New York, September 08, 2014 -- Moody's Investors Service (Moody's) upgraded the corporate family rating (CFR) for ProQuest LLC (ProQuest) to B2 from B3 and assigned a B2 rating to the proposed $435 million 1st lien term loan due 2021. The use of proceeds is to refinance its existing credit facility and senior unsecured note as well as pay transaction fees and expenses. As part of the transaction, ProQuest also announced a $60 million first out revolver due 2019 (not rated by Moody's). In addition, the existing first lien credit facility was upgraded to Ba2 from Ba3 and the existing senior unsecured note was upgraded to B3 from Caa1, although the credit facility and note rating are expected to be withdrawn upon repayment. The rating outlook remains stable.
The upgrade reflects the reduction in the company's leverage ratio to 5.4x as of Q2 2014 from 6.5x in 2012 and expectations that leverage will decline modestly in the future. The previously completed platform migration and removal of minority equity put risk following Goldman Sachs Partner's investment are also positives that support the B2 CFR.
The announced all first lien transaction is expected to lead to interest expense savings despite the $14 million increase in debt which will improve free cash flow (although final pricing has not been determined as of this publication). The sponsors will add its Search and Discovery business in exchange for cash and equity that is anticipated to contribute modestly to EBITDA and offset the impact on leverage levels from the increase in debt. The transaction also extends its debt maturity to 2021 from 2018.
Moody's took the following ratings actions:
-New $435 million Senior Secured 1st lien term loan maturing 2021 assigned a B2 (LGD4)
....Corporate Family Rating, B2 upgraded from B3
....Probability of Default Rating, upgraded to B2-PD from B3-PD
$40 million Senior Secured Revolving Loan maturing April 2017, upgraded to Ba2 (LGD2) from Ba3 (LGD2)
Senior secured Term Loan B maturing April 2018, upgraded to Ba2 (LGD2) from Ba3 (LGD2)
....$275 million Senior Unsecured Notes maturing October 2018, upgraded to B3 (LGD5) from Caa1 (LGD5)
....Outlook, remains stable
ProQuest's B2 CFR reflects the company's adjusted leverage of 5.4x as of Q2 2014 pro-forma for the proposed transaction (incorporating Moody's standard adjustments as well as expensing content and software costs instead of capitalizing them) as well as a challenging, but improving economic environment constraining sales to corporations, government organizations and public libraries. Despite growth in its Higher Education division, driven by strength in its E-book business, organic revenue growth has been modest due to declines from its Dialog business and weakness from legacy products that are in secular decline (microfilm and print).
The company's ratings are supported by a large subscription base in the library reference market with extensive content databases sold to libraries, corporations and government organizations, as well as high renewal rates and a recurring stream of revenues. We believe ProQuest will benefit from platform integration savings due to the platform consolidation, but will face slightly higher operating costs from cloud based services. While higher cloud expenses could weigh on EBITDA, the company will save on capex which is anticipated to modestly benefit free cash flow. The benefits of lower platform spending will likely be partly reinvested to enhance its product offering, which is important given the competitiveness of the industry, and to drive future growth. The company has benefited from the acquisition of Ebook Corporation Limited (EBL) in 2013 that should support modest growth and deleveraging over the next year.
ProQuest's liquidity profile is expected to be good given the positive, although seasonal, free cash flow generation and the availability of its new $60 million first out revolver due 2019 (not rated by Moody's). Moody's expects free cash flow as a percentage of debt to be in the mid single digits. Cash on the balance sheet as of the close of the transaction is expected to be $15 million, although we anticipate it will grow through the balance of the year due to the timing of its free cash flow in the second half of the year. Interest coverage pro-forma for the transaction is expected to be about 3x (as calculated by Moody's). We expect free cash flow to be used for potential acquisitions as well as modest distributions to the owners to offset the impact of tax obligations.
The term loan is expected to be covenant lite, but the revolver is expected to have a springing 1st lien leverage covenant when 35% is drawn. The company is anticipated to have the ability to issue an unlimited amount of incremental facilities as long as the Total Net First Lien Leverage Ratio (as defined in the credit agreement) does not exceed 4.5x plus $100 million.
The company's stable outlook reflects Moody's view that leverage will decline slightly over the next 12 months driven by modest revenue and EBITDA growth primarily from its E-books business.
Given the recent upgrade, upward rating pressure is not expected in the near term. However, Moody's would consider an upgrade if ProQuest is able to demonstrate improved organic revenue and EBITDA growth and reduce leverage below 4.25x on a sustained basis. Maintenance of a good liquidity position and confidence that the company would not be negatively impacted by the ability of Goldman Sachs Partners to put their equity position to the company starting at the end of 2019 would also be required.
Ratings could experience downward pressure if leverage exceeded 6x due to challenging operating trends or from meaningful customer subscription loses. An increase in leverage due to a debt funded equity friendly transaction or acquisition that was not offset by a comparable amount of EBITDA could also lead to negative rating pressure.
ProQuest LLC's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside ProQuest LLC's core industry and believes ProQuest LLC's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Ann Arbor, Michigan, ProQuest LLC (ProQuest) aggregates, creates, and distributes academic and news content serving academic, corporate and public libraries worldwide. Cambridge Information Group (CIG) acquired the ProQuest Information and Learning business of Voyager Learning Company (fka ProQuest Company) in February 2007 and merged it with its Cambridge Scientific Abstracts, Limited Partnership (CSA) business to form ProQuest. In conjunction with the transaction, ABRY Partners acquired a 20% stake in ProQuest with CIG contributing CSA for the remaining 80% voting interest and a cash distribution. Goldman Sachs Partners (Goldman) acquired ABRY's ownership position as well as additional ownership units in November 2013. Annual revenue as of Q2 2014 was $537 million.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Scott Van den Bosch
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
John C Diaz
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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