Moody's Investors Service, January 25, 2021 rating action: "Moody's assigns Caa1 rating to HC2 Holdings' senior secured notes" [Moody's rating of proposed refinancing notes unimproved, observing HC2 is now "reliant on one operating subsidiary for the majority of its cash flow"]

Source: Moody's Investors Service, January 25, 2021 rating action

Rating Action: Moody's assigns Caa1 rating to HC2 Holdings' senior secured notes

25 Jan 2021

New York, January 25, 2021 -- Moody's Investors Service, ("Moody's") has assigned a Caa1 rating to HC2 Holdings, Inc.'s ("HC2") proposed $300 million senior secured notes. The proceeds from the notes along with proceeds from the recently completed sale of the company's Beyond6 operating subsidiary, which builds and operates compressed natural gas fueling stations, will be used to redeem the company's existing $340 million senior secured notes due December 2021 and to repay $15 million of borrowings on its revolving credit facility which matures in September 2021. HC2's B3 corporate family rating, B3-PD probability of default rating, the Caa1 rating on its existing senior secured notes, its stable ratings outlook and speculative grade liquidity rating of SGL-3 remain unchanged. The rating on the existing senior secured notes will be withdrawn once the refinancing is completed.

Assignments:

..Issuer: HC2 Holdings, Inc.

....Senior Secured Regular Bond/Debenture Assigned Caa1 (LGD4)

RATINGS RATIONALE

HC2's B3 corporate family rating reflects its holding company status and the structural subordination of its debt to the direct claims on the assets and cash flows of its key operating subsidiaries, which do not guarantee the debt of HC2. HC2's sole source of internal cash flow is the dividends, tax sharing payments and management fees it receives from its operating subsidiaries and the company is reliant on one operating subsidiary for the majority of its cash flow. The limited scale and lack of profitability of a few of its operating subsidiaries and the company's acquisitive history along with the risk of additional debt funded acquisitions are also factored into the rating. However, the company has recently shifted its focus to selling some of its operating subsidiary assets and refinancing their debt and its high cost holding company debt. HC2's rating is supported by the collateral value of the assets and the diversity and potential monetization of its subsidiaries.

HC2's dividend, management fee and tax sharing payments from its operating subsidiaries are not expected to cover its holding company expenses of about $47 million in 2021 including about $14 million of corporate expenses, around $31 million in interest payments on $300 million of senior secured notes and $55 million of 7.5% convertible senior notes, and around $2 million of preferred stock dividends. However, the company is expected to have a healthy cash balance after the proposed refinancing is completed and is in negotiations to potentially sell its insurance subsidiary and to possibly pull forward the expected sale of its remaining stake in the Huawei Marine Networks Co., Limited ("HMN") joint venture. If completed as currently contemplated, then these two transactions could generate proceeds of around $95 million - $100 million for HC2 and would provide funds to cover the shortfall in its holding company expenses as it pursues the commercialization of businesses in its Pansend Life Sciences subsidiary and profitability in its Broadcasting segment.

Since HC2 is a holding company and depends on its subsidiaries to generate sufficient cash flows, we believe it makes sense to use projected dividends rather than EBITDA in our analysis of its credit profile. Its credit metrics will remain weak for its B3 corporate family rating on this basis. However, HC2's rating receives support from its minimum liquidity and collateral coverage covenants which ensure it maintains adequate liquidity and the collateral value of the assets of its operating subsidiaries well exceeds its holding company and subsidiary debt. The company's collateral coverage ratio may not be less than 1.5x and was about 2.5x as of September 30, 2020 according to an independent appraisal. The liquidity covenant does not permit the aggregate amount of (i) all unrestricted cash of the company and the subsidiary guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit and (iii) dividends, distributions or payments that are immediately available to be paid to the company by any of its restricted subsidiaries to be less than the company's obligation to pay interest on its debt and mandatory cash dividends on its convertible preferred stock for the following six months.

HC2's speculative grade liquidity rating of SGL-3 reflects Moody's expectation that its liquidity will remain adequate in the near term. As of September 2020, the company had only $8.9 million of cash at the corporate level and no availability on its $15 million revolving credit facility which matures in September 2021. However, the company completed a $65 million rights offering in November 2020 that enhanced its liquidity position and is expected to have about $30 million in cash after the proposed refinancing.

HC2's senior secured notes are rated Caa1, which is one notch below the corporate family rating due to the structural subordination of the note holders' claims on the assets and cash flows of HC2's operating subsidiaries. The senior secured note holders have a first-priority pledge in HC2's ownership interest in most of its operating subsidiaries including its 90% interest in DBM Global. Most of the operating subsidiaries including DBM Global do not provide guarantees on the senior secured notes. The notes are also structurally subordinated to any existing and future debt of the company's non-guarantor subsidiaries, which had about $250 million of debt outstanding as of September 2020.

The stable outlook reflects our expectation for continued positive cash flow from its operating subs and the use of those cash flows to pay dividends to HC2. The stable outlook also reflects our expectation that HC2 will maintain an adequate liquidity profile and a leverage ratio (Debt/Dividends) below 6.5x.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of HC2's ratings could be considered if it lowers its leverage ratio below 4.5x (Debt/Dividends), strengthens its liquidity profile and consistently receives dividends from its operating subsidiaries that cover its holding company cash obligations.

A downgrade could occur if HC2 maintains a leverage ratio above 6.5x (Debt/Dividends) or makes additional debt financed acquisitions of companies with limited cash generating capabilities. A moderate reduction in liquidity could also result in a downgrade.

Headquartered in New York, New York, HC2 Holdings, Inc. is a holding company whose principal focus is on acquiring or entering into combinations with businesses in diverse segments. The company's principal holdings include controlling interests in DBM Global Inc., a North American engineering, modeling, steel fabrication and erection company and through its GrayWolf subsidiary provides maintenance, repair, installation, outage and turnaround services. In addition to DBM Global, HC2 owns or has investments in other businesses, including in the insurance (Continental Insurance Group), life sciences (Pansend) and over-the-air broadcast television (HC2 Broadcasting) sectors. HC2 generated $1.8 billion in revenues during the trailing 12 months ended September 30, 2020.

The principal methodology used in these ratings was Construction Industry published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061454. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For 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.

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Michael Corelli, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
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Glenn B. Eckert
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Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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