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Rating Action:

Moody's affirms Applied Systems' B3 CFR on acquisition of Indio; outlook stable

09 Dec 2019

New York, December 09, 2019 -- Moody's Investors Service (Moody's) affirmed Applied Systems, Inc.'s (Applied Systems) B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) following the company's announced plan to raise $210 million of incremental first and second lien debt. Moody's assigned a B2 rating to the company's proposed $150 million incremental senior secured first lien term loan and a Caa2 rating to the proposed $60 million incremental senior secured second lien term loan. Moody's also affirmed Applied Systems existing B2 first lien and Caa2 second lien term loan ratings. The rating outlook remains stable.

Applied Systems announced on December 4th 2019 that it signed a definitive agreement to acquire Indio Technologies, a software company that offers products which digitize the commercial lines insurance application and renewal process. Net proceeds from the debt issuance, along with Indio management rollover equity, will be used to fund the purchase of Indio and add $4 million to Applied Systems' balance sheet.

Assignments:

..Issuer: Applied Systems, Inc.

....Senior Secured 1st Lien Bank Credit Facility, Assigned B2 (LGD3)

....Senior Secured 2nd Lien Bank Credit Facility, Assigned Caa2 (LGD5)

Affirmations:

..Issuer: Applied Systems, Inc.

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating, Affirmed B3

....Senior Secured 1st Lien Bank Credit Facility, Affirmed B2 (LGD3)

....Senior Secured 2nd Lien Bank Credit Facility, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: Applied Systems, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The affirmation of Applied Systems' B3 CFR is based on Moody's expectation that the company will be successful with its integration of Indio, which follows shortly after the company's 2019 acquisitions of TechCanary and Policy Works. All three acquisitions are expected to bolster the depth and breadth of Applied Systems product offerings catering to the niche property and casualty (P&C) insurance broker market. Though top-line growth has been strong in recent periods, neither Indio or Tech Canary have historically generated significant levels of profitability. After creating integrations with Applied Systems Epic broker management software, the company will be in a position to offer these new products to its approximately 12,000 strong base of existing customers.

The B3 CFR broadly reflects Applied Systems' highly aggressive financial policies underpinned by the company's very high debt to EBITDA leverage resulting from numerous debt-funded dividends and acquisitions over the years. During the first half of 2019, Applied Systems incurred a one-time stock compensation expense and executed a tender offer for common stock owned by its employee base concurrent with Hellman and Friedman's 5 year anniversary of ownership. When adjusting for this approximately $50 million expense, pro forma leverage was about 9x as of the LTM period ended September 30, 2019. When further adjusting for change in deferred revenue, Applied Systems "cash adjusted" debt to EBITDA was about 8.8x. Applied Systems however has historically maintained adjusted EBITDA margins in the range of 45-50% and revenue growth in the high single-digit to low double-digit percent range. The strong profit margins and healthy growth rates has enabled the company to consistently generate free cash flow in the low to mid-single digit percent range of total gross debt and support its aggressive financial policies.

Moody's anticipates that over the next 12-18 months, Applied Systems will generate free cash flow to debt of about 2-3% and organic revenue growth in the range of 7-10%, supporting deleveraging by about 1x. Moody's does not believe the company will repay any debt other than mandatory annual 1% amortization payments on its 1st lien term loans. While Moody's believes that following the currently contemplated transactions the company will have the ability to de-lever below 8x, in practice there is a high likelihood that additional distributions or M&A activity will occur. Under the company's financial sponsor ownership, Applied Systems has demonstrated a very aggressive financial strategy which Moody's expects to continue. If not for the exceptionally strong business model, ratings would likely be lower.

The stable outlook reflects Moody's expectation that Applied Systems will successfully integrate its recently acquired businesses and reduce debt to EBITDA leverage toward 8x over the next 12-18 months, supported by earnings growth in the high single-digit percent range.

Applied Systems' ratings could face downward pressure if free cash flow to debt is sustained below 1-2% while continuing its aggressive financial strategy. Conditions that could also put downward pressure on the ratings include market share losses, margin erosion, declines in the rate of revenue growth or adjusted leverage levels exceeding 9x on other than a temporary basis.

Although it is considered highly unlikely by Moody's, ratings could be upgraded if Applied Systems were to maintain leverage below 7x on a long term basis, while also sustaining free cash flow to debt levels around 8%.

Liquidity is considered good, supported by Applied System's strong free cash flow generation capabilities (annualized FCF in excess of $50 million is anticipated over the next 12-18 months), access to an undrawn $50 million revolving credit facility expiring in 2022, and modest cash balances (about $17 million expected at transaction close). The revolving credit facility contains a maximum springing first lien leverage ratio set to 8x, applicable if 35% or more of the revolver is drawn at quarter end. Moody's does not anticipate the covenant will be in effect over the next 12 months.

Applied Systems, headquartered in University Park, Illinois, is a provider of software solutions to the P&C and benefits insurance industry with a focus on insurance brokers and agencies in the US, Canada, the UK and Ireland. For the twelve-month period ended September 30, 2019 the company generated revenue of $427 million. The company is owned by private equity investors Hellman & Friedman (majority), JMI Equity (minority), Stone Point Capital (minority) and CapitalG (minority).

The principal methodology used in these ratings was Software Industry published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Stephen Morrison
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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