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  Title	Priority Technology Holdings Inc. Ratings Raised To 'B' On Continued Solid Performance; Outlook Stable
  ID	4252096
  External ID	7312657322
  Author	Unknown
  Published Date	Nov. 18, 2024, 6:07 p.m.
  Summary	U.S.-based payment technology company Priority Technology Holdings Inc.'s revenue growth, profitability, and cash flow over the first nine months of fiscal 2024 have exceeded our expectations. By refr
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  URL	https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/html/id/3286048
  Sentiment	Negative: 0.02140    Neutral: 0.02429    Positive: 0.95432
  Relevance	0.03814

• Content Details

  Content ID	2518512
  Key	acf5a7ba-2c9d-4aa3-887d-7f6a8245cde5
  Content	U.S.-based payment technology company Priority Technology Holdings Inc.'s revenue growth, profitability, and cash flow over the first nine months of fiscal 2024 have exceeded our expectations. By refraining from acquisitions, it has continued to reduce leverage to 5.6x for the trailing 12 months ended September 2024 while continuing to generate solid free operating cash flow (FOCF). The company is proposing an incremental $115 million term loan B to repay the remaining portion of its redeemable senior preferred stock outstanding, which will increase funded debt. Since we consider this instrument a debt-like obligation and include it in our adjusted metrics, this should constitute a largely leverage-neutral transaction. However, it will reduce the total S&P Global Ratings-adjusted interest expense and will simplify the capital structure. Our updated forecast assumes that revenue growth, margin expansion, and reduced interest expense from this transaction will support further improvement in credit metrics. It also assumes Priority's financial policies will support sustaining them. We raised all of our ratings on Priority, including our issuer credit rating and the issue-level ratings on its first-lien debt, to 'B' from ‘B-' and affirmed our ‘3' recovery rating on this debt, based on our expectation of meaningful (50%-70%; rounded estimate: 55%) recovery in the event of default. The stable outlook reflects our belief that Priority will continue generating solid revenue growth, margin expansion, and improved cash flow, and adhere to a sufficiently conservative financial policies to reduce its S&P Global Ratings-adjusted leverage to the low-5x area within the next 12 months. NEW YORK (S&P Global Ratings) Nov. 18, 2024--S&P Global Ratings today took the rating actions listed above. Priority's continued growth and margin improvement are driving stronger credit ratios. It has outpaced the industry average, increasing revenue 20.1% year over year for the three-month period and 17.7% for the nine-month period ended Sept. 30, 2024. Its small and midsize business (SMB) segment revenue (which made up about 70% of the quarter's total revenue) increased 13.2% and 3.4% for those periods, driven by increased transactions and merchant volumes. Priority's most profitable segment, Enterprise (about 20% of the quarter's revenue), expanded 34% and 40.3% in those periods, given its increasing new customer enrollments seeking embedded finance and treasury services, along with increased interest income. Priority's B2B (business-to-business) segment revenue (about 10% of the quarter's total revenue) increased 61.1% and 235% through the acquisition of Plastiq (completed in August 2023). A key factor driving B2B growth is the shift from check to electronic payments increasing demand for its automation capabilities for accounts payable, accounts receivable, and other working capital offerings. Priority's profitability has also benefitted from the growth of all three of its segments, improved operating leverage and the interest income and lower cost to service its unified commerce platform. S&P Global Ratings-adjusted EBITDA margins reached 21.3% for the three-month period and 20.5% for the nine-month period ended Sept. 30, improving 90 basis points (bps) and 130 bps respectively compared with the same periods last year. With revenue and margin improvements driving higher EBITDA, leverage also continues to further decrease. S&P Global Ratings-adjusted EBITDA for the trailing 12 months ended September 2024 was 5.6x, down from 6.6x in the same period last year. This reflects industry tailwinds and Priority's ability to effectively cross-sell services under its unified commerce platform, and we believe the company can sustain much of this operating performance. For 2025, we project high-single-digit percent revenue growth and modest margin expansion of approximately 30 bps, which should bring leverage down to the low-5x area by year-end. We also anticipate FOCF to debt will remain in the high-single-digit percent area for 2025. Growth prospects in its more profitable