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Rating Action:

Moody's assigns B2 CFR rating to IFS; Outlook negative

10 Oct 2019

Frankfurt am Main, October 10, 2019 -- Moody's Investors Service ("Moody's") has today assigned a B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) to IGT Holding III AB (IFS, or the 'company'). Moody's has also assigned a B2 rating on the SEK 9.6bn (equivalent) senior secured term loan facilities due in 2024, as well as the SEK 1.0bn senior secured revolving credit facility (RCF) due in 2023, both are borrowed at the subsidiary IGT Holding IV AB. The outlook on both entities is negative.

RATINGS RATIONALE

The B2 CFR reflects at first instance the company's high leverage following the increase of the term loan primarily to finance shareholder distributions as well as the delayed increase tranche for a potential acquisition. Moody's adjusted debt/EBITDA increases to nearly 7x at the end of 2019 from 5.5x for the last twelve month ended in July. The company's free cash flow in 2019 may also be curtailed by working capital outflows as consumers switch to a subscription model from the current perpetual licenses for the company's software suite. Additionally we see some risk for the company to achieve its ambitious growth targets.

IFS' grew strongly since 2018 when the new strategy has been implemented and following the acquisition of Workwave in November 2017. The company was able to grow above the market rate while increasing Moody's adjusted EBITDA-margin to 24.4% in the last twelve month ending in July 2019 from 20.8% in 2018 pro forma, driven by a focus on larger deals and higher product penetration at the existing customer base. Moody's expects adjusted debt/EBITDA to fall to below 6x in 2020, which would be in line with our guidance for the current rating, and assuming continued license sales growth, successful implementation of cost optimisations and the focus on larger customers as well as continued free cash flow generation.

The weakly positioned B2 rating furthermore reflects (i) the company's relatively small size as a specialised operational enterprise application software provider with a focus on defined end markets, (ii) the related challenge to compete with both larger and more integrated enterprise software providers such as SAP in some sectors, particularly for large global customers, as well as with other specialised players, (iii) the execution risk of the new strategy with related push to cloud and subscriptions which may result in increasing customer churn. However, the rating also continues to reflect the company's solid track record with both relatively steady organic license sales growth over the last three years complemented by growth from acquisitions.

It also reflects (i) the established strong market positions in defined end markets, (ii) the very high renewal rates and strong degree of recurring revenues, (iii) the company's ability to provide more tailored solutions as a specialised provider, and (iv) the opportunities for margin expansion and possibly more sales channels provided by the development of its partner network, increased share of outsourced consulting work as well as the actions in progress to standardise and centralise maintenance and consulting work.

The B2 instrument ratings are in line with the CFR, reflecting the pari passu capital structure, and given that the rated facilities represent essentially the entire debt capital structure at IGT Holding III AB (excluding the PIK facility above the rated group of companies). Guarantors for the rated facilities represent at least 75% of EBITDA and security comprises shares, bank accounts, intercompany receivables, and where possible, a general and floating charge over other assets.

Moody's views the company's liquidity profile as good. As of July 2019 the company had SEK 434 million of cash on the balance sheet, and access to the committed SEK850 million revolving credit facility due 2023 which will be upsized to SEK 1,000 million. It is currently drawn by SEK132 million but will be repaid with the proceeds from the increased term loan tranche. Moody's expects the company to remain free cash flow positive on an annual basis before the envisaged shareholder distribution. There is also a springing net leverage covenant for the revolving credit facility, tested quarterly, if the revolving credit facility is drawn more than 40%; Moody's expects the company to maintain sufficient headroom.

RATING OUTLOOK

The negative outlook reflects the increased leverage expected following the proposed debt-funded shareholder distribution, as well as the planned acquisition tranche, which will increase leverage to a level that is high for the current B2 rating, and execution risks related to the ambitious growth plan which might defer the expected deleveraging.

FACTORS THAT CAN CHANGE THE RATINGS UP/DOWN

The rating is weakly positioned and reliant on visible deleveraging in 2019 and 2020. The outlook could be stabilized in the next twelve months if the company is able to sustainably reduce leverage below 6.0x and generate free cash flow/debt around of at least 5,0%.

While unlikely at this time, positive pressure could arise if Moody's-adjusted debt/EBITDA reaches 4.5x and free cash flow (after cash interest)/debt approaches 10% while maintaining a good liquidity profile. Conversely, negative pressure could arise if Moody's-adjusted debt/EBITDA does not fall below 6.0x within 12-18 months, free cash flow (after cash interest)/debt falls to low single-digits or liquidity weakens. Any further debt-funded acquisitions could also pressure the rating.

We take into account the impact of environmental, social and governance (ESG) factors when assessing companies' credit quality. In the case of IFS, the main ESG-related drivers is financial policy considerations as an element of governance considerations. IFS has followed quite an aggressive financial policy in the past, evidenced by a high leverage following the largely debt-funded acquisition of Workwave in 2017 as well as the currently proposed shareholder distribution.

PRINCIPAL METHODOLOHY

The principal methodology used in these ratings was Software Industry published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

IGT Holding III AB is an enterprise software provider with a focus on five distinct industry verticals, where the company provides enterprise resource planning, enterprise asset management and field service management solutions. The verticals are manufacturing, aerospace & defense, energy & utilities, service companies and construction. EQT acquired a controlling stake in the company in 2015 followed by a full delisting and take-private in 2016. IFS has acquired Workwave and Mxi in 2017, which complemented the service offering and brought roughly SEK 800 million in revenues.

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.

Dirk Goedde
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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