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Rating Action:

Moody's assigns a B2 rating to OEC's $75 million first lien delayed draw term loan; ratings remain unchanged after $75 million first-lien term loan add-on

06 Apr 2021

New York, April 06, 2021 -- Moody's Investors Service, ("Moody's") assigned a B2 (LGD3) rating to OEConnection LLC's ("OEC") incremental $75 million senior secured first lien delayed draw term loan. The proposed issuance of a $75 million first lien senior secured term loan add-on, and a $75 million first lien senior secured incremental delayed draw term loan, does not affect the ratings or the outlook.

Proceeds from the term loan add-on are expected to be used to fund the acquisition of a web-based provider of retail inventory management software ("RIM"), and to pay transaction fees. The new debt is expected to be fungible with the existing first lien senior secured term loan due 2026. The acquired target will complement OEC's core original parts sourcing software with planning tools that help auto dealers maintain optimal inventory levels.

Assignments:

..Issuer: OEConnection LLC

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

RATINGS RATIONALE

OEConnection LLC's ("OEC") B3 corporate family rating reflects its small scale, with $182 million in revenue as of 2020, and very high debt/EBITDA at roughly 8.5x pro forma for the proposed acquisition (Moody's adjusted as of December 2020, including capitalized software as an expense and other adjustments). The incremental $75 million of debt is partially offset by the EBITDA contribution from the acquired target, but pro forma leverage at closing remains very high. The rating incorporates the expectation that OEC will continue to pursue debt-funded acquisitions that will sustain high levels of leverage, partially offset by the company's strong growth profile and deleveraging capacity. Moody's anticipates that OEC will continue to use the committed capacity under the new $75 million delayed draw term loan ("DDTL") to fund M&A targets that complement the company's suite of original parts and inventory software solutions. In 2020, the company utilized the majority of its previously committed delayed-draw capacity to fund the acquisitions of NuGen IT and Summit Consulting. Free cash flow to debt as of December 2020 was 3.5% (Moody's adjusted) and is expected to remain in the 1.5%-3.5% range, which is appropriate for the B3 rating category. OEC's revenue base is heavily dependent on its relationship with Ford and GM, and their network of affiliated dealerships, which creates customer concentration. The proposed acquisition of a RIM software provider with sizeable customers outside of OEC's traditional client base could open cross sell opportunities and support some diversification, but concentration remains high.

OEC benefits from a leading position in the niche original equipment ("OE") auto parts market in the US. A stable recurring base of subscription revenues with high gross retention rates above 94% and a sticky business model embedded in client workflows are credit positive. The recession caused by COVID-19 led to a severe disruption in 2020 to OEC's cyclical client base (mainly franchised dealerships and original equipment manufacturers ("OEM")). Despite the headwinds, OEC's subscription-based revenue model generated positive growth in 2020, reflecting the stability of the business model and OEC's attractive value proposition by focusing on highly profitable service and parts operations. Healthy SaaS EBITDA margins around 40% and low capital expenditure requirements result in stable cash flow generation and partially mitigate the exceptionally high level of financial leverage. Long-standing relationships with OE manufacturers, affiliated dealers and auto repair shops create barriers to entry and an attractive network for prospective new dealers seeking to grow revenue from OE parts.

The stable outlook reflects the expectation that OEC will return to high single-digit growth or above (including inorganic contributions), as the slowdown caused by COVID-19 wanes and OEC's client base resumes IT spending. EBITDA margins over the next 12 months are expected to decline slightly, within the 38%-40% range (Moody's adjusted), as wage reductions and other cost saving initiatives that were put in place in response to the COVID-19 shock roll off, offsetting the expansion from additional scale and price increases. Debt/EBITDA will benefit from top line growth, declining below 8x over the next 12-18 months, but we anticipate incremental debt-funded transactions could keep leverage at higher levels. We expect the coronavirus impact will continue to wane in 2021 and overall macroeconomic conditions will improve as vaccination efforts are rolled out. However, the outlook and credit rating could be pressured if the recovery does not materialize or conditions deteriorate, leading to extended budget pressure among OEC's client base.

The ratings for the individual debt instruments incorporate OEC's overall probability of default, reflected in the B3-PD, and the loss given default assessments for the individual instruments. The pro forma first lien credit facilities, consisting of a $50 million revolver expiring in 2024, a $530 million term loan maturing in 2026 and a $75 million delayed draw term loan (undrawn at closing), are rated B2, one notch higher than the B3 Corporate Family Rating ("CFR"), with a loss given default assessment of LGD3. The B2 first lien instrument rating reflects their relative size and senior position ahead of the second lien term loan, that would drive a higher recovery for first lien debt holders in the event of a default. OEC's $185 million second lien term loan, due 2027, is rated Caa2, two notches below the corporate family rating, with a loss given default assessment of LGD5. The Caa2 second lien term loan rating acknowledges its junior ranking as well as its relative size within the capital structure. The revolver (only) includes a 8.0x springing maximum first lien net leverage covenant, applicable when the revolver is at least 35% drawn. The term loans do not include any financial covenants. We expect OEC will stay in compliance with the springing covenant if it were to draw on the revolver, given the generous EBITDA add-backs and our current outlook. Amortization on the first lien senior secured term loan (including the delayed draw facility) is 1% annually.

Liquidity is adequate, with a cash balance of roughly $40 million as of December 2020 and our expectation for positive free cash flow to debt over the next 12-18 months. The undrawn $50 million revolver provides additional liquidity. In the past, OEC has drawn on the revolver to finance M&A, but has been able to fund internal obligations with operating cash flow or cash on hand. The company's software subscription SaaS business model with monthly billing results in minimal working capital swings and low capex, which also support liquidity. The new $75 million delayed draw term loan will provide additional liquidity to fund acquisitions.

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

The ratings could be upgraded (all metric Moody's adjusted) if 1) Debt/EBITDA is expected to remain below 6.0x; 2) FCF/debt is sustained above 5.0%; 3) OEC, which is private equity owned, can demonstrate a track record of conservative financial policies; and 4) stronger than anticipated revenue enables OEC to build meaningful scale.

OEC's ratings could be downgraded if the impact of the coronavirus outbreak lasts longer than anticipated, reducing OEC's ability to improve its credit metrics through growth and creating further uncertainty. The ratings could also be downgraded (all metrics Moody's adjusted) if 1) organic revenue growth is sustained at low single-digit percentages or below, reflecting client losses or a slowdown in dealer penetration and cross-selling initiatives; 2) OEC undertakes a large leveraging transaction, or Moody's expects debt/EBITDA will be sustained above 8.0x without a path to deleveraging; 3) Moody's expects FCF/debt will be flat or negative; or 4) liquidity deteriorates.

OEConnection provides cloud-based SaaS software solutions to automotive dealers, OEMs and auto repair shops, that allow them to efficiently identify, locate, and price original equipment parts for the completion of repair services. As a result of the 2017 acquisition of Clifford Thames and Bluegrasscoms in 2018, OEC expanded its presence into European markets and added electronic parts catalogues and repair databases to its product suite. As of the fiscal year ending December 2020, OEC reported $182 million in revenue. In September 2019, private equity owner Genstar Capital acquired a majority stake in the company.

The principal methodology used in this rating 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 rating have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is 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.

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.

Ignacio Rasero
Vice President - Senior 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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