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New York, July 26, 2022 -- Moody's Investors Service ("Moody's") changed Forum Energy Technologies, Inc.'s (Forum) outlook to positive from stable. Concurrently, Moody's affirmed Forum's Corporate Family Rating (CFR) at Caa1, Probability of Default Rating (PDR) at Caa1-PD and convertible senior secured notes rating at Caa2. The Speculative Grade Liquidity (SGL) rating is unchanged at SGL-3.
"The change in Forum's rating outlook reflects our expectation that Forum will grow EBITDA through 2023, driving improved leverage," said Jonathan Teitel, a Moody's analyst.
..Issuer: Forum Energy Technologies, Inc.
.... Corporate Family Rating, Affirmed Caa1
.... Probability of Default Rating, Affirmed Caa1-PD
.... Senior Secured Conv./Exch. Bond/Debenture, Affirmed Caa2 (LGD4)
..Issuer: Forum Energy Technologies, Inc.
....Outlook, Changed To Positive From Stable
The change of the rating outlook to positive reflects Moody's expectation that Forum will grow EBITDA and reduce leverage over the next 12-18 months.
Forum's Caa1 CFR reflects high but improving leverage amid a supportive industry backdrop offset by free cash flow that is pressured by working capital needs to grow revenue, affected by cost inflation and supply chain disruptions. Moody's expects that Forum will grow revenue and EBITDA through 2023, driving debt/EBITDA lower. Forum operates in a cyclical industry and its revenue is highly correlated to the US rig count, which has increased. Forum benefits from exposure to both domestic and international markets, as well as diversification of its business segments across the well life cycle. A large portion of the company's notes are mandatorily convertible into common stock if the company's stock reaches a certain price for a period of time. These terms provide a potential path for meaningful reduction of debt and interest expense and improving the company's ability to generate positive free cash flow.
Forum's SGL-3 rating reflects Moody's expectation for Forum to maintain adequate liquidity through 2023. As of March 31, 2022, the company had $21 million of cash. The borrowing base of the company's undrawn ABL revolver was $159 million ($18 million in letters of credit are outstanding). The revolver matures in September 2026, unless the secured notes due August 2025 are still outstanding three months prior to their maturity, in which case the revolver will mature then. The revolver has a maximum springing (based on excess availability) fixed charge coverage ratio covenant of 1x.
Forum's $257 million of convertible senior secured notes (amount outstanding as of March 31, 2022) due 2025 are rated Caa2, one notch below the Caa1 CFR. The notes are secured by a first lien except with respect to ABL revolver priority collateral which includes cash, receivables and inventory. The notes have a second lien with respect to the ABL revolver priority collateral.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade include consistent positive free cash flow generation and a sustained improvement in debt service coverage, with EBITDA/interest above 2.5x.
Factors that could lead to a downgrade include EBITDA/interest below 1x or weaking liquidity.
Forum, headquartered in Houston, Texas, is a publicly traded company with equipment sales primarily to the oil and gas industry.
The principal methodology used in these ratings was Oilfield Services published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74277 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
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 on https://ratings.moodys.com/rating-definitions .
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Jonathan Teitel, CFA Vice President - Senior Analyst 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
Peter Speer Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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