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Rating Action:

Moody's affirms IFS' corporate family rating at B2; outlook negative

10 Mar 2021

Frankfurt am Main, March 10, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the B2 corporate family rating (CFR) of IGT Holding III AB (IFS). Moody's has also affirmed IFS' probability of default rating (PDR) at B2-PD. At the same time, Moody's has assigned B2 instrument ratings to the new SEK11.8 billion senior secured term loan (B1 and B2) and the new SEK2.175 billion senior secured revolving credit facility issued by IGT Holding IV AB. The outlook on all ratings remains negative.

The affirmation of the B2 ratings reflects the robust operating performance of IFS over the recent quarters with solid profitability levels and positive free cash flow generation that lead to a good deleveraging in 2020. However, the outlook remains negative considering a relatively high financial leverage of 6.4x as of 2020 pro forma for the proposed refinancing and uncertainties regarding a timely deleveraging back to the requirements for the B2 rating category over the next quarters. Deleveraging could be delayed in absence of profitability improvements over the next quarters or in case of a continuation of debt-funded acquisitions or further shareholder distributions.

The senior secured term loans (B1 and B2) will predominantly be used to refinance IFS' existing term loans, financing of acquisitions and pay a shareholder distribution to private equity owners EQT Partners and TA Associates. We consider the carve-out of Workwave from the restricted group a credit negative as it effectively reduces revenue and EBITDA and the value of the restricted group.

RATINGS RATIONALE

The B2 CFR positively reflects (1) the company's solid track record with both steady organic license sales growth over the last three years and growth from acquisitions, (2) the company's leading market positions in defined industry verticals (3) the very high renewal rates and strong level of recurring revenue, (4) the company's ability to provide more tailored solutions as a specialised provider; and the opportunities for margin expansion and possibly more sales channels, provided by the development of its partner network, increased share of outsourced consulting work, as well as the ongoing measures to standardise and centralise maintenance and consulting work.

IFS' B2 CFR is constraint by (1) the company's scale as medium-sized provider of operational enterprise application software provider with a focus on defined industry verticals (2) the challenges associated with competing with both larger and more integrated enterprise software providers, such as SAP SE (SAP, A2 stable), in some sectors, particularly for large global customers, as well as with other specialised market participants, (3) an aggressive financial policy evinced by ongoing debt-funded acquisitions and shareholder distributions.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the still-high leverage — a level that is high for the current B2 rating — following the debt-funded shareholder distribution and acquisitions and the execution risks related to the ambitious growth plan which might defer the expected deleveraging. The outlook could change to stable if the company is able to reduce leverage below 6.0x and maintain FCF/debt at least around 5.0%, both on a sustained basis.

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

While unlikely at this time, the rating could be upgraded if IFS' Moody's-adjusted debt/EBITDA reaches 4.5x and FCF (after cash interest)/debt approaches 10% while the company maintains good liquidity.

The rating is weakly positioned and relies on significant deleveraging in 2021. It could be downgraded if IFS' Moody's adjusted debt/EBITDA does not fall below 6.0x within the next 12 months, FCF (after cash interest)/debt falls to the low-single-digit percentages or liquidity weakens. Any further debt-funded acquisitions could also strain the rating.

LIQUIDITY

We view IFS' liquidity as adequate. We expect the company to maintain cash on balance above SEK500 million following the transaction. This is complemented by the fully undrawn SEK2,175 million RCF due in 2027 and our expectation of positive free cash flow generation. There is a springing net leverage covenant for the RCF, tested quarterly, if the RCF is drawn more than 40%. We expect the company to maintain sufficient capacity.

STRUCTURAL CONSIDERATIONS

The B2 instrument ratings of IFS are in line with the CFR, reflecting the pari passu capital structure and given that the facilities we rate essentially represent the entire debt capital structure at the company. Guarantors for the facilities we rate represent at least 80% of EBITDA and the security comprises shares, bank accounts, intercompany receivables, and, where possible, a general and floating charge over assets.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

We take into account the impact of ESG factors when assessing the companies' credit quality. In the case of IFS , the main ESG related drivers are as follows.

IFS is not significantly affected by environmental matters, but has some exposure to social risks in terms of privacy and data protection of the infrastructure, in which the company's software is installed and which aggregates and processes significant amounts of sensitive data. We acknowledge that the company has proper control systems and processes implemented to prevent such an event.

In terms of governance, IFS follows an aggressive financial policy under its private equity ownership. EQT Partners has, despite the ambitious growth plan, put a high leverage on the company and further evinced high tolerance for leverage with the mostly debt-funded acquisition as well as repeated debt-funded shareholder distribution since 2019.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

IGT Holding III AB (IFS) is an enterprise software provider with a focus on enterprise resource planning, enterprise asset management and field-service management solutions. The company serves defined industry verticals including manufacturing, aerospace and defence, energy and utilities, service companies and construction. EQT Partners acquired a controlling stake in the company in 2015, which was followed by a full delisting and take-private in 2016. In 2020 EQT sold IFS from its fund VII to its fund VIII and IX for an enterprise value in excess of €3.0 billion and TA Associates became minority shareholder of the company.

In fiscal year 2020, IFS generated SEK7.0 billion in revenue (pro forma for acquisitions and before the carve-out of Workwave), with company adjusted EBITDA of SEK2.1 billion.

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_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Dirk Goedde
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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