Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) for
The Rating Outlook is Stable. Fitch has also affirmed the company's senior unsecured notes at 'BB-'/'RR3'.
The ratings impact approximately
ZIP grew meaningfully since its 2010 founding and quickly become one of the leading online marketplaces for
Key Rating Drivers
Near-Term Growth Challenges: ZIP's growth profile has historically been a credit positive, but it is currently hampered by a weaker macro landscape in the
EBITDA also grew meaningfully and is approaching
Competitive Landscape: Fitch views the
Industry Cyclicality: Fitch views the highly cyclical nature of the staffing industry as a key credit consideration that constrains the IDR. The company could experience material negative headwinds on revenue, EBITDA and FCF in a prolonged recession given employers would meaningfully reduce jobs being advertised. ZIP expects 2023 revenue to decline 13% to 15% YoY while 1Q23 could be worse with revenue projected to decline more than 20%. Peers in online job postings experienced revenue declines of more than 30% during 2009 while staffing companies realized declines as high as 30%-40%.
Moderate Leverage: ZIP's debt/EBITDA near 3.0x is relatively low for the 'B+' rating category, but Fitch believes the staffing industry's cyclicality could lead to meaningfully higher leverage in a relatively short timeframe if economic conditions deteriorate. Revenue declined 14% YoY, for example, in the two quarters following the beginning of the pandemic in the
Solid Liquidity: Fitch expects the company will continue to generate positive free cash flow in the future, helped by low capital intensity and working capital requirements. This should further bolster the balance sheet that had
Derivation Summary
Relative to EmployBridge and AMN, ZIP experienced stronger revenue growth in recent years and has higher EBITDA margins. ZIP's leverage profile is manageable for the IDR relative to peers. ZIP's strong growth and solid margins could position the IDR higher over time. However, the nascent stage of its business in a fragmented and competitive industry, its relatively small EBITDA scale, and cyclicality inherent in the recruiting industry constrains the rating to the 'B+' rating category.
Key Assumptions
Revenues are pressured in 2023 due to slower hiring trends (down low-teens percentage) but growth resumes to mid-teens in FY2024-2026.
EBITDA margins improve in 2023 as the company is expected to focus on costs/profitability, with more modest margin expansion starting in FY2024. The company has targeted EBITDA margins of more than 30% over time but will likely balance the pace of achieving this target with revenue growth.
FCF generation remains solid due to limited working capital, cash taxes and capex requirements.
Capital allocation priorities are likely weighted toward share buybacks and M&A over time. Fitch has not forecasted M&A in its it base case.
Recovery Assumptions:
For entities rated 'B+' and below, where default is closer and recovery prospects are more meaningful to investors, Fitch undertakes a tailored, or bespoke, analysis of recovery upon default for each issuance. The resulting debt instrument rating includes a Recovery Rating (RR) from 'RR1' to 'RR6' that is notched from the IDR accordingly. In this analysis, there are three steps: (i) estimating the distressed enterprise value (EV); (ii) estimating creditor claims; and (iii) distribution of value.
Fitch assumed ZIP would emerge from a default scenario under the going concern approach versus liquidation. Key assumptions used in the recovery analysis are as follows:
Fitch assumes a
Fitch assumes an EV/EBITDA multiple of 6.5x upon emergence from bankruptcy. This multiple is validated based upon comparable public company trading multiples (current & historic), industry M&A, and comparable reorganization multiples Fitch has witnessed historically.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA leverage, Fitch-defined as debt/EBITDA, sustained below 4.0x in conjunction with EBITDA scaling to sustainably above
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage sustained above 5.0x;
Sustained deterioration in EBITDA margins to mid-teens percentage or lower, signaling potential competitive and/or market pressures.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Solid Liquidity:
Debt Structure: The company has a relatively simple debt capital structure, with a
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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