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Rating Action:

Moody's assigns B1 CFR to Cars.com and B3 to proposed notes; outlook stable

26 Oct 2020

New York, October 26, 2020 -- Moody's Investors Service, ("Moody's") assigned a first-time B1 Corporate Family Rating (CFR) and a B1-PD Probability of Default Rating (PDR) to Cars.com Inc. (Cars.com). In connection with the proposed debt issuance, Moody's also assigned a B3 instrument rating to the new senior unsecured notes. The outlook is stable.

Net proceeds from the new notes and proposed credit facility (unrated) will be used primarily to refinance just under $600 million of existing funded debt and pay related expenses. Rating assignments remain subject to Moody's review of final transaction terms and conditions. Today's rating actions are summarized below:

Assignments:

..Issuer: Cars.com Inc.

.... Corporate Family Rating, Assigned B1

.... Probability of Default Rating, Assigned B1-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

....Senior Unsecured Regular Bond/Debenture, Assigned B3 (LGD5)

Outlook Actions:

..Issuer: Cars.com Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Car.com's B1 CFR reflects the company's position as a leading digital automotive marketplace and solutions provider to North American dealerships and OEMs with a well-known brand and substantial consumer traffic. Despite revenue declines since the beginning of 2019 reflecting declining dealership count for Cars.com, weak demand for national advertising, and more recently, the impact of the coronavirus pandemic, Cars.com has been able to reduce debt balances and generate good cash flow with 12% -13% adjusted free cash flow to debt. Looking forward, Moody's expects Cars.com will grow revenues in the low single digit percentage range over the next year with improved EBITDA margins, supported by recent growth in dealership count and organization right-sizing. As a result, Cars.com is expected to expand adjusted free cash flow to debt to greater than 15% with adjusted debt to EBITDA (less capitalized software) migrating to less than 5x followed by continued deleveraging given the company's reported net leverage target of 3x-4x (or roughly 3.5x--4.5x on a Moody's adjusted basis, less capitalized software).

Nevertheless, ratings are pressured by economic weakness and social distancing practices in North America as a result of the impact of COVID-19 which has led to reduced demand for advertising and IT services, as well as a significant decline in customer traffic to new and used car dealer locations. 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. Moody's analysis has considered the effect on the performance of consumer assets and corporate assets from the current weak North American economic activity and a gradual recovery for the coming months. 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 Moody's forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, given the substantial implications for public health and safety. There are further downside risks in the event the economy remains weak or demand for advertising continues to be soft beyond 2020 in a scenario in which COVID-19 is not contained.

Ratings reflect Moody's expectation that revenues will decline 12% in 2020, followed by low single digit percentage topline growth in 2021 supported by an increase in dealership count and good acceptance of newer offerings including Dealer Inspire which has been rolled out across hundreds of GM franchises this year, followed by the rollout across certain Honda and Nissan franchises. Good free cash flow generation, even during periods of declining revenues, provides Cars.com with the ability to reduce debt balances and maintain credit metrics in line with Moody's base case. Given recent operating results for Cars.com and Moody's forecast for growth in North American auto sales of 10.2% and 5.8% in 2021 and 2022, respectively, Moody's expects sustained demand for Cars.com offerings as dealers in North America embrace online solutions including home delivery, virtual dealer appointments, and support for virtual test-drives.

Moody's believes that beyond next year, Cars.com will benefit from its leading position and brand recognition which better positions the company when car buying rebounds from currently reduced levels. Cars sales in North America are already seeing an uplift in demand for new or used vehicles reflecting in part consumer preference for the safety of private transportation as opposed to mass transit. Moody's also expects Cars.com will adhere to prudent financial policies which will partially mitigate pressure on near-term revenues and profit margins caused by COVID-19 and uncertainties in the North American economic outlook.

The online auto marketplace is highly competitive with a number of digital platforms that compete directly with Cars.com. Demonstrating effective ROI to the dealer and OEM customer base is critical to retaining dealer and OEM customers. In addition, there are broader advertising alternatives that will continue to take a share of advertising spend from dealers and OEMs, including programmatic platforms. There is also the potential need for Cars.com to allocate capital to fund investments and M&A to accelerate revenue growth in a rapidly evolving online industry. Despite these competitive pressures, Moody's expects Cars.com will be able to maintain its market share over the next year supported by improvements in dealer retention (highest level since the spin-off in 2017) with less than 2% monthly churn and leading brand awareness.

