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.
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
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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
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Ignacio Rasero
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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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.
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JOURNALISTS: 1 212 553 0376
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