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Moody's assigns a B3 Corporate Family Rating to P2 Upstream Acquisition Co.

Global Credit Research - 18 Oct 2013

Approximately $480 million of newly rated debt

New York, October 18, 2013 -- Moody's Investors Service assigned a B3 corporate family rating ("CFR") to P2 Upstream Acquisition Co., a newly formed borrower within the P2 Energy Solutions ("P2") family. Moody's also assigned B1 and Caa2 facility ratings to P2's new first and second lien debt, respectively. Proceeds from the approximately $480 million new debt issuance will be used to facilitate Advent International's $780 million acquisition of P2, which will include the retirement of existing P2 secured debt, the ratings for which will be withdrawn upon closing. The ratings outlook is stable.

Ratings Rationale

The combined effect of P2's high, approximately 7.0x debt-to-EBITDA leverage (including Moody's standard adjustments), which has edged back up as a result of Advent's October 2013 acquisition of the firm, along with its modest, sub-$200 million revenue base, minimal cash position at closing, and an acquisition-friendly business model, positions the company squarely among its B3-rated software peers. The company, moreover, begins the Advent era having recently completed a smallish acquisition of a weakly performing, Australia-based software provider to the metals, mining, and oil and gas industry -- and during a quarter, the fiscal first, of P2's weakest liquidity. P2's strong, nearly 40% EBITDA margins, low capex requirements, and the underlying oil and gas exploration and production industry's very favorable prospects allow for only limited room for error in the face of an aggressively structured buyout by Advent.

Moody's believes P2's renewed focus on higher-margin, recurring-revenue licensing, data and support, and hosting businesses, and an under-emphasis on sporadic, lower-margin professional services businesses, should bolster the company's already attractive operating margins. We expect the company to generate free cash flow of approximately $20 million per annum, giving it ample liquidity to meet the B term loan's minimal amortization requirements. However, P2's historically acquisitive model and the aggressive financial policy inherent to private-equity-run firms will likely preclude the company from meaningfully reducing leverage, which Moody's expects will remain stubbornly high, easing to only about 6.5x by the end of 2014.

The ratings could face downward pressure if EBITDA margins fail to expand meaningfully, or if free-cash-flow-to-debt were to turn negative. Alternatively, the ratings could be upgraded if leverage improves to less than 6.5x on a sustained basis, or if free-cash-flow-to-debt holds at better than 5%, also on a sustained basis.

The following ratings (and LGD assessments) were assigned:

Corporate Family Rating, B3

Probability of Default Rating, B3-PD

$30 million Senior Secured Revolver due 2018 B1 (LGD3, 32%)

$295 million First Lien Term Loan due 2020 B1 (LGD3, 32%)

$155 million Second Lien Term Loan due 2021 Caa2 (LGD6, 96%)

P2 Upstream Acquisition Co. (formerly known as P2 Energy Solutions Inc.) provides specialized software to exploration and production companies in the oil and gas industry. Moody's expects the company will generate approximately $180 million of revenue for the fiscal year ended September 2014. P2's principal offices are in Houston, TX, Denver, CO, and Calgary, Alberta.

The principal methodology used in this rating was Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Kevin Q Stuebe
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert P Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns a B3 Corporate Family Rating to P2 Upstream Acquisition Co.
No Related Data.

 

© 2014 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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