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Rating Action:

Moody's affirms Recorded Books' B3 CFR following dividend recap; outlook stable

24 Sep 2020

New York, September 24, 2020 -- Moody's Investors Service ("Moody's") affirmed Recorded Books, Inc's ("RBmedia") ratings, including its B3 Corporate Family Rating (CFR) and the B3 rating on the upsized $893 million first lien senior secured term loan. The rating outlook is stable.

The proceeds from the $250 million first lien term loan add-on and balance sheet cash will be used to fund a dividend to its private equity owners and pay transaction-related fees.

The dividend recapitalization is credit negative because RBmedia's debt-to-EBITDA will increase substantially, to 7.9x proforma from 6x for LTM 6/2020 (Moody's adjusted, with capitalized pre-publication costs expensed). The dividend recap demonstrates the company's aggressive financial strategy as it comes less than four months following a significant OverDrive acquisition and at a time of uncertainty around public libraries' purchasing amid economic downturn. However, the rating affirmation reflects Moody's expectation of deleveraging through EBITDA growth, supported by robust growth in consumer demand for digital and audiobooks and shift of library spending from physical to digital content. Moody's expects that RBmedia will continue to generate positive free cash flow, providing capacity to delever to the current level over the next 12-18 months.

RBmedia benefits from demographic and social shifts of content consumption to digital and mobile methods and increased demand for spoken word content. This is one of key factors supporting the rating affirmation. The coronavirus outbreak is accelerating the transformational social changes, providing earnings growth and deleveraging opportunities to the company.

A summary of today's actions follows:

Issuer: Recorded Books, Inc

Corporate Family Rating -- Affirmed, B3

Probability of Default Rating -- Affirmed, B3-PD

First-Lien Senior Secured Revolver due 2023 -- Affirmed, B3 (LGD3)

First-Lien Senior Secured Term Loan due 2025 -- Affirmed, B3 (LGD3)

Outlook: Stable

RATINGS RATIONALE

RBmedia's B3 CFR reflects its small revenue scale relative to rated peers, high financial leverage, governance risks with its private equity ownership and aggressive financial strategy that tolerates high leverage. The company's rating also reflects execution risks of integrating the recently acquired OverDrive business. Nevertheless, RBmedia's rating is supported by contractually guaranteed revenue for a substantial portion of its audiobooks distribution channel and strong secular trends supporting digital content consumption that is further accelerated by the impact of the coronavirus outbreak. The recently completed acquisition of OverDrive by KKR has added diversity to the revenue stream and provides increasing scale to the business, with stronger cash flow contribution and additional growth opportunities.

Pro forma for the incremental debt that will be raised to fund a $250 million dividend, Moody's estimates the leverage ratio (Moody's adjusted pro forma total Debt/EBITDA, including expensing capitalized pre-publication costs) will be near 7.9x, up from 6x pre-recap. Moody's expects leverage to fall to approximately 6.3x Debt/EBITDA by the end of 2021, as RBmedia grows its revenue and executes approximately $14 million in cost savings. There are operating and integration risks of the OverDrive acquisition that could produce less favorable results than expected. With only moderate margins, cash conversion, although improved on a combined basis, will remain limited and a constraint to financial flexibility.

The stable rating outlook reflects Moody's view that the company will maintain its strong position within the digital audio content production and digital media distribution businesses and reduce its leverage primarily through EBITDA growth. The stable outlook also reflect Moody's expectation that revenue will continue to expand mid-to-high single digits driven by robust demand for digital and audiobooks, cross-sell opportunities via OverDrive platform and contractually agreed increases in revenue.

ESG CONSIDERATIONS

RBmedia is exposed to social risks. The company's access to readership data exposes it to incremental data privacy risks in the event that there is a data breach of library patron readership and listening habits. However, the company also benefits from demographic and social shifts of content consumption via digital and mobile methods, and increased demand for spoken word content.

The coronavirus outbreak is accelerating the transformational social changes impacting the company. The spread of the coronavirus outbreak, deteriorating global economic outlook, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The media/publishing has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. The coronavirus outbreak and the economic downturn have placed an increased level of uncertainty regarding future library funding as tax revenues decline. However, the social distancing mandates and the temporary closure of physical library facilities has led to an accelerated transition to various forms of e-books or audio media consumption and to a broader adoption of digital and audio books, providing growth opportunities to RBmedia. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The governance risk Moody's considers in RBmedia's credit profile include an aggressive financial strategy under private equity ownership and control, which tolerates high leverage and is motivated to extract a return on its very significant investment which may be in lieu of de-levering, as demonstrated by this dividend recap.

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

Ratings may be upgraded if leverage is sustained below 6x (Moody's adjusted Debt/EBITDA, including expensing capitalized pre-publication costs) and consistently generates positive free cash flow such that Moody's adjusted FCF/Debt > 5%. Management's commitment to a more conservative financial policy, larger scale, and improved liquidity would also be needed for RBmedia to be considered for an upgrade.

Ratings could be downgraded if leverage is sustained above 7x (Moody's adjusted pro forma Debt/EBITDA with expensed capitalized pre-publication costs). A downgrade would also be considered if RBmedia experiences a sustained reduction in its revenue trajectory, loses a major distribution contract, generates weak returns on content investment or liquidity worsens.

The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Recorded Books, Inc is a digital audiobook and related spoken word content producer with over 49,000 titles in its portfolio. The company distributes its products through third party digital retailers and via contracts with various libraries. In addition, the company distributes its own and third-party content via its owned subscription based digital audiobook store. On June 9, 2020, KKR closed on its acquisition of OverDrive, a digital content distribution platform primarily used by libraries, schools and corporations, hosting e-books and audiobooks. OverDrive obtains distribution rights from a broad variety of publishers, and generates revenue from selling this publisher content to libraries through its digital marketplace.

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.

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 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.

Dilara Sukhov, CFA
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

Lenny J. Ajzenman
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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