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Rating Action:

Moody's affirms ProQuest B2-CFR; outlook is stable upon incremental debt raise

05 Dec 2019

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

No Related Data.
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