New York, September 10, 2010 -- Moody's Investors Service lowered the corporate family and probability of default ratings of ProQuest LLC (ProQuest) to B2 from B1 and assigned a B3 rating to the company's proposed $250 million senior unsecured bonds. The proposed transaction would increase total debt by approximately $100 million and annual interest expense by $15 million, and the downgrade of the corporate family rating incorporates the resultant negative impact on credit metrics. Also, the transaction creates greater flexibility for acquisitions and distributions.
ProQuest intends to use proceeds of the transaction to 1) fund an up to $50 million distribution to its parent Cambridge Scientific Abstracts, Limited Partnership (CSA) 2) repay its $60 million second lien term loan in entirety 3) repay approximately $93 million of its first lien term loan and 4) fund transaction related fees and expenses. The remainder of the proceeds (approximately $35 million) will be available for general corporate purposes, including potential acquisitions.
Pro forma for the proposed offering, Moody's considers the first lien lenders to be in a stronger position based on repayment of a portion of the first lien bank debt and an increase in junior capital from the $250 million of senior unsecured bonds. In accordance with Moody's Loss Given Default Methodology, Moody's upgraded the senior secured first lien bank debt to Ba2 from Ba3.
Moody's believes ProQuest maintains a good market position and generates recurring revenue from subscriptions to extensive content databases sold primarily to libraries (with a concentration in academic libraries), and the B2 corporate family rating incorporates these benefits, tempered by our view that preserving this position will require continued investment in both content and technology. The company's high leverage and modest free cash flow limit its flexibility to manage these investment needs, although balance sheet cash of approximately $40 million pro forma for the proposed transaction provides good liquidity that could fund potential acquisitions or investment projects. Nevertheless, acquisitions would likely involve some integration costs, delaying the potential for incremental free cash flow from such acquisitions. Furthermore, some event risk exists related to ProQuest's position as the largest operating entity of its owner Cambridge Information Group (CIG) and limited visibility into the other operations of CIG, which might draw on ProQuest's financial support. CIG managed ProQuest more conservatively throughout 2009 than in prior years given economic challenges and the investment in a database platform consolidation project, but the proposed $50 million dividend demonstrates the willingness to weaken the credit profile for shareholder returns as well as growth.
....Probability of Default Rating, Downgraded to B2 from B1
....Corporate Family Rating, Downgraded to B2 from B1
....Senior Unsecured Bonds, Assigned B3, LGD5, 72%
....Senior Secured First Lien Bank Credit Facility, Upgraded to Ba2, LGD2, 16%, from Ba3, LGD3, 39%
The stable outlook assumes ProQuest maintains an adequate liquidity profile and that leverage trends toward 5 times debt-to-EBITDA (as per Moody's adjustments) as investments in a platform consolidation decline over the next several years and the company begins to benefit from the expiration of an expensive information technology services contract. At the B2 corporate family rating, the stable outlook builds in tolerance for acquisitions that would cause leverage to temporarily rise towards 6 times debt-to-EBITDA and for temporary negative free cash flow related to integration costs, provided ProQuest maintained adequate liquidity to manage some cash consumption.
Upward momentum is somewhat limited by Moody's expectations for management to pursue a growth oriented financial strategy. An upgrade would likely require some evidence of a change in financial philosophy or permanent debt reduction.
Moody's would consider a negative outlook or downgrade based on expectations for sustained leverage exceeding 6 times debt-to-EBITDA or sustained negative free cash flow, whether due to incremental distributions, acquisitions, the loss of a critical content supplier, a material change in content licensing terms, or inability to achieve projected cost savings. A deterioration of the liquidity profile could also have negative ratings implications.
The principal methodology used in rating ProQuest LLC was Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA rating methodology published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.
Headquartered in Ann Arbor, Michigan, ProQuest LLC (ProQuest) aggregates, creates, and distributes academic and news content serving over 12,000 academic, corporate and public libraries worldwide. Cambridge Information Group (CIG) acquired the ProQuest Information and Learning (PQIL) business of Voyager Learning Company (fka ProQuest Company) for $222 million 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 invested $63 million for a 20% stake in ProQuest with CIG contributing CSA for the remaining 80% voting interest and a cash distribution. Pro forma annual revenue for calendar year 2009 was approximately $450 million.
Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.
Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.
MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
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