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Rating Action:

Moody’s assigns B2 CFR to Internet Brands following leveraged buyout; rates new credit facilities B1 (first-lien) and Caa1 (second-lien); outlook stable

16 Jun 2014

Approximately $755 million of new debt rated

NOTE: On June 30, 2014, the press release was revised as follows: The headline has been revised to: “Moody’s assigns B2 CFR to Internet Brands following leveraged buyout; rates new credit facilities B1 (first-lien) and Caa1 (second-lien); outlook stable”. The first paragraph has been revised to: “Moody’s Investors Service has assigned to Internet Brands, Inc. (“Internet Brands” or the “company”) a B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating (PDR). In connection with this rating action, Moody’s assigned a B1 rating to the company’s proposed senior secured first-lien debt facility ($435 million first-lien term loan due 2021, $50 million delayed draw first-lien term loan due 2021 and $75 million revolving credit facility due 2019) and Caa1 rating to the new $195 million second-lien term loan facility maturing 2022. The rating outlook is stable.” In the Debt List section, under the heading “Ratings Assigned:”, the issuer name Internet Brands, Inc. was added with the following ratings listed: "Corporate Family Rating - B2", "Probability of Default Rating - B2-PD". The “Ratings Downgraded:” and “Ratings Affirmed:” sections have been removed. In the fourth paragraph, the third sentence has been revised to: “We will withdraw the company’s existing B1 CFR, B2-PD PDR, as well as the B1 ratings and LGD assessments on the existing credit facilities upon their full repayment and extinguishment.” In the first paragraph in the Ratings Rationale section, the first sentence has been revised to: “Internet Brands’ B2 CFR reflects the company’s elevated leverage following its second LBO in less than four years.” Revised release follows.

New York, June 16, 2014 -- Moody’s Investors Service has assigned to Internet Brands, Inc. (“Internet Brands” or the “company”) a B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating (PDR). In connection with this rating action, Moody’s assigned a B1 rating to the company’s proposed senior secured first-lien debt facility ($435 million first-lien term loan due 2021, $50 million delayed draw first-lien term loan due 2021 and $75 million revolving credit facility due 2019) and Caa1 rating to the new $195 million second-lien term loan facility maturing 2022. The rating outlook is stable.

Proceeds from the new credit facilities plus $554 million of equity (including approximately $40 million of management rollover equity) will be used to finance the leveraged buyout (LBO) of Internet Brands by private equity firm Kohlberg Kravis Roberts & Co. L.P. ("KKR" or the "equity sponsor") from Hellman & Friedman ("H&F") for a total purchase price of approximately $1.125 billion (net of balance sheet cash and excluding transaction fees and expenses, estimated to total about $50 million). The new credit facilities will replace the existing debt capital structure ($324 million outstanding term loan B and $50 million revolver) and fund at closing. However, the delayed draw first-lien term loan is scheduled to fund after closing to coincide with planned acquisitions.

Two parent holding companies named Micro Holding Corp. and MH Sub I, LLC will be co-issuers of the new credit facilities and will be jointly and severally liable for the debt obligations. Internet Brands is a wholly-owned subsidiary of Micro Holding Corp. and together with MH Sub I, LLC will hold the operating assets of the company. Internet Brands will provide an upstream guarantee of the credit facilities while the direct parent and certain indirect parent entities of Micro Holding Corp. and MH Sub I, LLC will provide downstream guarantees.

Ratings Assigned:

..Issuers: Internet Brands, Inc.

Corporate Family Rating - B2

Probability of Default Rating - B2-PD

..Issuers: Micro Holding Corp. and MH Sub I, LLC

$ 75 Million Revolving Credit Facility due 2019 -- B1 (LGD-3, 35%)

$435 Million First-Lien Term Loan due 2021 -- B1 (LGD-3, 35%)

$ 50 Million (Delayed Draw) First-Lien Term Loan due 2021 -- B1 (LGD-3, 35%)

$195 Million Second-Lien Term Loan due 2022 -- Caa1 (LGD-5, 87%)

For companies whose debts are sourced from two different lender classes, Moody's generally assumes a mean family recovery rate of 50% under the Loss Given Default (LGD) Methodology, which results in the affirmation of the PDR at B2-PD following the downgrade of the CFR to B2. The assigned ratings are subject to review of final documentation and no material change in the size, terms and conditions of the transaction as advised to Moody's. We will withdraw the company’s existing B1 CFR, B2-PD PDR, as well as the B1 ratings and LGD assessments on the existing credit facilities upon their full repayment and extinguishment.

RATINGS RATIONALE

Internet Brands’ B2 CFR reflects the company’s elevated leverage following its second LBO in less than four years. Pro forma for the contemplated KKR buyout, total debt to EBITDA leverage will climb to 8.1x (incorporating Moody's standard adjustments, cash distributions from the Chrome joint venture and $35 million takedown of the delayed draw term loan; excluding one-time transaction expenses and non-recurring charges) from 4.0x (Moody's adjusted) as of March 2014 before declining to around 7x by year end 2014. Leverage is high compared to the median of 5.3x for B2-rated global industry peers (6.0x for B2-rated global cross industry peers). Nonetheless, we believe the business model can accommodate a more leveraged capital structure due to Internet Brands' revenue visibility, focus on performance-based ad revenue, high EBITDA margins in the 40-45% range and history of positive free cash flow generation.

