Liquid Intelligent Technologies is grappling with significant financial challenges following a recent downgrade of its credit rating by major rating agencies, Fitch and Moody’s.
The downgrade has raised concerns about the company’s financial health and its ability to meet debt obligations.
Fitch Ratings downgraded Liquid’s credit rating from B to CCC+, while Moody’s lowered it from B3 to Caa1, citing potential breaches of debt covenants. These downgrades indicate increased credit risk, reflecting concerns about Liquid’s financial stability and ability to repay its substantial debt, which stands at $930.6 million.
The downgrades come as Liquid faces liquidity challenges, with its net debt-to-earnings ratio (EBITDA) at 3.47 as of June 2024, close to the 3x limit imposed by its lenders. This ratio must be reduced by the end of August 2024 to avoid a breach of covenants, which could trigger penalties or further downgrades.
Moody’s and Fitch highlighted Liquid’s weak liquidity position, noting that the company’s cash reserves have dwindled to $48 million, down from $57 million at the end of the previous financial year. The decline is attributed to high expenses and unfavorable exchange rates. Fitch warned that without successful refinancing of its R3.3 billion ($179 million) loan due in March 2026, Liquid could face a debt restructuring event.
CEO Hardy Pemhiwa has attempted to reassure the market, mentioning a $90 million cash injection, including investment from the US International Development Finance Corporation. However, credit agencies have expressed skepticism, noting that even if the full $90 million is used to pay down debt, it may not be enough to meet the 3x debt-to-earnings requirement by the August deadline. Fitch also pointed out that delays in receiving the second tranche of this investment could further strain Liquid’s finances.
The downgrade signifies a higher risk for investors, potentially leading to increased borrowing costs for Liquid as it may need to offer higher interest rates on new debt. This could exacerbate the company’s financial difficulties, making it more challenging to refinance its existing obligations.
Despite the dire situation, Fitch believes that Liquid has options to navigate this crisis. The company could seek to refinance its debt, negotiate for lower interest rates, or extend repayment deadlines. However, these solutions would likely require additional external funding, improved operating efficiencies, and better capital management.
Fitch remains cautiously optimistic that Liquid can secure a refinancing agreement, provided it can reduce leverage and generate positive operating cash flow. Nevertheless, the road ahead is fraught with challenges, and much will depend on the company’s ability to stabilize its finances and meet its debt obligations in the coming months.
Source: TechZim