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Rating Action:

Moody's assigns B3 CFR to acquirer of HelpSystems in connection with LBO; outlook stable

13 Mar 2018

Approximately $735 million of new debt rated

New York, March 13, 2018 -- Moody's Investors Service ("Moody's") assigned a B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) to HS Purchaser LLC ("HelpSystems") following the announcement of its $1.1 billion leveraged buyout. Concurrently, Moody's assigned a B2 rating to the company's proposed $535 million senior secured first lien credit facility ($40 million revolver and $495 million term loan) and a Caa2 rating to the proposed $200 million senior secured second lien term loan. The ratings outlook is stable.

Proceeds from the proposed debt financing, along with new and rollover equity will be used to fund a buyout of HelpSystems by HGGC, LLC and Pamplona Capital Management, LLP (New Sponsors) from HIG Capital, LLC and Split Rock Capital, LLC (Existing Sponsors), refinance existing debt, and pay transaction fees and expenses. Existing Sponsors, along with the current management, will remain invested in the company. At closing, HGGC, LLC will own approximately 70% of the pro forma equity and have control of the board. The ratings of the pre-LBO company, including the B2 CFR and instrument ratings, are not affected and will be withdrawn upon closing of the transaction and repayment of existing debt.

HS Purchaser, LLC is an acquisition vehicle that will be merged with and into HS Group Holdings, Inc. upon closing of the transaction, with HS Group Holdings, Inc. being the surviving entity and obligor under the new capital structure.

HelpSystems' very high funded debt and leverage, small operating scale with product revenue concentration and reliance on the IBM i platform for approximately 60% of its revenue are key credit factors negatively affecting the company's ratings. The contemplated transaction will increase the company's pro forma debt-to-EBITDA leverage by 2.5x, from 5.2x to 7.7x (Moody's adjusted and incorporating annualized EBITDA from recent acquisitions) as of December 31, 2017. Moody's expects debt-to-EBITDA leverage to remain above 7.0 times over the next 12-18 months.

Moody's assigned the following ratigns:

Issuer: HS Purchaser, LLC:

---Corporate Family Rating at B3

---Probability of Default Rating at B3-PD

---$40 million senior secured first lien revolving credit facility due 2023 at B2 (LGD3)

---$495 million senior secured first lien term loan due 2025 at B2 (LGD3)

---$200 million senior secured second lien term loan due 2026 at Caa2 (LGD5)

---Outlook at Stable

The assignment of ratings remains subject to Moody's review of the final terms and conditions of the proposed financing transaction that is expected to close by end of March 2018, as well as receipt of the final 2017 audit. Moody's anticipates all of the corporate and instrument ratings at HS Group Holdings, Inc. and Help/Systems Holdings, Inc. (the predecessor entities) including the B2 CFR will be withdrawn upon completion of the proposed transaction and repayment of existing debt.

RATINGS RATIONALE

HelpSystems' B3 CFR reflects the company's highly leveraged capital structure following the LBO, its limited operating scale with revenue concentration, offset by its highly recurring subscription and maintenance revenue streams that lead to predictable EBITDA and cash flow generation. HelpSystems' high customer retention rates lend visibility into the company's revenue streams, of which approximately 72% were derived from high-margin maintenance and support and subscription contracts as of December 31, 2017. Though the company lacks the scale of some of its larger competitors in the IT operations management tools market (ITOM), HelpSystems has maintained a strong niche position within the IBM i market. The applications for the IBM i platform tend to be custom-tailored to the user's needs, which creates a high degree of difficulty for enterprise or SMB customers to migrate to other platforms. While the server count in the IBM i market is declining 1-2% annually, this decline is more than offset by the growth in data consumption and attach rates. Furthermore, HelpSystems has been outperforming the market as a whole by continuing to develop its core systems management and automation products as well as expanding cybersecurity and other offerings, and developing and expanding its international sales channels. Moody's anticipates the company will deleverage from currently elevated levels as a result of EBITDA growth and, to a lesser extent, debt repayment, but debt-to-EBITDA leverage is expected to remain above 7.0 times over the next 12-18 months. Moody's expects the company to remain acquisitive and pursue tuck-in acquisitions to support its strategic growth plan. HelpSystem's strong EBITDA margins and minimal capital spending should drive free cash flow of $25-30 million on an annual basis over the next 12-18 months.

The stable rating outlook reflects Moody's view that the company's credit metrics will improve over the next 12-18 months from the pro forma LBO levels, such that debt-to-EBITDA (Moody's adjusted) will trend towards 7.0 times. Moody's also anticipates that HelpSystems will maintain good liquidity, including free cash flow-to-debt in the low-to-mid single digits.

Moody's could upgrade the ratings if debt reduction combined with sustained earnings growth leads to a material improvement in credit metrics, such that debt-to-EBITDA (Moody's adjusted) leverage is maintained below 6.5 times, and free cash flow to debt levels were maintained at over 5%.

The ratings could be downgraded if HelpSystems experiences a material loss of clients, market share erosion and/or competitive pricing pressures that lead to revenue decline or low free cash flow. Quantitatively, the ratings could be downgraded if the company's debt-to-EBITDA (Moody's adjusted) leverage exceeds 8.0 times on other than a temporary basis or free cash flow-to-debt at breakeven levels.

HelpSystems, based in Eden Prairie, MN provides IT management and security software tools, primarily for IBM i users. Following the completion of the leveraged buyout, HelpSystems will be majority owned by HGGC, LLC, with remaining shares held by Pamplona Capital Management, LLP, HIG Capital, LLC, Split Rock Capital, LLC and management. HelpSystems had pro forma revenues of approximately $174 million in the last twelve months ended December 31, 2017.

The principal methodology used in these ratings was Software Industry published in December 2015. 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 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 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
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

Lenny J. Ajzenman
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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