New York, February 18, 2021 -- Moody's Investors Service ("Moody's") affirmed Renaissance Holding Corp.'s
(dba Renaissance Learning) B3 Corporate Family Rating ("CFR") and B3-PD
Probability of Default Rating ("PDR") following the company's
proposed acquisition of Nearpod. Moody's also affirmed the B2 rating
for the company's first lien senior credit facilities including revolver
and term loan, and affirmed the Caa2 rating for the second lien
term loan. Additionally, Moody's assigned a B2 rating
to the proposed $140 million of new revolver (upsized and extended
from the existing $80 million revolver due 2023). The outlook
remains stable.
The $650 million acquisition of Nearpod along with related fees
and expenses will be financed with an additional $358 million first
lien term loan and $135 million second lien term loan, as
well as equity contribution from its equity sponsor, Francisco Partners.
Moody's views this primarily debt funded acquisition as very aggressive
financial policy because it will increase Moody's adjusted debt-to-EBITDA
leverage to in excess of 10.0x pro forma for the transaction (vs
low 9.0x for the trailing twelve months ended September 30) due
to the high acquisition multiple the company is paying for Nearpod.
Given the very high pro forma leverage, Moody's views the
company as weakly positioned in the B3 category. However,
Moody's affirmed the ratings based on the expectation that Renaissance
Learning will be able to de-lever to below 9.0x debt-to-EBITDA
by year end 2022 with solid earnings growth including realization of synergies
from the Nearpod acquisition. The affirmation also reflects the
company's track record of successfully integrating acquisitions
in the past. Pro forma for the transaction, the company will
have good liquidity with $71 million cash on balance sheet to fund
seasonal working capital needs and is expected to generate positive free
cash flow of over $30 million over the next year, which also
supports the affirmation of the B3 CFR. The company is upsizing
its revolver from $80 million to $140 million, which
Moody's expects will primarily be used to fund working capital needs
for the year. The acquisition will further increase Renaissance
Learning's scale with Nearpod's content delivery platform
as well as additional content from the existing learning products on Nearpod's
platform. Additionally, the educational technology industry
is experiencing high growth accelerated by the coronavirus pandemic and
the increase in distance learning.
Moody's took the following ratings actions:
Issuer: Renaissance Holding Corp.
Ratings Affirmed:
.... Corporate Family Rating, affirmed
at B3
.... Probability of Default Rating,
affirmed at B3-PD
.... Gtd Senior Secured First Lien Revolving
Credit Facility, affirmed at B2 (LGD3)
.... Gtd Senior Secured First Lien Term Loan,
affirmed at B2 (LGD3)
.... Gtd Senior Secured Second Lien Term Loan,
affirmed at Caa2 (LGD5)
Ratings Assigned
.... New $140 million Gtd Senior Secured
first lien revolver, assigned B2 (LGD3)
Outlook Actions:
....Outlook, Remains Stable
Moody's expects to withdraw the B2 rating on the existing revolver expiring
in 2023 once the transaction closes and the new revolver is in place.
RATINGS RATIONALE
Renaissance Learning's B3 CFR broadly reflects its very high leverage
as the result of aggressive growth strategy with debt funded acquisition.
Pro forma Moody's adjusted debt-to-EBITDA exceeds 10.0x
(after deducting software development costs). Debt-to-EBITDA
leverage would be in the 8.0x range if the change in deferred revenue
is included in the calculation of EBITDA. Although Moody's
expects leverage will decline to below 9.0x due to earnings growth
over the next 12 to 18 months including through the realization of synergies,
Renaissance Learning's leverage is expected to remain high over
the longer term given its private equity ownership and a growth strategy
that incorporates strategic debt funded acquisitions. The leverage
weakly positions the company within the rating category. The rating
is also constrained by the competitive nature of the industry with other
participants in the relatively fragmented K-12 digital learning
and assessment market. High investment needs will consume cash
as the company continues to enhance content and product features to maintain
competitiveness. However, the rating is supported by Renaissance
Learning's established brand name with a portfolio of well-recognized
product offerings in the digital education market, and solid growth
prospects driven by favorable industry fundamentals such as the transition
of educational services to more digital-oriented delivery.
The rating also benefits from the company's relatively stable cash
generating capability due to a high level of recurring revenue and good
margins.
Moody's views Renaissance Learning's governance risk as high due
to its private equity ownership by Francisco Partners. Given this,
Moody's expects an aggressive financial and acquisition strategy
that tends to favor shareholders.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Although
an economic recovery is underway, it is tenuous, and its continuation
will be closely tied to containment of the virus. As a result,
the degree of uncertainty around our forecasts is unusually high.
Moody's regards the coronavirus outbreak as a social risk under our ESG
framework, given the substantial implications for public health
and safety. Renaissance Learning is experiencing positive demand
growth from school districts related to societal trends toward digital
learning tools that is being bolstered by distance learning during the
pandemic. This is more than offsetting the drag the company's
orders and sales from pressure on school budgets from lower tax revenues.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that the company will
be able to de-lever rapidly with solid earnings growth over the
next 12 to 18 months as well as maintain good liquidity with free cash
flow generation of about $30 million over the next year.
The ratings could be downgraded if growth is weaker than expected and
leverage is not declining rapidly, market share declines,
EBITA-to-interest expense less than 1.0x, free
cash flow to debt is below 1%, or liquidity deteriorates
The ratings could be upgraded if the company delivers sustained organic
revenue and earnings growth, with Moody's adjusted debt-to-EBITDA
maintained well below 6.5x and free cash flow as a percentage of
debt sustained above 5%.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Renaissance Learning is a provider of subscription-based educational
practice and assessment software and school improvement programs for kindergarten
through senior high (K-12) schools. The company has been
owned by private equity firm Francisco Partners since 2018. Pro
forma for the acquisition, total billings (revenue proxy) is expected
to be about $400 million in 2020.
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.
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Joanna O'Brien
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Client Service: 1 212 553 1653
John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
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