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Rating Action:

Moody's assigns B3 CFR and stable outlook to Aptos; rates proposed LBO financing

24 Feb 2020

Approximately $340 million of new debt rated

New York, February 24, 2020 -- Moody's Investors Service, ("Moody's") assigned a B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) to 1236904 B.C. Ltd. (dba "Aptos") following the announcement of its leveraged buyout. At the same time, Moody's assigned a B3 rating to the company's proposed $340 million senior secured first lien credit facility ($40 million revolver and $300 million term loan). The outlook is stable.

Proceeds from the new first lien term loan, along with a contribution of new common equity from Goldman Sachs Merchant Banking Division ("Sponsor") and rollover equity from management, will fund the leveraged buyout of Aptos from Apax Partners, refinance existing debt, and pay transaction fees and expenses. The proposed $40 million revolving credit facility is expected to be undrawn at closing. The ratings of predecessor company Aptos, Inc., including the B3 CFR and instrument ratings, will be withdrawn upon closing of the transaction and repayment of existing debt.

Leverage is expected to remain high and cash flow limited over the next 12-18 months as Aptos continues to accelerate the transitioning of its products and services into the cloud through a Software as a Service ("SaaS") offering. Growth in SaaS bookings is expected to remain strong due to increased adoption of Aptos One, the company's cloud-native software suite, driving sequential improvement in recurring revenue, while improving its profitability and growing scale. Moody's believes the company also has the potential to greatly improve its scale and diversification by expanding its software solutions in new geographies and adjacent retail segments.

Moody's assigned the following ratings to 1236904 B.C. Ltd.:

---Corporate Family Rating, at B3

---Probability of Default Rating, at B3-PD

---Proposed $40 million first lien senior secured revolving credit facility due 2025, at B3 (LGD4)

---Proposed $300 million first lien senior secured term loan B due 2027, at B3 (LGD4)

Outlook Action:

---Outlook, Assigned Stable

The assignment of ratings remain subject to Moody's review of the final terms and conditions of the proposed financing transaction that is expected to close in March of 2020.

RATINGS RATIONALE

Aptos' B3 Corporate Family Rating reflects the company's high pro forma debt-to-EBITDA leverage, estimated in the mid-8.0x range (Moody's adjusted, excluding unrealized synergies and SaaS bookings run-rate) at December 31, 2019, relatively small scale (with annual revenue of around $200 million) compared to its enterprise software peers as well as the company's acquisition appetite. Moody's anticipates the company will deleverage from currently elevated levels as a result of modest EBITDA growth, decline in one-time expenses and realization of cost synergies. As such, we expect debt-to-EBITDA (Moody's adjusted) to decline towards 7.0x over the next 12-18 months. The company has limited organic growth prospects due to continued transition from license revenue to SaaS and looks to strategic acquisitions for growth and improved market position. Moody's expects Aptos to use a combination of cash flow and debt to fund future acquisitions. The rating also considers the highly competitive nature of the enterprise software market, the company's niche position as a provider of retail software solutions to mid-market and large specialty retailers, and the risk of potential disruptions from headwinds in the retail industry. Within its narrow market focus, Aptos competes against large players, such as Oracle Micros, Manhattan Associates and JDA.

Positively, Aptos' credit profile benefits from its leading market position in the niche retail enterprise software market, geographic diversification with deployments to over 60 countries, and high customer renewal rates. Aptos' recurring subscription and support revenue is approximately 60%, a level that is below that of many rated enterprise software companies but which nevertheless provide good revenue and operating cash flow stability.

The stable rating outlook reflects Moody's view that the company's credit metrics will gradually improve over the next 12-18 months, such that debt-to-EBITDA (Moody's adjusted) will trend towards 7x. Moody's also anticipates that Aptos will maintain at least adequate liquidity including free cash flow-to-debt in the low-single digits.

Moody's expects Aptos to maintain good liquidity over the next 12-15 months. Sources of liquidity consist of $15 million of balance sheet cash expected at the close of the transaction, projected free cash flow of around $10-15 million annually, and access of funds under the new $40 million revolving credit facility (undrawn at closing). Moody's believes that current cash sources provide good coverage of approximately $3.0 million of mandatory debt amortization, paid quarterly. There are no financial maintenance covenants under the term loan but the revolving credit facility is subject to a springing maximum first lien net leverage ratio, as defined in the bank credit agreement (set at the greater of 7.35x or 35% cushion at closing) if the amount drawn exceeds 35% of the revolving credit facility. The company is not expected to utilize the revolver during the next 12-15 months and will remain well in compliance with the springing first lien net leverage covenant, if tested.

Given Aptos' small scale and relatively high proportion of professional service revenues compared to many rated enterprise software peers, upgrade leverage hurdles are tighter than for many other B3 rated enterprise software companies. The ratings could be upgraded if debt-to-EBITDA (Moody's adjusted) is expected to remain consistently under 5.5 times and free cash flow to debt greater than 7%.

The ratings could be downgraded if Aptos faces top-line and earnings pressure such that debt-to-EBITDA (Moody's adjusted) is sustained above 7.0 times, or liquidity deteriorates, including increased revolver usage or an inability to sustain positive free cash flow generation.

Aptos, Inc. (formerly Retail Solutions Group, Inc. or Epicor RSG) is a leading provider of retail software solutions including point of sale software for mid-market retail. Following the completion of the leveraged buyout, Aptos will be majority owned by Goldman Sachs Merchant Banking Division, with remaining shares held by management. The company generated annual revenue of approximately $200 million in fiscal 2019.

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.

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.

Oleg Markin
Asst Vice President - Analyst
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

Karen Nickerson
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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