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Rating Action:

Moody's affirms First Advantage's B3 CFR, outlook changed to positive

24 Sep 2020

New York, September 24, 2020 -- Moody's Investors Service, ("Moody's") affirmed First Advantage Holdings, LLC's ("First Advantage") B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating. At the same time, Moody's affirmed the B2 rating for the company's first lien senior secured credit facility (revolver and term loan) and the Caa2 rating for its senior secured second lien term loan. The outlook has been changed to positive from negative.

The affirmation of First Advantage's ratings and positive outlook reflect the stabilization of background screening volumes and Moody's expectation that the trends will begin to normalize over the next several quarters such that First Advantage's revenue and earnings will recover fully from the declines caused by the COVID-19 pandemic by the end of 2020. The positive outlook also reflects Moody's view that the diversification of First Advantage's customer base across industries, in conjunction with its favorable mix of enterprise clients, will contribute to the resiliency of the company's operating performance over the next 12-18 months. A portion of the cost actions taken in response to the pandemic are expected to be permanent, which will further support the positive trajectory of First Advantage's earnings over the next 12-18 months. Although COVID-19 has yet to be contained and there are downside risks that global employment trends will remain volatile over the coming quarters, Moody's anticipates that First Advantage's liquidity profile will remain resilient, such that the company will maintain total cash and revolver availability in excess of $190 million over the next 12-15 months. Moody's acknowledges that the company has a highly variable cost structure and can adjust its operating and capital expenses in response to diminished demand for screening services. Moody's also recognizes that despite an improved operating profile, the company's financial leverage will remain elevated over the next 12-18 months, which limits further upward rating momentum at this time.

Affirmations:

..Issuer: First Advantage Holdings, LLC

.... 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 (LGD6)

Outlook Actions:

..Issuer: First Advantage Holdings, LLC

....Outlook, Changed To Positive From Negative

RATINGS RATIONALE

First Advantage's B3 CFR is constrained by: (1) its high debt-to-EBITDA leverage (Moody's adjusted and expensing all capitalized software costs) in the mid-7.0 times for the LTM period ended June 30, 2020; (2) operating headwinds in the background screening sector, including the risk for protracted revenue and earnings contraction due to the COVID-19 pandemic and uncertainties around the global macroeconomic outlook; (3) operations within the highly competitive and fragmented market segments; (4) modest operating scale and narrow product focus; (5) moderate social and reputational risks; and (6) private equity ownership which could lead to persistent elevated leverage levels.

First Advantage's ratings are supported by (1) a strong global market position and screening capabilities that includes services that are deeply embedded into clients' human resource, security and risk management functions and entail high switching costs; (2) good end user industry diversification, long standing relationship with its blue-chip customers, high retention rates and no significant customer concentration; (3) solid EBITDA margin relative to industry peers; (4) capacity to manage its cost base in challenging economic environments with continuous focus on efficiency improvements; and (5) expectation that management will maintain at least good liquidity over the next 12-15 months.

The positive outlook reflects Moody's expectation for a sustained improvement in operating performance and liquidity stemming from a gradual normalization of employment trends. The positive outlook also reflects the demonstrated resiliency of First Advantage's operating performance, which is supported by its diversified customer base and favorable mix of enterprise clients, and its demonstrated ability to quickly adjust costs and maintain a good liquidity profile.

Moody's expects First Advantage to maintain good liquidity over the next 12-15 months. Sources of liquidity consist of cash reserves of $117 million at June 30, 2020 and unfettered access to the company's $75 million revolving credit facility due 2025. Free cash flow is expected to recover from muted YTD levels at a pace that is in-line with the earnings recovery. There are no financial maintenance covenants under the first and second lien term loans, but the revolving credit facility is subject to a springing maximum first lien leverage ratio of 7.75x if the amount drawn exceeds 35% ($26.25 million) of the revolving credit facility. The first and second lien term loans do not mature until 2027 and 2028, respectively. The company is expected to maintain covenant compliance over the next 12-15 months.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the positive outlook, a downgrade is unlikely over the near-term. However, the ratings could be downgraded if First Advantage's revenue and earnings decline more severely than expected leading to further and sustained increases in debt-to-EBITDA (Moody's adjusted and expensing all capitalized software costs). Additionally, ratings could be downgraded is liquidity deteriorates for any reason.

The ratings could be upgraded if First Advantage demonstrates good organic growth, sustainably decreases in debt-to-EBITDA (Moody's adjusted and expensing all capitalized software costs) sustainably below 6.0x, improves free cash flow meaningfully and maintains sufficient liquidity with balanced financial policies.

First Advantage Holdings, LLC, headquartered in Atlanta, GA, provides screening and background-check services to a variety of industries, including retail, transportation/logistics, industrial, professional services, finance, staffing, and healthcare. Services include criminal record checks, education and employment verification, credit score standings, drug testing and fingerprinting. FADV also generates revenue from other services such as tax-credit screening for federal- and state-related tax incentive programs, fleet vehicle services, driver qualification services and multi-family housing applicant screening. Following the completion of the 2020 leveraged buyout, First Advantage is majority owned by Silver Lake Partners, with management also rolling over a significant portion of their ownership in the transaction.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Oleg Markin
Asst Vice President - 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

Karen Nickerson
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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