Internet Brands has a loyal client base supported by a subscription-based revenue model in which 60% of sales are recurring, high customer (revenue) retention rates in the 90% range and growing demand from small and medium-sized businesses (SMBs) that are increasingly seeking to automate key work functions by outsourcing their IT needs to specialty providers that can offer one-stop shopping through a broad offering of Software-as-a-Service (SaaS)-based integrated workflow tools. These attributes should drive EBITDA growth from both an organic and inorganic standpoint. Barring another leveraging event, we anticipate higher EBITDA combined with the scheduled debt amortization and mandatory 50% excess cash flow sweep (operative in fiscal 2015) will reduce total debt to EBITDA to around 6x (Moody's adjusted) by year end 2015, which will better position the company within the B2 rating category.

The B2 CFR is supported by Internet Brands' position as an established online media company that owns leading websites with reasonably long operating histories and differentiated content and services targeted to specific customer groups. Additionally, the rating recognizes Internet Brands' good diversification within the consumer segment. Moody's expects this segment will continue to benefit from strong organic traffic and revenue growth as traditional print media, professional services, entertainment and leisure content increasingly migrate to digital and mobile computing platforms. We believe this is the result of three secular online trends: (i) rising consumer Internet penetration and usage; (ii) growth in e-commerce; and (iii) an increasing percentage of merchant advertising dollars shifting to online media. The CFR also reflects the company's low-cost traffic acquisition model and efficient operating cost structure facilitated by a shared proprietary technology platform and content contributed by unpaid members from its website communities. Low operating expenses combined with modest working capital and capital expenditure requirements result in high EBITDA margins and high conversion of EBITDA to free cash flow.

At the same time, the B2 rating considers the company's small revenue base, concentrated earnings profile in the cyclical consumer segment, acquisition-focused growth strategy, and inherent business risk for Internet companies to experience potential decline in website traffic due to rapidly changing technology and industry standards, inability to develop features that attract consumers to its websites or lower rankings in search engine results. Alternative means of content delivery as well as changes in consumer sentiment may also contribute to the risk of obsolescence or waning relevance of traditional Internet portal sites, which represent about 60% of Internet Brands' traffic sources. Low entry barriers can also create a potential competitive threat from the major search portals, other content-driven specialty website aggregators and merchant-owned e-commerce websites. Finally, the rating also captures event risks related to ownership by its equity sponsor.

Rating Outlook

The stable rating outlook reflects our expectation that over the next 12-18 months Internet Brands will maintain its position as a leading online media company with steady growth in average monthly unique website visitors. The stable outlook also anticipates that Internet Brands will maintain a low-cost traffic acquisition model, stable operating margins and steady cash flows.

What Could Change the Rating -- Down

Ratings may be downgraded if Internet Brands' competitive position were to weaken (as measured by market share), advertising revenue declined, acquisitions exhibited underperformance or marketing and development costs increased (as measured by revenue and operating margin performance). Ratings could also deteriorate if the company: (i) engages in debt-funded acquisitions that are materially greater in size than the historical average or debt-funded shareholder distributions; or fails to reduce LBO leverage resulting in total debt to EBITDA sustained above 6.5x (Moody's adjusted) by year end 2015; (ii) paid sizable dividends resulting in negative free cash flow; or (iii) experienced weakened liquidity.

What Could Change the Rating -- Up

An upgrade is unlikely given our expectation for a highly levered capital structure consistent with the B2 rating category over the rating horizon. However, over the long-term, ratings could be upgraded if Internet Brands were to increase scale, maintain its leading market position, demonstrate organic revenue/earnings growth and continue to successfully integrate acquisitions. An upgrade would also be considered if the company were to further enhance end market diversification and reduce financial leverage to at least 5.0x adjusted total debt to EBITDA on a sustained basis. Internet Brands would also need to maintain a good liquidity position to be considered for an upgrade.

Moody's subscribers can find additional information in the Internet Brands credit opinion published on www.moodys.com.

The principal methodology used in rating Internet Brands, Inc. was Global Business & Consumer Service Industry published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Internet Brands, Inc. is an Internet media company that owns more than 250 branded websites across four consumer verticals (Automotive -- 49% of revenue; Health -- 22%; Legal -- 19%; and Home and Travel -- 10%). The company also licenses its content and Internet technology products and services to small and medium-sized businesses (SMBs), major corporations and individual website owners. Revenue for the twelve months ended March 2014 was approximately $188 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John C Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody’s assigns B2 CFR to Internet Brands following leveraged buyout; rates new credit facilities B1 (first-lien) and Caa1 (second-lien); outlook stable
No Related Data.
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