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