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Rating Action:

Moody's assigns B2 rating to TMF Group Holding B.V.; outlook stable

Global Credit Research - 26 Nov 2012

London, 26 November 2012 -- Moody's Investors Service today assigned a B2 corporate family and probability of default rating to TMF Group Holding B.V. (TMF). Concurrently, Moody's also assigned a (P)B1 rating to the new EUR380 million of senior secured floating rate notes due in 2018, and (P)Caa1 to the EUR200 million senior unsecured notes due in 2019. The outlook on all ratings is stable. Moody's has assigned the provisional ratings pending the completion of the refinancing transaction.

Moody's issues provisional ratings in advance of the final sale of securities and these reflect Moody's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation Moody's will endeavour to assign definitive ratings. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The different ratings for the notes reflect the relative ranking within the capital structure. The senior secured floating rate notes together with the revolving credit facility benefit from a guarantor and security package that is ultimately expected to comprise 84% of total group EBITDA, excluding those entities with negative EBITDA. However, the revolver benefits from priority of payment according to the intercreditor agreement. The senior unsecured notes rank behind these instruments and benefit from a senior subordinated guarantee from the same guarantor group.

The B2 rating reflects the company's limited size and reliance on Europe, in particular the Benelux region, for a large part of revenues and EBITDA. It further considers the need for strong compliance and know-your-customer (KYC) procedures given the complexity of regulation, tax and reporting requirements across the world and elevated legal risks inherent in the industry, particularly related to situations where TMF provides trustee, (independent) director, or proxy management representative services for clients. Importantly, it also incorporates the significantly leveraged capital structure that together with some remaining restructuring and integration cost following the Equity Trust merger pressure operating cash flow generation. In addition, the rating does not factor in any material further acquisition activity and corresponding potential restructuring or acquisition charges.

However, the rating also reflects TMF's strong position as a corporate services provider in the Benelux region, complemented by a global network of offices in 80 jurisdictions that enables growth for clients into new regions and offers cost-efficient outsourcing of corporate functions. The business benefits from clients' needs for quality, expertise and responsiveness over cost, and TMF's services are sometimes deeply embedded in the clients' processes. This results in significant switching cost allowing for stable performance throughout the cycle and solid cash flow generation.

Following the envisioned refinancing transaction, TMF remains significantly leveraged with an estimated and pro-forma Debt/EBITDA around 5.7x (Moody's adjusted) for the last twelve months to September 2012. While the company is cash generative, the capital structure provides for limited debt repayment options in the absence of amortizing debt instrument. Hence TMF will need to remain on a visible positive operating trajectory to achieve leverage reductions.

Moody's also notes that the company experiences a degree of geographic concentration with its core Benelux and broader EMEA regions accounting for 51% and 77% of last twelve months to September 2012 EBITDA generation before corporate overhead cost. The two largest contributors are the Netherlands and Luxembourg, both known for their low corporate tax environment and extensive global double taxation treaty network that appeals to corporate clients for setting up holding or finance entities. The company remains exposed to any changes to the appeal of these countries although the rating currently assumes no near-term pressure on TMF.

The industry is exposed to significant legal risks in situations where parties involved may have taken differing views with regard to the provision of services in compliance with contracts or complex regulation, reporting and tax requirements. The company is regulated by 18 regulators and Moody's notes the importance of maintaining the necessary (IT) infrastructure and retain qualified and experienced personnel to ensure compliance across the world. Additionally, Moody's identifies elevated legal risks in the company's structured finance business, which also includes the provision of (independent) directors and officers, and the domiciliary and management services which include proxy management representatives. However, Moody's takes a degree of comfort from the fact that these businesses represent a smaller part of TMF's operations as these services are only provided in countries where the company is confident that it can manage the risk. TMF also has a comprehensive compliance structure in place and carries customary litigation and D/O liability insurance cover.

The business process outsourcing market in which TMF operates is fairly fragmented and the company sometimes competes against much larger or more specialised companies. The company benefits from the client's need for consistent, quick and high quality execution, and the fact that it is sometimes deeply embedded in a client's processes. Tax, regulatory and reputational implications from non-compliant procedures can be severe for clients which results in reduced switching incentives purely on price considerations. As a result client relationships last on average more than 7 years and client retention rates reach 90% notwithstanding typically short contract maturities that are rolled over regularly. Moody's also positively notes TMF's high client diversity across industries with the top 20 clients accounting for less than 5% of total revenues. As a result, TMF's resilient business model has resulted in solid margins, cash flow generation and stable performance throughout the business cycle.

The company achieves organic revenue growth mainly through a referral system from a network of relationships across law or accounting firms and cross-selling to existing clients for example as they expand into new countries. In this context, Moody's views the company's investment over the last year in improving its sales force and commercial abilities as a positive that should support organic revenue growth. However, growth in some regions such as the Americas and APAC may pressure margins due to a different mix of services provided and reduced scale.

Limited capital expenditure needs and modest working capital seasonality in combination with good EBITDA to cash flow conversion results in generally solid cash flow generation. However, the business also incurred substantial cash restructuring and acquisition cost over 2011 and 2012 from the merger with Equity Trust weighing significantly on cash flow generation. Moody's would expect these charges to reduce from 2013 onwards in the absence of new acquisitions.

The stable outlook reflects Moody's expectation that the company will continue to deliver resilient operating performance through the cycle.

Negative pressure on the rating could arise if any concerns around the resilience of the business materialises, for example from changes in the Netherlands' or Luxembourg's appeal as tax-efficient regions. Negative pressure could also arise if any legal dispute becomes more substantiated. In any case, the rating would come under pressure if the ratio of adjusted Debt/EBITDA moves towards 6x or free cash flow generation turns negative.

Conversely, positive pressure could arise if the company successfully executes on its growth plans diversifying the business into APAC and Americas regions so that adjusted Debt/EBITDA falls sustainably below 5x and FCF/Debt exceeds 5%.

Moody's views the company's liquidity profile as good. Following the transaction the company will have no material debt maturities until 2018 when the secured notes and revolving credit facility fall due. While Moody's expects generated cash flows to cover working capital and capital expenditures needs for the year, existing cash and the undrawn EUR70 million revolving credit facility provide for additional flexibility to weather any working capital swings and temporary capital expenditure peaks. The revolver carries one financial maintenance covenant with sufficient headroom.

The principal methodology used in rating TMF Group Holding B.V. was the Global Business & Consumer Service Industry Rating Methodology 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.

TMF Group Holding B.V. ("TMF") is a provider of business process services mainly for companies but also for individuals, funds and structured finance with 64% of revenues generated in EMEA including 34% in the Benelux region in 2011, not counting the fund services business. Services include the establishment and maintenance of operating or holding entities and the provision of accounting and reporting, legal administrative and HR services (eg payroll) on an ongoing basis. The group operates over 35,500 client entities in 80 jurisdictions. The business is owned by Doughty Hanson (65.2%) and management (34.8%).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Tobias Wagner
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Chetan Modi
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B2 rating to TMF Group Holding B.V.; outlook stable
No Related Data.
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