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Rating Action:

Moody's assigns B3 CFR to Answers Corporation, B1 to first-lien credit facilities, Caa2 to second-lien facility; outlook stable

16 Sep 2014

Approximately $535 million of new debt rated

New York, September 16, 2014 -- Moody's Investors Service assigned to Answers Corporation ("Answers" or the "company") a first-time B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR). Concurrently, Moody's assigned a B1 rating to the proposed $320 million first-lien senior secured term loan and $40 million first-lien senior secured revolving credit facility (RCF); and Caa2 rating to the $175 million second-lien senior secured term loan. The rating outlook is stable.

Proceeds from the new credit facilities plus $428 million of equity from the new sponsor and management will be used to finance the leveraged buyout (LBO) of Answers by private equity firm Apax Partners ("Apax" or the "equity sponsor") from TA Associates and Summit Partners (the "prior equity sponsors") for a total purchase price of approximately $900 million (excluding balance sheet cash and transaction fees and expenses estimated to total about $23 million). Apax will own 91% of the parent, while the founders, management and employees will hold the remaining 9%. The new credit facilities will retire the existing senior credit facilities (approximately $268 million outstanding) residing at Answers and extinguish subordinated debt (approximately $44 million outstanding) residing at the parent AFCV Intermediate Holdings, LLC ("AFCV Intermediate") and Announce Media, LLC ("Announce") that was issued to the prior equity sponsors. Announce will not be part of the new corporate structure. Answers' new capital structure will retain $2.3 million in vendor financing arrangements that were assumed in connection with the ForeSee acquisition.

Ratings Assigned:

...Issuer: Answers Corporation

Corporate Family Rating -- B3

Probability of Default Rating -- B3-PD

$ 40 Million First-Lien Senior Secured Revolver due 2019 -- B1 (LGD-3)

$320 Million First-Lien Senior Secured Term Loan due 2021 -- B1 (LGD-3)

$175 Million Second-Lien Senior Secured Term Loan due 2022 -- Caa2 (LGD-5)

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

Answers' B3 CFR reflects the company's small size, limited operating history, elevated pro forma financial leverage of approximately 9.8x total debt to LTM EBITDA (incorporating Moody's standard operating lease adjustment, earnings associated with recent acquisitions, and certain non-standard adjustments deemed acceptable to Moody's related to one-time costs, but excluding future synergies), reliance on major search engines for customer traffic and ownership by a private equity sponsor. Importantly, the rating is constrained by the highly acquisitive growth strategy that produces a rapidly evolving business model and significant pro forma earnings adjustments, making it challenging to estimate a prospective run-rate EBITDA, in our opinion.

In addition, the rating takes into consideration material weaknesses associated with inadequate internal controls over financial reporting. In 2012, the internal control environment of Answers' parent company was deemed to be materially weak with respect to people, processes and systems. Through the course of 2013, Answers undertook a number of steps to address the weaknesses, including hiring of qualified personnel, implementation of new financial and IT systems and improvement of internal controls with respect to financial reporting. As a result of these initiatives, the material weaknesses were narrowed from a broad based issue to four specific areas. The company has continued to address the issues and expects these to be resolved in the near future.

The B3 rating also embeds the exposure to cyclical advertising revenue as well as the inherent business risk for Internet companies to experience potential decline in website traffic due to: (i) rapidly changing technology and industry standards; (ii) inability to develop features that attract consumers to its websites or; (iii) lower rankings in search engine results due to algorithm revisions. 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. Low entry barriers can also create a potential competitive threat from the major search portals, social content website aggregators, social networking sites and content syndication firms.

These concerns are mitigated by Answers' position as a leading Q&A website (Answers.com) that has consistently attracted an increasing amount of high volume traffic and registered users through a community-generated knowledge portal that also delivers high-demand, high quality medium-to-long form content across a variety of topics. Rising traffic has led to increased advertising revenue (higher revenue/content). The CFR is also supported by the company's proprietary content management, technology and analytics platform that enables Answers to quickly deploy new site experiences across its web properties and retail network. Answers' ACS business has a loyal client base supported by a subscription-based revenue model with recurring sales (approximately 40% of Answers' total revenue as of the June 2014 quarter), high contract renewal rates above 100% and growing demand from advertisers that are increasingly utilizing third-party analytics to help drive customer retention and increase website traffic. These attributes should drive organic EBITDA growth.