segments, along with reductions in interest expense, will continue to elevate cash flow. Since Priority has continued to expand in its B2B and Enterprise segments, Priority has increased its mix of fee-based income (with larger customers) and decreased its mix of volume-based transaction-level income pertaining to SMB, which depends on small business (merchant) performance. We believe this continued mix shift toward B2B and Enterprise will help bolster more earnings stability. Furthermore, as Priority continues to roll out additional technologies on its platform, it will have increasing opportunities to capture additional customer wallet share in the B2B and Enterprise segments. Growth in these segments has increased total deposit balances, subsequently boosting the company's float income as well. This is high-margin (almost 100% EBITDA) float income, earned from investing customer account balances. While we note that the rate of interest earned in float income could decline with interest rates, the floating-rate income stream acts as a natural hedge against floating-rate debt obligations, which we view favorably. Priority's in-market transaction is leverage neutral and enhances free cash flow, thus we expect its ongoing financial policy will continue to support credit metrics. The company has proposed a $115 million term loan B, fungible to its existing loan, and plans to use the proceeds to fund the repayment of its preferred stock (which we treat as debt), which will be roughly S&P Global Ratings-adjusted leverage neutral. By replacing the remainder of its preferred stock with proceeds from its term loan B with a lower all-in rate, we expect the transaction will reduce total S&P Global Ratings-adjusted interest expense (which includes preferred stock dividends) and in turn help strengthen FOCF generation. While cash flow and leverage have continued to benefit from strong performance, our base case also assumes Priority continues adhering to a conservative financial policy conducive to deleveraging. Given Priority's flexibility in rolling out new technologies with the unified platform and demonstrated ability to drive organic growth on new offerings, we expect potential acquisitions would likely seek smaller targets carrying niche technologies that Priority could add on to its platform and quickly scale. We believe its cash flow generation would support modest size purchases without the need for additional leverage. Additionally, the company has refrained from utilizing leverage to fund share buybacks or dividends. We expect continued restraint would help keep leverage down. With Priority's small public float and significant increase of its recent stock price, we find a significant share buyback unlikely at this time and project the company will continue focusing on deleveraging through EBITDA growth. However, the 61% ownership held by the founder holds inherent risk of releveraging, which we also consider in our ratings. The stable outlook reflects our belief that Priority will continue solid revenue growth, margin expansion, and improved cash flow, and adhere to sufficiently conservative financial policies to reduce its S&P Global Ratings-adjusted leverage to about the 5x area within the next 12 months. We could lower our rating if we expect: Priority's S&P Global Ratings-adjusted leverage to weaken and revert to the 7x area; or FOCF to debt to fall below 3%. This could occur if operating performance falls short of our forecast due to unanticipated declines in processing volumes or reductions in enrollments, changes in payment networks, pressures from competitors or resellers, or Priority demonstrates less-conservative financial policies. We could raise our rating on Priority if it extends its track record of revenue and earnings growth with a financial policy that will support keeping leverage comfortably below 5x. This could occur if: Favorable industry conditions continue supporting volume growth and further transition toward digital payments; and Priority continues to gain market share and enhance its offerings, bolstering its higher-margin segments, and continuing to improve operational efficiency. Related Criteria Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings. European Endorsement Status Global-scale credit rating(s) issued by S&P Global Ratings' affiliates based in the following jurisdictions [ To read more, visit Endorsement of Credit Ratings ] have been endorsed into the EU and/or the UK in accordance with the relevant CRA regulations. Note: Endorsements for U.S. Public Finance global-scale credit ratings are done per request. To review the endorsement status by credit rating, visit the spglobal.com/ratings website and search for the rated entity.
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  Publisher Name	S&P Global
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