McAfee Corp. -- Moody's rates McAfee secured notes B2; unsecured notes Caa2

Rating Action: Moody's rates McAfee secured notes B2; unsecured notes Caa2Global Credit Research - 31 Jan 2022New York, January 31, 2022 -- Moody's Investors Service ("Moody's") assigned a B2 rating to McAfee Corp.'s ("McAfee") proposed senior secured notes and a Caa2 rating to the company's proposed senior unsecured notes. The proposed notes along with previously rated first lien secured term loans (rated B2) and new equity will be used by private equity firms Permira, Advent and Crosspoint to acquire McAfee. The transaction is expected to close in the first half of 2022.RATINGS RATIONALEMcAfee's B3 Corporate Family Rating ("CFR") reflects the company's very high initial leverage offset by its leading position in the consumer endpoint security markets and track record of steady revenue growth. Debt to EBITDA will be around 10x pro forma for the acquisition based on trailing September 2021 results (excluding stranded costs, public company costs, and certain one-time expenses) and about 9x on a cash EBITDA basis. Moody's expects the company can de-lever towards 8x over the next two years based on continued revenue growth unless they pursue debt funded acquisitions.While there will likely be some moderation in double digit growth rates that were temporarily boosted during the pandemic, Moody's expects solid mid-single digit or higher growth over the next several years driven by consumer concerns over digital security and the ongoing shift of consumers to a digital world. Prior to the pandemic, McAfee was able to grow revenues despite declining PC sales though bundling of new products and services as well as a successful multi-channel sales strategy.The consumer security business is however less "sticky" than traditional enterprise software and more susceptible to free alternatives and changes in the popularity of PC's. McAfee competes with NortonLifeLock, Trend Micro and Kaspersky Lab as well as numerous freeware or "freemium" competitors. McAfee has often outpaced subscriber growth and revenue growth at its competitors partly driven by its diverse multi-channel sales strategy. Successful marketing and branding strategies as well as constant development and investment (or acquisitions) in new products are critical to sustained growth in the consumer security industry.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's expectation of mid-single digit or higher growth and leverage declining to 8x over the next two years. The ratings could be upgraded if McAfee sustains leverage under 7.5x and free cash flow to debt greater than 5%. The ratings could be downgraded if operating performance deteriorates significantly, leverage is not on track to decrease below 9x, or free cash flow is negative on other than a temporary basis.Liquidity is good based on an estimated cash balance of $250 million and $1 billion undrawn revolver at closing as well as positive free cash flow over the year post closing.Similar to most security software providers, McAfee has limited environmental risk. Social risks are considered low to moderate, in line with the software sector. Broadly the main credit risks stemming from social issues are linked to reputational risk, data security, diversity in the workplace, and access to highly skilled workers. Given the large reliance on the brand's reputation, high profile security breaches or improper corporate behavior could materially impact performance. McAfee is likely benefitting from work from home trends as a result of the recent pandemic. Moody's views the impact from COVID-19 as a social risk.McAfee will be privately held and will not have an independent Board of Directors. Moody's expects financial policies will be aggressive under private equity ownership as evidenced by the very high leverage at closing of the acquisition.The following ratings were assigned:Assignments:..Issuer: McAfee Corp.....Senior Secured 1st Lien Global Notes, Assigned B2 (LGD3)....Senior Unsecured Global Notes, Assigned Caa2 (LGD5)McAfee is a leading provider of consumer security software. The company is headquartered in San Jose, CA. Revenue for the consumer business in the last twelve months ended September 25, 2021 was approximately $1.8 billion ($3.2 billion inclusive of the divested enterprise business). The company is being acquired by private equity investors Permira, Advent and Crosspoint.The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. 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. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.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 www.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 www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Matthew B. Jones VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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