By The Star Staff
Standard & Poor’s has revised the outlook of technology and digital marketing company Red Ventures Holdco to negative from stable on elevated leverage, reaffirming its ‘BB-’ rating.
S&P expects the Puerto Rico-based firm to maintain leverage near a 4x downside threshold over the next 12 months. Red Ventures ended 2023 with an S&P Global Ratings-adjusted net leverage of 4.3x.
“Although we expect the company to decrease leverage to 3.9x in 2024, this remains well below our previous expectations for leverage of about 3x in 2024 and remains close to our 4x downside threshold for the current ‘BB-’ rating,” the credit rating agency said.
The company underperformed its previous expectations due to adverse macroeconomic conditions leading to reduced advertising spending on its portfolio of owned and operated websites. It also led to lower spending in the company’s partnership business (Red Digital) in which Red Ventures advertises directly on behalf of its clients and runs their marketing campaigns.
“Our base case assumes the company is able to increase its EBITDA [earnings before interest, taxes, depreciation, and amortization] by about 2%-4% in 2024 given its recent cost reductions and restructuring initiatives,” the credit rating agency said. “We expect leverage to decline back toward the low-3x area by the end of 2025 but our view of the company’s future performance remains highly limited given the short lead times of digital advertising.”
S&P says it expects the company to generate about $130 million of S&P-reported free operating cash flow (FOCF) over the next 12 months. It expects FOCF generation to remain healthy in 2024, despite earnings pressure, because the company has historically been able to convert 45%-50% of its EBITDA to free cash flow. “We expect Red Ventures will continue to maintain a balanced capital allocation strategy between a mix of debt reduction, shareholder returns, and acquisitions,” S&P said. “The company has already reduced the outstanding borrowings under its revolving credit facility by $60 million through the first quarter of 2024, and we expect the company could use excess cash for further debt reduction.”
Red Ventures expects to receive an additional cash benefit from the monetization of its Puerto Rico tax credits, which it believes could lead to around $215 million of cash proceeds over the next five years and could use a portion of those proceeds for debt reduction.
“However, we also note Red Ventures maintains an acquisitive strategy and could use excess cash and revolver capacity to fund acquisitions,” S&P said. “We also expect the company will continue to engage in shareholder returns via either cash distributions or share repurchases. Red Ventures ended its first quarter with about $98 million of cash on the balance sheet, and we believe it is unlikely to take its cash balance below this level because the company typically maintains a minimum cash balance of $100 million.”
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