S&P Assigns 'B' Rating to Polycom (PLCM); Outlook is Stable

September 8, 2016 8:17 AM EDT

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S&P Global Ratings assigned its 'B' corporate credit rating to Polycom Inc. Polycom (Nasdaq: PLCM). The outlook is stable.

We also assigned our 'B+' issue-level rating and '2' recovery rating to the company's $800 million first-lien credit facility, consisting of a $50 million revolver due in 2021 and a $750 million first-lien term loan B due in 2023. The '2' recovery rating indicates our expectation of substantial (lower half of the 70%-90% range) recovery for the first-lien debt holder in the event of default. In addition, we are assigning our 'B-' issue-level rating and '5' recovery rating to the company's $175 million second-lien term loan due in 2024. The '5' recovery rating indicates our expectation of modest (upper half of the 10%-30% range) recovery for the second-lien debt holders in the event of default.

The rating reflects Polycom's declining market share and niche products within the highly competitive and transitioning unified communications (UC) industry. These risks are partially mitigated by the company's strong brand, large footprint with enterprise customers, deepening partnership with Microsoft, and new and refreshed product offerings. Our assessment of Polycom's financial risk profile is based on its high debt burden, with leverage in the mid-5x area in the 12 months ended June 30, 2016. Although we expect cost reductions to mitigate EBITDA margin declines, we estimate that adjusted leverage will peak to the low-6x area by the end of 2016 as we expect revenues to decline in the high-single digit area.

Polycom is a global provider of voice and video endpoint solutions within the UC industry. The company serves more than 400,000 companies and institutions in various end markets, including financial services, manufacturing, government, education, and healthcare. The company has a leading position within the enterprise conference and desktop communications endpoint market. Recently, it experienced market share loss as the UC industry consolidates and shifts from an on-premises model to a cloud model.

We expect the approximately $5 billion UC cloud market to reach $16 billion by 2020, outgrowing the UC on-premise market, which is about $17 billion and is expected to decline at a negative 5% compound annual growth rate (CAGR) for the same period. In response, large UC providers such as Avaya, Mitel, and Cisco have made strategic investments in cloud solutions and competing voice and video endpoints to create a full stack offering. While Polycom does not compete in the broader UC industry, it has leading share of the video and voice desktop and conferencing equipment market. We expect demand for Polycom's legacy products and services to continue to decline as customers prefer an open ended architecture cloud service model, whether from full stack providers or independent UC cloud providers such as Microsoft Skype for Business (SfB). Secular declines in the UC on-premise market combined with Cisco's refreshed products contributed to Polycom's market share loss, particularly in video where refresh cycles tend to be long. Despite that, we expect revenues from new product sales to more than offset declines in legacy products and services by 2017. We believe the company's new and refreshed interoperable products, coupled with partnering with one of the fastest growing UC providers, Microsoft SfB, would enable Polycom to achieve revenue growth in 2017. The partnership includes R&D investment from Microsoft to support product integration and a joint go-to-market strategy.

The stable outlook reflects our view that the company will achieve low-single-digit revenue growth and its planned cost savings will mitigate margin declines in 2017.

We could lower the rating over the next 12 months if the company is unable to realize cost synergies or experiences increased competitive pressure such that leverage increases to 7x on a sustained basis or FOCF approaches break-even.

An upgrade is unlikely over the next 12 months as we expect costs to achieve synergies and continued investment in new products will weigh on company's ability to generate higher FOCF for debt repayment. In addition, we view the company's private equity ownership structure precludes sustained debt reduction below 5x.



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