In response to COVID-19 and revenue declines, Cars.com cut operating costs by initiating furloughs and benefits for a portion of employees, executing a 10% initial pay reduction to include director fees, putting a freeze on hiring, suspending merit and promotion pay increases, and reducing marketing and travel expenses. These actions help Cars.com maintain adjusted EBITDA margins, and Moody's believes the company could further reduce expenses, if needed, to preserve liquidity.

Governance risk is another key consideration with ownership and control, board oversight and effectiveness, and management being key elements of Moody's assessment of creditworthiness. Cars.com is publicly traded with Vanguard, Ninety One UK, Dimensional Fund Advisors, BlackRock, and Greenvale Capital owning roughly 6%-9% of common shares each, followed by other investment management companies holding less than 4%. Good governance is supported by a board of directors with nine of the company's ten board seats being held by independent directors. Despite pressure from an activist shareholder through 2019, Cars.com has not issued debt to fund share repurchases or dividends.

The SGL-2 short term liquidity rating reflects Moody's expectation that Cars.com will maintain good liquidity supported by estimated cash balances of $33 million at closing and adjusted free cash flow of more than $80 million per year, or 14% of debt. The current suspension of share buybacks will allow the company to accumulate excess cash, a portion of which can be used to further reduce debt balances. Cars.com's liquidity is supplemented by the proposed $230 million revolving credit facility (unrated, undrawn at closing) maturing in 2025.

Moody's expects Cars.com will maintain good EBITDA cushion to proposed credit agreement maintenance covenants, including a maximum 3.5x senior secured leverage ratio (as defined) and a minimum 2.75x interest coverage ratio (as defined) with a step-up to 3.0x at a time to be determined. The maximum senior secured leverage ratio may be increased by 0.5x for 12 months to accommodate a material acquisition. The B3 instrument rating for the senior unsecured notes is two notches below the B1 CFR, given their position behind the senior secured credit facility (unrated) consisting of the proposed revolver and term loan. The notes and credit facility are provided with subsidiary guarantees.

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

Notwithstanding significant uncertainty regarding the duration of the current decline in North American GDP and weak demand for advertising and IT services, the stable outlook reflects Moody's expectation that revenues for Cars.com will grow in the low single-digit percentage range over the next year supported by an increase in dealership count and continued gains for newer solutions offerings. The stable outlook also incorporates Cars.com's track record for generating low double-digit percentage adjusted free cash flow to debt even at reduced revenue levels which supports liquidity and debt repayment. Moody's expects adjusted EBITDA (less capitalized software) margins will improve above the current 22% level (or 25% with capitalized software), as a result of recent actions to control costs. Adjusted debt to EBITDA (less capitalized software) is expected to trend towards 4.75x driven by adjusted EBITDA growth and debt repayment. The outlook assumes Cars.com will not fund share buybacks or other distributions until adjusted debt to EBlTDA (less capitalized software) falls below 4x.

Ratings could be upgraded if sustained top line growth leads to increased scale and revenue diversity. Cars.com would also need to grow adjusted free cash flow, maintain very good liquidity, and adhere to conservative financial policies resulting in Moody's adjusted debt to EBITDA (less capitalized software) being sustained below 3x. Ratings could be downgraded if Cars.com adopts more aggressive financial policies leading Moody's to expect that adjusted debt to EBITDA (less capitalized software) would be sustained above 4.5x. Competitive pressures or weak demand for new offerings resulting in declining revenues or adjusted EBITDA (less capitalized software) margins approaching 15% could also lead to a downgrade. There would be downward rating pressure if deterioration in liquidity results in adjusted free cash flow to debt falling below 10% or a meaningful reduction in cash and revolver availability.

Cars.com Inc., founded in 1998 and headquartered in Chicago, IL, is a leading digital automotive marketplace and solutions provider to dealerships and OEMs in North America. Customers include more than 18,000 dealerships, ranging from independent businesses to large franchises, plus nearly all OEMs. Moody's expects Cars.com will generate revenues of roughly $550 million over the next year.

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.

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.

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.

Carl Salas
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

Stephen Sohn
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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CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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