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Rating Action:

Moody's affirms Blackboard's B2 CFR upon Schoolwires acquisition; maintains negative outlook

Global Credit Research - 11 Mar 2015

Nearly $1.4 billion of rated debt affected

New York, March 11, 2015 -- Moody's Investors Service (Moody's) has affirmed Blackboard Inc.'s B2 corporate family rating, B2-PD probability of default rating, and B1 and Caa1 ratings on the company's first lien facilities and senior unsecured notes, respectively. The affirmation encompasses the $85 million upsizing of Blackboard's senior secured term loan, the incremental proceeds from which, along with cash on hand, Blackboard expects to use to effect the acquisition of Schoolwires, a web-based, K-12 learning community management system provider, for a total of approximately $92 million. The outlook, which Moody's changed to negative last month, has been maintained.

RATINGS RATIONALE

The B2 CFR and negative outlook reflect Blackboard's aggressive financial policies at a time when the company is highly leveraged and its core domestic business lines, with products viewed in some cases as dated and cumbersome, are being challenged by competitors. The Schoolwires acquisition represents an additional allocation of resources devoted to incremental investments in product quality and innovation, and to aggressive (albeit planned) expansion into the domestic K-12 markets, in which Blackboard has been particularly weak of late. Representing about 15% of revenues, the domestic K-12 segment has seen mid-single-digit revenue declines over the past few years. Even with expected synergies -- which would be realized through the reduction of duplicative sales and marketing, R&D, and corporate overhead expenses -- the acquisition represents a debt-acquisition multiple of 10.0 times, which implies a leveraging scenario relative to Blackboard's current, Moody's-adjusted-debt-to-EBITDA of about 7.8 times.

However, Moody's views the scale of the incremental debt ($85 million represents 7% more debt on a base, also Moody's-adjusted, of about $1.3 billion) as modest enough so as not to be a destabilizing factor. The acquisition is fully in line with the company's efforts to shore up its K-12 product offerings and customer base. Further, the acquisition does not disrupt Moody's expectations that, through the successful realignment of the company's go-to-market strategy and its focus on product quality and integration, overall revenue and earnings growth will help Blackboard to realize modest deleveraging, to about 7.5 times, by the end of this year.

The transaction occurs at a time when there are seasonal working-capital demands. Nevertheless, we consider liquidity adequate given our expectations for positive annual free cash flow and significant availability under the $100 million revolver, despite seasonal utilization. Given our expectation of annual free cash flows of about $35 to $40 million over the next 18 months, and the investments required to maintain growth rates (e.g., new technology and services to cross sell into existing customers, and the integration of Schoolwires), Moody's sees modest improvement from the low-single-digit free-cash-flow-to-debt ratios this year. Indeed, in order to capture growth opportunities in a vertical that is rapidly adopting new technologies, the company has focused not on debt reduction but rather on spending initiatives to support revenue growth, and Moody's negative outlook is based partly on this development. Additionally, a 7.5 times leverage measure is still weak compared to most of Blackboard's software peers, and has constrained the company as it navigates through a highly competitive environment. The negative outlook, then, also reflects Moody's view that the company will in fact need to demonstrate improved top line and profit measures over the ratings horizon in order for the CFR to avoid being lowered to a B3.

The ratings could be downgraded if the company fails to show progress in reducing debt-to-EBITDA toward 7.0x, liquidity declines materially, or the company pursues further acquisitions that add to financial leverage. Over the long term, the B2 CFR could be upgraded if the company were to demonstrate meaningful revenue growth, if free-cash-flow-to-debt reaches double digits, and adjusted debt to EBITDA were to fall to 4.5x on a sustained basis.

..Issuer: Blackboard, Inc.

.... Probability of Default Rating, Affirmed B2-PD

.... Corporate Family Rating, Affirmed B2

....Senior secured credit facilities maturing 2016 and 2018, Affirmed B1

....Senior unsecured bond maturing 2019, Affirmed Caa1

Outlook, Remains Negative

The principal methodology used in these ratings was Global Software Industry published in October 2012. 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.

REGULATORY DISCLOSURES

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.

Kevin Stuebe
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Blackboard's B2 CFR upon Schoolwires acquisition; maintains negative outlook
No Related Data.
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