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Rating Action:

Moody's assigns B2 ratings to Shield Holdco ltd

10 Jun 2010

London, 10 June 2010 -- Moody's Investors Service has today assigned a B2 corporate family rating (CFR) and a B3 probability of default rating (PDR) to Shield Holdco ltd, the parent company of Sophos plc ("Sophos" or "the company"). Moody's has concurrently assigned a provisional (P) B2 rating to the senior secured bank debt including a USD20 million revolving credit facility (RCF), a USD75 million term loan A and a USD225 million term loan B. The outlook is stable on all ratings.

The rating assignment follows Apax Partners' announcement in early May 2010 that it had agreed to acquire a 68% stake in Sophos from the founders, valuing the company at approximately USD880 million. The founders of Sophos together with management will retain a minority stake in the company. The transaction is scheduled to close in mid-June 2010, subject to certain approvals.

Despite its small size and relatively limited product line diversification, Sophos has managed to position itself as one of the leading software providers for SMEs. Sophos' business profile also benefits from positive industry trends, a large and diversified customer base and high customer retention rates.

"Sophos' credit metrics at the end of March 2010, pro-forma for the transaction, are weak for the rating category based on its IFRS reported EBITDA which currently understates the company's cash flow generation," says Stefano del Zompo, lead analyst for Sophos at Moody's. "In addition, Sophos' cash flow generation is expected to remain limited in the near term due to tax payments and to high interest payments resulting from the new capital structure. However, Moody's expects Sophos to improve its credit metrics going forward thanks to its successful commercial strategy such that its debt to EBITDA ratio will decrease below 5x by the end of March 2012 and its FCF to debt ratio will remain above 10%."

The level of cash on hand at the end of March 2010 (pro forma for the transaction) is expected to be around USD25 million. Sophos will also have access to an undrawn USD20 million committed revolving credit facility. Although Moody's has not been provided with the final terms of the financial covenants, it has based its ratings on the assumption that Sophos will maintain comfortable headroom of around 25%. Moody's has also assumed in its analysis that the Consideration Loan Notes will be converted into equity and preferred equity certificates (PECs) immediately after the completion of the acquisition.

The stable outlook reflects Moody's expectations that Sophos will be able to improve its financial metrics as positive momentum continues. The stable outlook also assumes that the company will maintain an adequate liquidity position and comfortable headroom under its financial covenants. Positive pressure on the ratings or outlook could arise if the company materially de-levers its balance sheet leading to a debt to EBITDA ratio below 4.0x and improves EBITDA-Capex/interest coverage to above 3.0x. Downward pressure might occur as a result of: i) failure to reduce leverage to below 5.5x by 2012; ii) EBITDA-capex/interest coverage trending below 1.5x; or iii) a deterioration in the company's liquidity position.

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

The principal methodology used in rating Sophos was the "Global Software Industry" methodology, published in May 2009, and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating Sophos can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Abingdon (UK), Sophos is a leading IT provider, specialised in security software for businesses. The company operates in more than 150 countries but generates more than 80% of its sales in two regions: Europe and North America. At the end of March 2010, Sophos reported around USD270.8 million in sales and around USD15.7 million in IFRS EBITDA.

London
Chetan Modi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Stefano Del Zompo, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B2 ratings to Shield Holdco ltd
No Related Data.
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