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Rating Action:

Moody's assigns B2 CFR to AHEAD DB following buyout and B1 to new first lien credit facility; outlook stable

25 Sep 2020

New York, September 25, 2020 -- Moody's Investors Service, ("Moody's") assigned a B2 Corporate Family Rating (CFR) and a B2-PD Probability of Default Rating to AHEAD DB Holdings, LLC (AHEAD). As part of the rating actions, Moody's assigned a B1 rating to the company's proposed first lien senior secured revolver and senior secured term loan. Moody's also assigned a Caa1 rating to AHEAD's proposed second lien term loan. The outlook is stable.

Proceeds from the new first lien and second lien term loans, along with $616 million in contributed and rolled over equity, will fund the $1.5 billion acquisition of AHEAD (includes RoundTower Technologies, LLC and Kovarus, Inc.) by Centerbridge Partners and Berkshire Partners.

The following ratings were assigned:

Assignments:

..Issuer: AHEAD DB Holdings, LLC

.... Corporate Family Rating, Assigned B2

.... Probability of Default Rating, Assigned B2-PD

.... New $115 million, Gtd senior secured first lien Revolver (undrawn), Assigned B1 (LGD3)

.... New $785 million, Gtd senior secured first lien Term Loan, Assigned B1 (LGD3)

.... New $235 million, Gtd senior secured second lien Term Loan, Assigned Caa1 (LGD5)

Outlook Actions:

..Issuer: AHEAD DB Holdings, LLC

....Outlook, Assigned Stable

The assigned ratings are subject to review of final documentation and no material change in the terms and conditions of the transaction as advised to Moody's.

RATINGS RATIONALE

The B2 CFR reflects AHEAD's small scale compared to competing IT value-added resellers and managed services firms as well as the challenges of evolving requirements of IT deployments for enterprises including the ongoing transition to cloud platforms. The proposed acquisition results in debt to EBITDA of 6x at closing (Moody's adjusted, with partial credit for planned cost synergies). Moody's expects credit metrics, including adjusted leverage and free cash flow, will improve over the next year primarily as revenue and EBITDA grow. Although revenues for AHEAD will increase by over 50% due to the acquisitions of RoundTower, plus west coast-based Kovarus, resulting in greater scale and geographic expansion, AHEAD will continue to have high vendor concentration given more than 50% of the company's product revenues will be represented by Dell EMC products. In addition, there is some sector concentration risk given roughly 50% of revenues will be derived from financial services and healthcare verticals.

Ratings are supported by AHEAD's position as an important U.S. channel partner for Dell EMC and other suppliers resulting in favorable vendor terms. In addition, more than 50% of AHEAD's revenues are generated from Fortune 1000 clients or their subsidiaries which has supported consistent topline growth, and Moody's expects continued revenue gains over the next year, albeit in the low single digit percentage range. Moody's base case projections incorporate only partial credit for planned cost synergies, although the company has a good track record for realizing targeted cost synergies tied to acquired business.

Moody's expects AHEAD will maintain good liquidity over the next year, despite being a full taxpayer, supported by adjusted free cash flow to debt in the mid to high single digit percentage range and the proposed $115 million revolver (undrawn at closing). Good free cash flow reflects the low level of reported annual capital expenditures (less than 1% of revenue) and modest working capital needs which is supported by favorable vendor terms.

Ratings for AHEAD's debt instruments reflect the B2-PD overall probability of default and an average family recovery in a default scenario. The B1 rating assigned to the first lien debt instruments is one notch above the CFR reflecting their position ahead of the second lien term loan. The Caa1 rating assigned to the second lien term loan is two notches below the CFR reflecting its position behind the first lien debt instruments.

Governance risks are a key consideration given that financial sponsors, including Centerbridge Partners and Berkshire Partners, look to enhance equity returns through distributions or debt financed acquisitions. Accordingly, Moody's views AHEAD's financial policy to be somewhat aggressive given the private-equity ownership, and the potential for debt financed distributions or acquisitions to enhance equity returns. Lack of public financial disclosure and the absence of board independence are also incorporated in the B2 CFR. The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, due to the substantial implications for public health and safety.

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

The stable outlook reflects Moody's expectation that AHEAD will continue to grow its revenue base while maintaining adjusted EBITDA margins at more than 8% and the company will achieve most of planned acquisition synergies in the first year following transaction closing. Moody's also expects that AHEAD will maintain its position in the southeast and midwestern regions of the US as a leading provider of technology-based solutions serving Fortune 1000 companies in the data center and cloud as well as a high-value sales channel partner for OEMs. Moody's expects credit metrics, including adjusted leverage and free cash flow, will improve primarily as revenue and EBITDA grow. Absent additional acquisitions, Moody's expects excess cash will be used reduce debt balances.

Ratings could be upgraded if AHEAD continues to grow its top line, expand its geographic reach, and improve its credit metrics resulting in adjusted debt to EBITDA being sustained below 4 times with adjusted free cash flow to debt above 12%. Ratings could be downgraded if a decline in revenue or cash flow lead to adjusted debt to EBITDA being sustained above 6x or reduced EBITDA margins. There would be downward pressure on ratings if liquidity were to weaken resulting in adjusted free cash flow to debt below 5% or reduced revolver availability. A deteriorating relationship with key suppliers, including Dell EMC, could also place downward pressure on ratings.

As proposed, the new first term loan is expected to provide covenant flexibility for transactions that could adversely affect creditors including incremental facility capacity equal to (i) the greater of $165 million and (ii) 100% of Consolidated EBITDA, plus additional pari passu credit facilities so long as the first lien net leverage ratio does not exceed 4.25x. Additional debt is permitted for incremental facilities that are secured on a junior lien basis (subject to a 5.5x senior secured leverage ratio limit and 2.0x interest coverage) or are unsecured (subject to a 6.0x total leverage ratio limit and 2.0x interest coverage). Proposed terms related to the release of subsidiary guarantees and collateral leakage through transfers to unrestricted subsidiaries have not been disclosed. Summary term sheet indicates a 100% net asset sale prepayment requirement stepping down to 50% when the first lien leverage ratio is 3.75x, and then 25% when ratio is 3.25x, subject to an 18-month retroactive and forward-looking reinvestment window.

AHEAD DB Holdings, LLC, headquartered in Chicago, IL, is a domestic provider of technology-based solutions serving Fortune 1000 companies in the data center and cloud as well as a high-value sales channel partner for OEMs. Upon closing, the company will be owned by Centerbridge Partners and Berkshire Partners (roughly 75%) and management (25%) with estimated gross revenues approaching $1.9 billion over the next year, pro forma for proposed acquisitions.

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.

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.

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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