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Rating Action:

Moody's assigns B3 CFR to Precisely upon change in ownership; outlook stable

10 Mar 2021

New York, March 10, 2021 -- Moody's Investors Service, ("Moody's") assigned a B3 Corporate Family Rating ("CFR") and B3-PD Probability of Default Rating ("PDR") to Syncsort Incorporated (Clearlake) ("Precisely") following the acquisition by private equity firms Clearlake Capital and TA Associates. Concurrently, Moody's assigned a B2 rating to Precisely's first lien bank credit facility consisting of a $1,645 million first lien term loan and a $200 million revolver, and a Caa2 rating to the proposed $445 million second lien term loan. The outlook is stable.

Clearlake Capital and TA Associates are acquiring most of the equity interests in Precisely from private equity firm Centerbridge. The CFR, PDR and existing debt instruments for the company under Centerbridge ownership will be withdrawn at the close of the transaction.

Assignments:

..Issuer: Syncsort Incorporated (Clearlake)

.... Corporate Family Rating, Assigned B3

.... Probability of Default Rating, Assigned B3-PD

....Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)

....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)

....Senior Secured 2nd Lien Term Loan, Assigned Caa2 (LGD6)

Outlook Actions:

..Issuer: Syncsort Incorporated (Clearlake)

....Outlook, Assigned Stable

RATINGS RATIONALE

Precisely's B3 CFR reflects the company's modest scale relative to its high debt levels, acquisitive growth strategy and aggressive financial policies which can lead to sustained high leverage levels. Pro forma for the financing transaction, debt-to-EBITDA is estimated at about 7.7x (Moody's adjusted) for FYE 12/31/2020 excluding integration expenses and expensing capitalized software, or near 10x including integration expenses.

Precisely benefits from its diversified niche product offering and track record of high customer retention rates reflecting the mission-critical nature of its products and preference by customers to avoid changing their enterprise data management platforms. Ratings also reflect the company's growing share of recurring revenue, driven by growth in subscription products. Moody's expects Precisely's partnerships with leading cloud-based data storage providers and its cross-selling ability to existing customers will support revenue growth at a minimum in the mid-single digit percentage range over the next year. Precisely has been successful with its integration of Software and Data (S&D) which is largely complete. As of year end for 2020, the company achieved $60 million of cost synergies against a $52 million initial target and exited its transition service agreements with Pitney Bowes in late 2020.

Although organic growth will support long term operating leverage and profit growth, Moody's expects near-term margin pressure as Precisely will make additional investments in sales and information technology in 2021. Still, Moody's expects debt-to-EBITDA to decline to the low-7x range over the next two years, with positive free cash flow generation given the winding down of integration spending related to the S&D acquisition.

Precisely's financial policies are a key corporate governance consideration under Moody's ESG framework. Moody's expects that periods of deleveraging due to profit growth will be followed by discrete jumps in financial leverage upon debt funded acquisitions and shareholder returns. High financial leverage limits Precisely's financial flexibility, which magnifies the impact of any performance deterioration.

Precisely's good liquidity will be supported by estimated cash balances of $126 million upon closing and full availability under the $200 million revolving credit facility. Although Moody's expects free cash flow will remain pressured in early 2021, restructuring expenses are expected to taper down for the remainder of 2021, resulting in positive adjusted free cash flow over the next 12 to 18 months. The new revolver is expected to contain a 9x springing net first lien secured leverage covenant to be tested should revolver utilization exceed 35%. Moody's expects that Precisely will maintain sufficient cushion over the next 12-18 months.

The B2 rating for Precisely's first lien debt (the revolver and term loan) is one notch above the B3 CFR reflecting the senior collateral position of the first lien debt relative to the second lien term loan (rated Caa2). The B2 ratings for the first lien credit facility is subject to review of the final terms and debt allocation. Should the proportion of first lien debt relative to second lien debt increase, there could be downward ratings pressure on the first lien debt. The first lien and second lien debt instruments are secured by substantially all of the tangible and intangible assets of the borrower and domestic subsidiaries.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that Precisely's top line will grow organically in the mid-single digit percentage range or better over the next year, with positive free cash flow to debt (Moody's adjusted) in the mid-single digit percentage range.

Ratings could be upgraded if Precisely demonstrates consistent, strong organic growth and adheres to a financial policy that will sustain adjusted debt-to-EBITDA below 6x and adjusted free cash flow to debt above 5%.

Ratings could be downgraded if Precisely experiences organic revenue declines, margin deterioration, or other operating challenges that lead to elevated leverage or reduced adjusted free cash flow. Quantitatively, this could be represented by debt-to-EBITDA exceeding 8x or negative free cash flow beyond 2021.

As proposed the first lien term loan provides flexibility that if utilized could negatively impact creditors, including: (1) incremental pari passu term facilities of at least $300 million and 100% of consolidated EBITDA (as defined in the credit agreement), plus additional amounts limited by maximum proforma First Lien Leverage Ratio (as defined) of 5.5x and incremental junior secured debt limited by proforma Senior Secured Leverage Ratio (as defined) of 7.0x. Proposed terms related to the release of subsidiary guarantees and collateral leakage through transfers to unrestricted subsidiaries have not been disclosed. The credit agreement requires 100% of net cash proceeds from asset sales and insurance proceeds from casualty events, subject to step-downs based on the First Lien Leverage Ratio (50% repayment requirement at 5.0x First Lien Leverage and 25% at 4.75x), to be used to repay the First Lien Term Loan if not reinvested within 18 months.

Headquartered in Pearl River, New York, Precisely is a global software company specializing in Big Data, high-speed sorting products, data protection, data quality and integration software and services, for mainframe, power systems and open system environments to enterprise customers. At close of the transaction, the company will be majority-owned by Clearlake and TA Associates, with remaining ownership stakes held by Centerbridge and management. Estimated revenues total $581 million for the fiscal year end December 2020.

The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

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

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Carl Salas
VP - Senior Credit Officer
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

Stephen Sohn
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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