S&P lowers System1

S&P said it lowered its ratings for System1 Inc. and its financing unit Orchid Merger Sub II LLC and its senior secured term loan to B- from B.

“System1's liquidity has tightened and will be further constrained in a recession. System1 could need to rely on its cash balance, which we estimate is currently between $35 million and $40 million, for liquidity in 2023. Over the next 12 months, System1 will have about $40 million of cash interest payments and $30 million of deferred cash compensation payments related to its merger with Protected and its acquisition of CouponFollow. We are forecasting FOCF to be about $20 million-$25 million in 2023 after these payments, but the company will need to pay term loan amortization of $20 million,” S&P said in a press release.

The agency warned System1’s cash flow could turn negative limiting the company’s financial flexibility.

S&P, however, said it still forecasts System1’s revenue and EBITDA to grow in 2023 and projects leverage will decline to about 4.7x in 2023 from about 6x annualized in the third quarter of 2022.

“However, we have very little visibility into the company's future performance, and if a more prolonged or deep recession occurs than we expect, we believe System1's revenue and EBITDA would underperform our current expectations,” S&P said.

The outlook is stable.

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