Investing.com -- Viavi Solutions Inc. has been downgraded to 'B+' from 'BB' by S&P Global Ratings following the completion of its debt-financed acquisition of certain Spirent Communications PLC assets.
The company closed its $425 million acquisition of Spirent's HSE, network security, and channel emulation testing business lines from Keysight Technologies Inc. This acquisition comes after Viavi's previous attempt to acquire all of Spirent in March 2024, when it was outbid by Keysight.
The acquired assets will primarily integrate into the lab portion of Viavi's Network and Service Enablement segment, increasing its exposure to the growing AI data center market. These assets are expected to add approximately $180 million in annual revenue and immediately improve margins, with earnings margin projected to improve by about 300 basis points post-integration.
To fund the acquisition, Viavi issued a $600 million term loan B due October 2032. Of this amount, $425 million will fund the acquisition, while the remaining $175 million is designated for general corporate purposes, though S&P views this as excess cash likely to be used for the outstanding $175 million contingent consideration liability related to its previously completed Inertial Labs acquisition.
The two-notch rating downgrade reflects Viavi's significantly higher debt balance, which nearly doubles following the acquisition. S&P projects $1.33 billion of adjusted debt by the end of fiscal 2026, with an adjusted debt to EBITDA ratio of 6.1x, exceeding S&P's former downside trigger of 4x by approximately 2x.
S&P expects leverage to remain elevated in the near term but projects steady deleveraging thereafter, with about a turn of earnings-driven deleveraging by the end of fiscal 2027. This assumes successful integration of the Spirent assets, achievement of cost synergies, continued solid demand from data center customers, and stabilizing demand from network equipment manufacturers.
The rating agency projects adjusted free cash flow of $25-35 million in fiscal 2026 and $45-55 million in fiscal 2027, slightly lower than historical levels due to payments on the Inertial Labs earnout and increased capital spending for the newly acquired assets.
S&P maintains a stable outlook, reflecting expectations that leverage will remain around 6x over the next 12 months as Viavi integrates the acquired assets and manages ongoing macroeconomic uncertainties. The outlook also assumes a restored cash cushion and healthy free cash flow generation.
The rating could be lowered if Viavi sustains adjusted leverage above 7x or if its liquidity position significantly deteriorates. Conversely, the rating could be raised if the company improves its adjusted leverage to below 5.5x through business recovery, successful management of tariff-related costs, smooth integration of acquisitions, or deployment of excess cash flow toward debt repayment.
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