Positive considerations also include robust EBITDA margins (Moody's adjusted), which we expect to be in the range of 25-30%, and an expectation for positive free cash flow generation in the range of $15-30 million given that capital expenditures represent only 4-5% of revenue. Over the next twelve months, Moody's believes Answers will convert around 30-35% of EBITDA to free cash flow (we assume no dividends over the rating horizon) enabling it to comfortably meet cash needs.

Barring another leveraging event, we project higher EBITDA combined with the scheduled debt amortization and mandatory 50% excess cash flow sweep (operative in fiscal 2016) will reduce total debt to EBITDA to around 6.7x (Moody's adjusted) by year end 2015, which will better position the company within the B3 rating category. We expect Answers will maintain good liquidity with cash balances of at least $5 million and access to a new $40 million revolver.

Rating Outlook

The stable rating outlook reflects our expectation that over the next 12-18 months Answers will exhibit steady growth in monthly unique visitors to attract advertisers to its websites without significant increase in promoted content costs and add new clients to its cloud-based ACS platform leading to stable operating margins and positive free cash flow generation. Answers has little room for negative variance in its operating results and will need to achieve projected EBITDA and synergy targets on a timely basis to maintain the current rating and outlook.

What Could Change the Rating -- Down

Ratings may be downgraded if Answers' competitive position were to weaken (as measured by monthly unique visitor rankings), advertising revenue declined, acquisitions exhibited underperformance or promoted content, marketing and/or infrastructure development costs increased (as measured by operating margin performance) resulting in reduced EBITDA or diminished cash flow. Ratings could also deteriorate if the company: (i) engages in debt-funded acquisitions or shareholder distributions; or fails to reduce LBO leverage resulting in total debt to EBITDA sustained above 9x (Moody's adjusted) by year end 2015; (ii) paid sizable dividends resulting in negative free cash flow; or (iii) experienced weakened liquidity. Ratings could also be revised downward if further concerns regarding material weaknesses and/or accounting control deficiencies were to surface.

What Could Change the Rating -- Up

An upgrade is unlikely over the rating horizon given our expectation for a highly levered capital structure consistent with the B3 rating and continuation of material weaknesses. However, over the long-term, ratings could be upgraded if Answers were to increase scale, exhibit increasing traffic and revenue per content/customer trends, demonstrate organic revenue/earnings growth and successfully integrate acquisitions. Importantly, all material weaknesses must be remediated before an upgrade could occur. Quantitatively, Answers could experience a ratings upgrade if EBITDA margins exhibit stable to improving performance amid revenue expansion resulting in sustained reduction in total debt to EBITDA below 6x (Moody's adjusted), free cash flow to adjusted debt of at least 5% and adjusted EBITDA interest coverage of at least 3x. The company would also need to maintain a good liquidity position and exhibit prudent financial policies to be considered for an upgrade.

Please see the credit opinion on www.moodys.com for additional information on Answers Corporation's ratings.

The principal methodology used in this rating was 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.

Answers Corporation, headquartered in St. Louis, Missouri, is an Internet-based media company that operates in two business segments: (i) Answers.com (roughly 70% of LTM 6/30/14 revenue), which consists of several websites that utilize a wiki-based, user-generated Q&A platform to monetize high volume traffic through display advertising and high-demand online content across a variety of topics via its 180+ million registered global users; and (ii) Answers Cloud Services or ACS (30% of LTM revenue), which provides an integrated suite of Software-as-a-Service (SaaS) solutions to help brands and retailers increase customer traffic to their websites with a focus on consumer experience analytics, content management and syndication and customer product reviews. Revenue totaled approximately $157 million for the twelve months ended June 30, 2014.

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 B3 CFR to Answers Corporation, B1 to first-lien credit facilities, Caa2 to second-lien facility; outlook stable
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