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Rating Action:

Moody's affirms OEConnection's B3 CFR; outlook is stable

01 Dec 2021

New York, December 01, 2021 -- Moody's Investors Service ("Moody's") affirmed OEConnection LLC's ("OEC") B3 corporate family rating ("CFR") and B3-PD probability of default rating ("PDR") following the company's announcement that it will upsize its senior secured first lien and senior secured second lien credit facilities by $120 million each. Moody's also affirmed the B2 rating on the senior secured first lien credit facilities and the Caa2 rating on the senior secured second lien credit facility. The outlook is stable.

Proceeds from the proposed incremental first lien and second lien debt, along with a full draw on the company's $50 million first lien delayed draw term loan, the issuance of $100 million in perpetual preferred equity, as well as cash on hand, will be used to 1) purchase OPSTrax ("OPS"), a provider of parts procurement and logistics software; 2) acquire Assured Performance Network ("APN") and Verifacts Automotive ("Verifacts"), providers of repair shop certification and network management solutions; and 3) pay transaction fees and expenses. The acquisitions of Verifacts and APN closed in October 2021 and November 2021, respectively, whereas the purchase of OPS is expected to close in January 2022.

Affirmations:

..Issuer: OEConnection LLC

.... Corporate Family Rating, Affirmed B3

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

....Gtd Senior Secured 1st Lien Term Loan, Affirmed B2 (LGD3)

....Gtd Senior Secured 1st Lien Delayed Draw Term Loan, Affirmed B2 (LGD3)

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

....Gtd Senior Secured 2nd Lien Term Loan, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: OEConnection LLC

....Outlook, Remains Stable

RATINGS RATIONALE

OEC's B3 CFR reflects the company's small scale, with roughly $275 million of expected annual revenue in 2021E, pro forma with the acquisitions of OPS, Verifacts, APN and other recent acquisitions, aggressive financial policies and elevated financial leverage. Expected 2021E debt/EBITDA is very high, around 9x, pro forma for the proposed capital structure and acquisitions (Moody's adjusted adding capitalized software costs as an expense and other adjustments). OEC's revenue base is heavily dependent on its relationships with Ford and GM (the "OEMs"), and their network of affiliated dealerships, creating customer concentration. Moody's expects OEC will continue to finance M&A targets with incremental debt, which will offset the deleveraging benefit of OEC's fast-growing revenue profile, and keep debt/EBITDA very high. The acquisitions of OPS, Verifacts and APN enhance OEC's certified repair network software solutions and add depth to its client base by incorporating new revenue streams from collision shops and aftermarket parts sales. The strategic benefits of the transaction support OEC's strong growth profile and increase revenue diversification, partially offsetting the negative impact of a hefty debt burden.

Unless otherwise noted, all financial metrics cited reflect Moody's standard adjustments. In addition, Moody's expenses capitalized software costs.

OEC benefits from a leading position in the niche original equipment ("OE") auto parts market in the US. A stable recurring base of subscription revenues with high gross retention rates around 93% and a sticky business model embedded in client workflows support the credit profile. The recession caused by COVID-19 led to a severe disruption to OEC's cyclical client base in 2020 (mainly franchised dealerships and OEMs). Despite the headwinds, OEC's subscription-based revenue model generated positive growth in 2020, reflecting the stability of the business model. Healthy SaaS EBITDA margins around 40% (Moody's adjusted) and low capital expenditure requirements result in good cash flow generation, which partially mitigates OEC's very high financial leverage. Long-standing relationships with the OEMs, affiliated dealers and auto repair/collision shops create barriers to entry and an attractive network for prospective clients seeking to grow their parts and service revenue.

OEC's liquidity profile is considered adequate, with an expected pro forma cash balance of $34 million as of December 2021 and free cash flow to debt metrics in the 3%-5% range over the next 12-18 months. The undrawn $50 million revolver provides additional liquidity. Moody's anticipates OEC will be able to fund internal obligations with operating cash flow and cash on hand. The company's software subscription SaaS business model with monthly billing results in minimal working capital swings and low capex, which also supports the liquidity profile.

The ratings for the individual debt instruments incorporate OEC's overall probability of default, reflected in the B3-PD, and the loss given default assessments for the individual instruments. The pro forma senior secured first lien credit facilities, consisting of a $50 million revolver expiring in 2024, a $723 million term loan maturing in 2026 (including the fully drawn delayed draw commitment and the proposed incremental term loan), are rated B2, one notch higher than the B3 CFR, with a loss given default assessment of LGD3. The B2 senior secured first lien instrument rating reflects their relative size and senior position ahead of the senior secured second lien term loan, that would provide first-loss protection and drive a higher recovery for senior secured first lien debt holders in the event of a default. OEC's $305 million senior secured second lien term loan, due 2027 (including the proposed incremental term loan), is rated Caa2, two notches below the CFR, with a loss given default assessment of LGD5. The Caa2 senior secured second lien term loan rating acknowledges its junior ranking as well as its relative size within the capital structure.

The revolver (only) includes a 8.0x springing maximum first lien net leverage covenant, applicable when the revolver is at least 35% drawn. The term loans do not include any financial covenants. Moody's expects OEC would stay in compliance with the springing covenant if it were to draw on the revolver, given the generous EBITDA add-backs and our current outlook. Amortization on the first lien senior secured term loan is about $7 million annually. The other existing terms in the credit agreement are expected to remain unchanged.

The perpetual preferred equity instrument is considered equity given that 1) interest payments can be paid in kind or cash at the sole discretion of the company's board; 2) the holders do not have the ability to put the instrument to the company; 3) there are no cross-default or cross-acceleration terms in the event of non-payment of the preferred interest; and 4) there is no maturity date. That said, the expectation for aggressive financial policies by the private equity owner could lead to further debt issuance to finance the repayment of the preferred equity, which would pressure the ratings. The described terms are preliminary and ratings could change if they differ materially from the final agreement.

The stable outlook reflects Moody's expectation for high single-digit organic growth over the next 12-18 months. EBITDA margin is expected to decline slightly towards the 39%-40% range as OEC integrates targets with a lower margin profile, partially offset by the benefits from additional scale and price increases. Debt/EBITDA will benefit from top line growth, declining towards 8.0x over the next 12-18 months, but Moody's also anticipates incremental debt-funded transactions, which could keep leverage at current levels.

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

The ratings could be upgraded if 1) Debt/EBITDA is expected to remain below 6.0x; 2) FCF/debt will be sustained above 5.0%; 3) OEC, which is private equity owned, can demonstrate a track record of more moderate financial policies; and 4) strong revenue growth over time enables OEC to build meaningful scale.

The ratings could be downgraded if 1) organic revenue growth is sustained at low single-digit percentages or below, reflecting a weaker competitive position; 2) Moody's expects debt/EBITDA will be sustained above 8.0x without a path to deleveraging; 3) Moody's expects FCF/debt will be around 0% or negative; or 4) liquidity deteriorates.

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.

OEConnection LLC, controlled by affiliates of private equity sponsor Genstar Capital, provides cloud-based SaaS software solutions to automotive dealers, OEMs and auto repair/collision shops, that allow them to efficiently identify, locate, and price OE parts for the completion of repair services. OEC's product suite also offers tools that facilitate the certification process for dealers and repair shops that seek to become part of an OEM network. The company generates the majority of its revenue in North America and also operates in the United Kingdom. Pro forma revenue as of 2021E, including recently closed and announced acquisitions, is expected to be roughly $275 million.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

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.

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.

Ignacio Rasero
VP - Senior Credit Officer
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.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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