New York, December 05, 2019 -- Moody's Investors Service ("Moody's") affirmed
ProQuest LLC's ("ProQuest") corporate family rating ("CFR")
at B2 and the company's probability of default rating (PDR) at B2-PD
upon its announcement of an incremental $210 million debt raise
to fund the acquisition of Innovative Interfaces, Inc. ("Innovative").
Moody's also affirmed B2 ratings on the incrementally higher senior
secured credit facilities, consisting of $150 million senior
secured revolving credit facility due in 2024 and $935 million
senior secured term loan due in 2026. Incremental term loan proceeds
together with a revolver draw will be used to pay for the acquisition
and transaction fees. The outlook is stable.
The rating affirmation reflects the strategic benefits of the acquisition
of Innovative to ProQuest by providing an entry into the public library
segment, a high level of recurring revenues, and complementary
technologies offset by high pro-forma leverage and an aggressive
financial policy.
ProQuest's has established a successful track record of integrating
sizable acquisitions and achieving targeted synergies and so, we
expect the company can achieve its targeted cost savings over the next
18 months to support the incremental debt taken on to finance the acquisition.
The fully debt financed acquisition shortly after the $43.2
million distribution to ProQuest Holdings for management incentive fees,
transaction fees and a minority shareholder buyout, is evidence
of an aggressive financial policy. Additionally, pro-forma
debt/EBITDA of approximately 5.9x is slightly below Moody's
6.0x downward rating trigger and so consumes capacity within the
B2 CFR.
Affirmations:
..Issuer: ProQuest LLC
.... Corporate Family Rating, Affirmed
B2
.... Probability of Default Rating,
Affirmed B2-PD
....Senior Secured 1st lien Term Loan B,
Affirmed B2 (LGD3)
....Senior Secured 1st lien Revolving Credit
Facility, Affirmed B2 (LGD3)
Outlook Actions:
..Issuer: ProQuest LLC
....Outlook, Remains Stable
RATINGS RATIONALE
ProQuest's B2 CFR reflects the company's high pro-forma leverage
(incorporating Moody's standard adjustments and expensing content costs)
of 5.9x as of Q3 2019 pro-forma for the acquisition.
Innovative provides integrated library systems to automate operations
primarily for academic and public libraries, generating recurring
revenue of approximately 94%. The acquisition provides ProQuest
with a new and direct market entry into a public library operations management
market as well as incremental market share supplementing its already strong
position in the academic library market. While ProQuest will continue
to support existing products of Innovative, meaningful synergies
are expected to be generated within a short period of time due to a reduction
in the combined company's product development spend, particularly
in the academic library market, where ProQuest has a strong Ex Libris
product offering. We anticipate that overall leverage will decline
to 5x by year-end 2020 due to rising EBITDA and absolute debt reduction
from free cash flow.
The company's ratings are supported by growth at the company's Ex Libris'
SaaS software business, a large subscription base in the library
reference market with extensive content databases sold to libraries,
corporations and government organizations, as well as high renewal
rates and a recurring stream of revenues. Nearly 90% of
the revenue base is either subscription based or is under renewable annual
contracts, with a historical renewal rate of 95%.
In addition, further business expansion is anticipated as ProQuest
consolidates and unifies the interface in its content aggregator product
and launches a new administrative tool to manage print and digital book
ordering within its Books segment. While printed books and their
sales continue to be challenged, we anticipate that growth in other
businesses, driven by expansion in sales of e-books will
offset revenue declines in maturing units. ProQuest operates in
a competitive environment and will face rising royalty payments as its
sales mix changes to more digital offerings, which will need to
be offset with revenue growth or cost savings elsewhere to avoid impacting
EBITDA margins.
The company recently addressed the maturing equity put that Goldman Sachs
Group, Inc. ("Goldman Sachs") held by facilitating a sale
of its majority stake to Atairos Group, Inc. ("Atairos")
and distributing $43.2 million to ProQuest Holdings for
management incentive fees, transaction fees and a minority shareholder
buyout. The maturity of the remaining equity put related to the
10% equity interest still owned by Goldman Sachs was pushed out
to 2022.
ProQuest has an aggressive financial strategy given the contemplated debt
financed acquisition of Innovative, the recent equity-holder
distributions, and control by Cambridge Information Group,
Inc. (56%), a family-owned investment company.
Other major shareholders include Atairos (31%) and Goldman Sachs
(10%). From a financial strategy perspective, private
equity sponsored companies favor equity holder rights over those of debt
holders. Both Goldman Sachs and Atairos have put rights of their
equity stakes, with Goldman's put having a right to convert into
a debt obligation bearing interest at 8% for a 3-year term
starting in June 2022. Atairos has their put exercisable in June
2027.
ProQuest has good liquidity given the positive, although seasonal,
free cash flow generation and the availability of its new $150
million senior secured revolver due 2024. Cash on the balance sheet
is expected to be $32 million pro-forma for the incremental
debt raise. Moody's projects free cash flow of approximately $70-$90
million, which weanticipate will be used for debt repayment,
additional acquisitions, or modest distributions to the owners to
offset the impact of tax obligations.
The term loan is covenant lite, but the revolver has a springing
covenant set at 6.75x net first lien leverage ratio (as defined
in the credit agreement) when 35% of the revolver is drawn.
The credit facilities provide for debt repayment from asset sales and
incremental debt and equity issuances, and have a leverage-based
free cash flow sweep mechanism.
The stable rating outlook reflects Moody's view that ProQuest will remain
a meaningful industry participant in the higher education and library
markets, that revenue and EBITDA will be up slightly in 2020 and
2021 and that there will be additional debt repayment over the forecast
horizon. Moody's outlook does not incorporate material shareholder
distributions or meaningful operating performance declines.
Moody's would consider an upgrade if ProQuest is able to demonstrate good
organic revenue and EBITDA growth and reduce leverage below 4.25x
on a sustained basis. Maintenance of a good liquidity position
and a stable competitive position would also be required. In addition,
confidence would be needed that the company would not raise leverage levels
to facilitate the exit of its equity partners.
Ratings could experience downward pressure if leverage increased above
6x on a sustained basis due to additional debt or weaker operating performance.
A weakened liquidity position could also lead to negative rating pressure.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Headquartered in Ann Arbor, Michigan, ProQuest LLC (ProQuest)
aggregates, creates, and distributes academic and news content
serving academic, corporate and public libraries worldwide.
The company's ownership consists of Cambridge Information Group,
Inc. (majority shareholder), Atairos and Goldman Sachs.
LTM revenue as of Q3 2019 was $748 million.
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.
Alina Khavulya, CFA
Vice President - Senior 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