Advantage Solutions outlook revised to negative at S&P, debt rating downgraded

S&P Global Ratings revised its outlook on Advantage Solutions Inc. to negative from stable, citing weaker-than-expected Q1 2025 results and lowered full-year expectations due to declining consumer spending and staffing issues. The agency confirmed Advantage's 'B' issuer credit rating but lowered the issue-level rating on its first-lien term loan and senior secured notes to 'B' from 'B+', projecting S&P Global Ratings-adjusted leverage to remain high at approximately 6x in fiscal year 2025. The negative outlook reflects concerns that operating performance could weaken, pushing leverage above 7x, while a stable outlook hinges on the company sustaining leverage below that threshold by resolving staffing issues and managing costs.

Analysis

S&P Global Ratings has revised its outlook for Advantage Solutions Inc. to negative from stable, primarily due to weaker-than-expected first-quarter fiscal year 2025 results, which included a 5% decline in organic revenue, and lowered full-year expectations stemming from reduced consumer spending and internal staffing challenges. Consequently, S&P has adjusted its revenue, EBITDA, and cash flow forecasts for Advantage, anticipating S&P Global Ratings-adjusted leverage to remain high at approximately 6x in fiscal year 2025 and reach about 6.8x by year-end 2025, a 1x increase from previous forecasts. While the 'B' issuer credit rating was confirmed, the issue-level rating for Advantage's first-lien term loan facility and senior secured notes was downgraded to 'B' from 'B+', and the recovery rating was revised to '3' from '2', indicating an expected decrease in enterprise value in a hypothetical default scenario due to recent asset sales. Despite these headwinds, S&P views the staffing issues as temporary and expects near-term profit to offset restructuring costs, projecting S&P Global Ratings-adjusted EBITDA growth of about 7% in 2025, mainly from reduced reorganization expenses. However, Advantage faces a projected free operating cash flow deficit of $60 million-$70 million in 2025, impacted by a $50 million payroll shift, unfavorable DSOs from a new ERP system implementation, $70 million in IT transformation capex, and $145 million in interest expenses, before an anticipated improvement to a $100 million inflow in 2026. The company maintains an adequate liquidity position with $121 million in unrestricted cash and $399 million available under its ABL facility as of March 2025, and aims for a 3.5x net leverage target, intending to use excess cash for debt reduction. The negative outlook signals a potential downgrade if S&P Global Ratings-adjusted debt to EBITDA remains above 7x, driven by risks such as persistent labor cost inflation, customer losses, or operational disruptions from its transformation efforts.

Key Decisions for Investors

• Investors should exercise caution regarding Advantage Solutions' near-term prospects, given S&P's negative outlook driven by high projected leverage (around 6.8x S&P adj. by end 2025), a 5% Q1 organic revenue decline, and ongoing macroeconomic and internal staffing challenges.
• Closely monitor the company's execution in resolving staffing issues, the progress and potential disruptions from its IT transformation and restructuring efforts, and its ability to manage costs or implement price increases without negatively impacting customer relationships.
• Evaluate Advantage's path to positive free operating cash flow generation beyond the projected 2025 deficit of $60-$70 million and its capacity to achieve its 3.5x net leverage target, particularly noting the downgrade of its first-lien debt and senior secured notes to 'B' and a revised recovery rating to '3', which signals increased risk for creditors.