mail metering market, and growth opportunities in the shipping and ecommerce businesses. The transition to higher growth shipping could prove beneficial over the long term given the growth potential for shipping-related offerings, in contrast to the secular decline in mail volumes. Profit margins, however, will continue to suffer from investments to optimize shipping and ecommerce capabilities, and there are execution risks related to growing market share among more diversified and deeper-pocketed shipping providers. Pitney Bowes will need to maintain good financial flexibility to support investments to realize operating efficiencies and provide a cash cushion to address unexpected challenges in a competitive environment.A good portion of Pitney Bowes' cash flow is exposed to declining trends for traditional mail delivery in the U.S. and abroad. The ongoing substitution of electronic mail for physical delivery represents a social risk. Pitney Bowes has partially mitigated this risk by adding shipping capabilities to its equipment and service offerings resulting in overall topline growth for the past two years. Pitney Bowes has generally adhered to its financial policies while investing in the transformation of its business model. Debt balances have declined over each of the past three years and quarterly dividends were cut by 73% since 1Q19. Pitney Bowes is publicly traded with its two largest shareholders, Vanguard and Blackrock, owning 9.5% - 11% of common shares, respectively, as of the end of December 2021, followed by other investment management companies holding less than 4%. Good governance is supported by a board of directors with nine of the company's ten board seats being held by independent directors.The SGL-2 rating reflects good liquidity supported by available cash of more than $500 million as of year-end December 2021 (excludes estimated amounts held by The Pitney Bowes Bank, Inc.) and an undrawn $500 million revolver expiring in 2026. The nearest significant debt maturity is in two years when $243 million of notes come due in March 2024. Moody's expects ongoing investments to optimize operations and expand third party equipment financing will limit free cash flow generation.The Ba2 instruments rating on the senior secured credit facilities is two notches above the CFR reflecting their position ahead of the unsecured notes and incorporating the B1-PD Probability of Default Rating, Moody's expectation for an average recovery in a distressed scenario, and expectations for redemption of near term note maturities. The B2 rating on the guaranteed senior unsecured notes is one notch below the CFR reflecting their position behind the secured debt, but ahead of the unguaranteed unsecured notes which are rated B3.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook for Pitney Bowes reflects good demand for shipping and ecommerce offerings by middle market customers which will continue to support overall topline growth with volume and price increases. After several years of significant investment in expansion, Pitney Bowes indicates the capacity of its global ecommerce network is well beyond current volumes being handled which allows for reduced capital spending in 2022 versus 2021 and future investments being focused on realizing efficiencies. Although leverage is elevated and Global Ecommerce will not be meaningfully profitable over the next year, Moody's expects total revenues will grow in the low to mid-single digit percentage range over the next year with gradually improving overall profit margins. Moody's believes that Pitney Bowes will continue to adhere to disciplined financial policies and remain committed to reducing adjusted leverage as well as maintaining strong credit protection measures for its equipment financing operations.Ratings could be upgraded if Pitney Bowes demonstrates consistent revenue and EBITDA growth with operating margins (Moody's adjusted) in the low-teen percentage range. Adjusted debt/EBITDA would need to be in the mid 3x range with adjusted free cash flow to debt approaching 5%. Moody's would also need to be comfortable with the execution and financial policies related to expanding third party equipment financing. Ratings could be downgraded if Moody's expects consolidated revenues will decline reflecting greater than expected weakness in mature mailing operations or competitive pressures for shipping or ecommerce businesses. Ratings could also be downgraded if adjusted debt to EBITDA does not improve consistently in 2022 or if Moody's expects adjusted leverage will be sustained above 4.5x beyond 2023. There would be downward pressure on ratings if EBITDA margins or free cash flow deteriorate reflecting underperformance in core operations or with expanding third party equipment financing.Based in Stamford, CT, Pitney Bowes Inc. is a global provider of ecommerce fulfillment, shipping and returns, cross-border ecommerce, office mailing and shipping, presort services, as well as related services and financing. Moody's expects revenues will exceed $3.8 billion over the next year.The principal methodology used in these ratings was Diversified Technology published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737. 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. 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