Research: Rating Action: Moody’s downgrades Casa’s CFR to Caa1; outlook negative



New York, November 17, 2022 — Moody’s Investors Service (“Moody’s”) downgraded Casa Systems, Inc.’s (Casa) ratings, including the Corporate Family Rating (CFR) to Caa1 from B3, Probability of Default Rating (PDR) to Caa1-PD from B3-PD, and senior secured term loan due 2023 (Term Loan) to Caa1 from B3. Reflecting the weak liquidity, Moody’s lowered the Speculative Grade Liquidity (SGL) rating to SGL-4 from SGL-2. The outlook is negative.

The downgrade of the ratings reflects Moody’s concern that Casa will be unable to refinance the Term Loan prior to maturity (December 20, 2023) on commercially viable terms due to the challenging refinancing market for leverage loans and Casa’s weak operating metrics and deteriorated liquidity. Given the unsustainable debt capital structure, there is an elevated risk that Casa will either purchase the remaining Term Loan at a large discount to principal or exchange the Term Loan for a reduced financial obligation over the next year. Moody’s would likely view either transaction as a distressed exchange, which Moody’s treats as a default.

Moody’s recognizes that Casa is taking steps to address the impending Term Loan maturity. These steps include the purchase of $41.7 million principal amount of the Term Loan on November 2, 2022 at only a modest discount to the face amount. Casa paid $39 million in cash to retire this portion of the Term Loan. Casa has also engaged an investment banking firm to seek alternative sources of financing to meet the upcoming maturity.

Moody’s views positively Verizon Ventures LLC’s $39.5 million purchase of a 9.9% equity stake in Casa on April 18, 2022, combined with a multi-year license agreement for Casa’s 5G Core Network Functions software. Moody’s views the equity purchase and license as indicative of Verizon’s confidence in Casa’s long term viability to support Verizon’s Mobile Edge Compute technology. The announcement in August of the partnership with Google Cloud for integrated Casa cloud-native software with Google’s service offerings provides further evidence of market confidence in Casa’s viability and capacity to execute.    

Moody’s anticipates increasing revenues over the next year, albeit from the low current level, on improving supply of semiconductor chips and reduced frequency of COVID-19 related shutdowns at Casa’s manufacturing service providers. The improved supply situation will allow Casa to execute on its orders and backlog, which have been delayed due to the supply constraints. Moody’s anticipates a continuation of the recent revenue growth from the cable multiple system operator (MSO) customers over the next year. However, fulfilling the backlog will require significant working capital utilization which will further limit the company’s operating flexibility.

Issuer: Casa Systems, Inc.

..Downgrades

…Corporate Family Rating, Downgraded to Caa1 from B3

…Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

…. Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-2

…Senior Secured Term Loan, Downgraded to Caa1 (LGD4) from B3 (LGD3)

Issuer: Casa Systems, Inc.

..Outlook Actions

…Outlook, Changed to Negative from Stable

RATINGS RATIONALE

The Caa1 CFR reflects the unsustainable debt capital structure due to the depressed revenues, which has resulted in negative EBITDA (Moody’s adjusted) and thus very high financial leverage.   Casa’s revenues have declined due to the company’s inability to fully supply customer demand. This stems from supply chain constraints that began in 2021 due to semiconductor chip shortages and periodic COVID-19 related manufacturing shutdowns. Casa’s small revenue scale also negatively impacts the credit profile, since it magnifies the impact of the cyclical infrastructure spending pattern of Casa’s large customers, causing revenue volatility within segments.

Given the anticipated improvement in the supply situation and continued customer demand for Casa’s products, Moody’s expects that revenues will gradually recover, with annual revenues approaching $325 million, and EBITDA and free cash flow will become modestly positive over the next 12 to 18 months. Moody’s expects that Casa will continue to benefit from the increasing bandwidth demands on telecom and cable system infrastructure due to 5G, IoT, remote work, streaming, and online gaming, which are driving demand for Casa’s products for network upgrades.

The negative outlook reflects Moody’s view of the heightened probability of a near term default.  

The Caa1 rating on the Term Loan reflects the seniority of this debt instrument in the capital structure. The Caa1 rating also reflects the collateral package and the loss absorption provided by the unsecured liabilities. Collateral includes a first priority interest in Casa’s assets and those of certain of its subsidiaries, and a stock pledge of certain other subsidiaries.

Casa’s weak Speculative Grade Liquidity (SGL) rating of SGL-4 reflects the company’s weak liquidity. Although Casa had cash of $193.5 million as of September 30, 2022 ($153.5 million proforma for the November 2nd Term Loan purchase), the company’s Term Loan outstanding amount totaled nearly $276 million ($234.3 million proforma). Moody’s expects that Casa will not generate sufficient cash flow over the next year to repay the Term Loan at maturity on December 20, 2023. Moreover, Moody’s believes that Casa will be challenged to refinance the Term Loan on commercially viable terms prior to maturity due to the company’s weak credit metrics and currently limited liquidity in the leveraged loan market. Casa does not have a revolving credit facility to provide an alternative source of liquidity.

Casa’s ESG Credit Impact Score is highly-negative (CIS-4). This reflects the highly-negative governance risks, which include concentrated ownership and financial policies that have lead to high financial leverage. Environmental and social risks are moderately negative, reflecting the longer-term environmental risks of Casa’s manufacturing partners. The moderately-negative social risks reflect Casa’s dependence on highly skilled technical and engineering talent characteristic of the Semiconductor & Technology Hardware sector broadly.  

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

The ratings could be upgraded if:

• Casa refinances the Term Loan within the next several quarters

• Casa demonstrates consistent revenue growth and strengthening free cash flow

• Free cash flow (FCF) to debt (Moody’s adjusted) is sustained above 5%

The ratings could be downgraded if:

• Fails to refinance the Term Loan by September 2023

• Revenues continue to decline and FCF remains negative

• Cash to reported debt declines below 30%

Casa Systems, Inc., based in Andover, Massachusetts, provides networking products and services to the cable, wireless, and telecommunications service provider industries. Products include Converged Cable Access Platform (CCAP) equipment, distributed and virtual networking solutions, and fixed wireless networking equipment. Casa became a public company in December 2017 but remains majority owned and controlled by including Summit Partners, Jerry Guo (Chairman and Chief Executive Officer), and former shareholders and insiders, who collectively own over 60% of the shares as of September 30, 2022.

The principal methodology used in these ratings was Diversified Technology published in February 2022 and available at https://ratings.moodys.com/api/rmc-documents/379525. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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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 https://ratings.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 https://ratings.moodys.com.

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Terrence Dennehy, CFA

VP – Senior Credit Officer

Corporate Finance Group

Moody’s Investors Service, Inc.

250 Greenwich Street

New York, NY 10007

U.S.A.

JOURNALISTS: 1 212 553 0376

Client Service: 1 212 553 1653


Stephen Sohn

Associate Managing Director

Corporate Finance Group

JOURNALISTS: 1 212 553 0376

Client Service: 1 212 553 1653


Releasing Office:

Moody’s Investors Service, Inc.

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JOURNALISTS: 1 212 553 0376

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