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Rating Action:

Moody's assigns B3 CFR to Da Vinci Purchaser Corp. (dba "WCG"); outlook stable

02 Dec 2019

New York, December 02, 2019 -- Moody's Investors Service ("Moody's") assigned a B3 Corporate Family Rating and a B3-PD Probability of Default Rating to Da Vinci Purchaser Corp. (indirect parent of WIRB-Copernicus dba "WCG"). Moody's also assigned a B2 rating to the company's proposed senior secured first lien credit facilities, consisting of a $125 million revolving credit facility expiring 2024 and a $920 million term loan due 2026. Proceeds from the new first lien term loan, the unrated $345 million second lien term loan, and new common equity from a group of investors led by the private equity firm Leonard Green & Partners (and including Arsenal Capital Partners and Novo Holdings) will be used to finance the acquisition of WCG in a leveraged buyout transaction. The outlook is stable.

"WCG's B3 Corporate Family Rating incorporates the aggressive financial policies under private equity ownership resulting in very high pro forma debt-to-EBITDA of 7.7x for the trailing twelve months ended September 30, 2019, following the proposed leveraged buy-out," said Vladimir Ronin, Moody's lead analyst for the company. "However, we forecast that WCG's projected earnings growth, and solid free cash flow generation support a reduction in leverage to the mid-6.0x over the next twelve to eighteen months," added Ronin.

Moody's took the following rating actions:

Issuer: Da Vinci Purchaser Corp.

Corporate Family Rating, Assigned B3

Probability of Default Rating, Assigned B3-PD

Proposed Gtd Senior Secured First Lien Revolving Credit Facility, Assigned B2 (LGD3)

Proposed Gtd Senior Secured First Lien term loan, Assigned B2 (LGD3)

Outlook: Stable

Ratings assigned are subject to receipt and review of final documentation.

RATINGS RATIONALE

WCG's B3 corporate family rating (CFR) broadly reflects its very high financial leverage with pro forma Moody's adjusted debt-to-EBITDA of 7.7x for the twelve months ended September 30, 2019. The rating also acknowledges the elevated financial risk associated with its private equity ownership evidenced by aggressively high initial debt levels following the proposed leveraged buy-out, as well as a track record of aggressive approach to growth through debt-funded acquisitions. WCG's rating is also constrained by its relatively small absolute size, and significant concentration among its top customers. The rating is supported by WCG's leading position within the fragmented niche market for institutional review board ("IRB") services and strong growth in its clinical services ("CSO") business segment. Moody's expects WCG to benefit from favorable industry and regulatory fundamentals within the market for IRB services, and growth supported by uptake in Single Review Service (SRS) and software product offerings. Moody's forecasts that debt/EBITDA will fall to the mid-6.0x over the next twelve to eighteen months, largely driven by EBITDA growth. While the industry has few legal barriers to entry, WCG's strong market share and solid reputation provide it with a defensible position within this niche information services segment, demonstrated by the company's historically high client retention rates.

The stable outlook reflects Moody's expectation that WCG will benefit from high single-digit earnings growth and solid free cash flow generation, which support the company's ability to reduce leverage to levels more in line with the rating category and maintain adequate liquidity. However, even with expected EBITDA growth, leverage is expected to remain very high due to the company's aggressive financial policies.

The ratings could be downgraded if the company faces top-line and earnings pressure, or if operating margins, cash flow, or liquidity deteriorate. Quantitively, ratings could be downgraded should WCG fail to consistently reduce debt/EBITDA over the next twelve to eighteen months such that it falls below 6.5x by the middle of 2021. Additionally, the ratings could be downgraded if the company engages in material debt-financed acquisitions or shareholder distributions.

The ratings could be upgraded if the company demonstrates a commitment to less aggressive financial policies with debt-to-EBITDA sustained below 5.5x and free cash flow as a percentage of debt maintained above 5%.

The proposed first lien term loan is expected to have no financial maintenance covenants while the proposed revolving credit facility will contain a springing maximum first lien leverage ratio that will be tested when the revolver is more than 35% drawn. In addition, the first lien credit facility contains incremental facility capacity up to the greater of $172.7 million or 100% consolidated EBITDA, plus an additional amount subject to either a 5.25x pro forma First Lien Secured Net Leverage Ratio (pari passu secured debt), 7.25x Secured Net Leverage Ratio (pari passu junior debt), or (i) 7.25x Total Net Leverage Ratio (pari passu unsecured debt), (ii) the company may also be able to incur unsecured debt subject to the 2.0x interest coverage ratio. Terms may allow for the release of guarantees when any subsidiary ceases to be wholly owned and there are no "blocker" provisions providing additional restrictions on top of the covenant carve-outs to limit collateral leakage through transfers of assets to unrestricted subsidiaries. There are leverage-based step-downs in the asset sale prepayment requirement to 50% and 0% if the First Lien Leverage Ratio is equal to or less than 0.5x and 1.0x, inside the closing date First Lien Leverage Ratio, respectively.

Social and governance considerations are material to WCG's credit profile. Social risks for WCG include failure to apply applicable regulations to the conduct of clinical research. WCG satisfies the regulations by providing the ongoing review of research protocols and related materials of various clinical trials. The protocol review assesses the ethics of the research and its methods, and seeks to ensure the risks of research for human subjects are reasonable relative to anticipated benefits of the research. Additionally, a possible data breach event, where intellectual property and other internal types of sensitive records could be subject to legal or reputational issues. However, management monitors its social risks closely, including data protection, and workforce resource planning. Management also notes that there have been no such instances since company began its operations. Among governance considerations, WCG's financial policies under private equity ownership are aggressive, reflected in high initial debt levels following the proposed leveraged buy-out, as well as a track record of strategy to supplement organic growth with material debt-funded acquisitions.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Princeton, NJ, WCG through its operating subsidiaries including WIRB-Copernicus Group, Inc., is a leading institutional review board ("IRB") and clinical services organization ("CSO"). IRBs provide federally mandated reviews of clinical trials and other research protocols to ensure compliance with regulations that govern the protection, safety, welfare, and ethical treatment of human trial subjects. WCG's CSO provides a suite of technology and technology-enabled services solutions to increase the efficiency of clinical research. WCG's clinical services and technology offerings include contract and budget negotiation, clinical trial document management, study start-up acceleration, regulatory and ethical review services, oversight of research involving gene therapy, and lab safety consulting. WCG's customers include pharmaceutical companies, biotechnology and contract research organizations (CROs) and institutions (primarily academic medical centers). The company signed a definitive agreement to be acquired by financial sponsor Leonard Green & Partners in late 2019. For the twelve months ended September 30, 2019 WCG generated revenues of approximately $427 million.

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.

Vladimir M. Ronin, CFA
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

John E. Puchalla, CFA
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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