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Rating Action:

Moody's assigns a B3 corporate family rating to Securus's LBO financing entity, SCRS Acquisition Corporation

31 May 2017

New York, May 31, 2017 -- Moody's Investors Service, ("Moody's") has assigned a B3 corporate family rating ("CFR") and B3-PD probability of default rating ("PDR") to SCRS Acquisition Corporation ("SCRS Acquisition"), a wholly owned subsidiary of investment funds of Platinum Equity ("Platinum" or "the sponsor") that will raise debt to finance its acquisition of Securus Technologies, Inc. ("Securus" or "the company"). SCRS Acquisition plans to raise $1.3 billion of new debt obligations, including a $150 million super priority five-year first lien revolving credit facility ($20 million drawn at close), a $870 million seven-year first lien term loan, and a $280 million eight-year second lien term loan. In addition to the debt, the sponsors will contribute approximately $522 million of equity to finance the $1.6 billion purchase. The existing $778 million of debt (as of 3/31/17) at Securus will be repaid upon close of the acquisition, which Moody's expects to occur in Q3 2017. Moody's has assigned a B1 (LGD-2) rating to SCRS Acquisition's super priority first lien revolver, a B2 (LGD-3) to the first lien term loan, and a Caa2 (LGD-6) rating to the second lien instrument. The ratings outlook for SCRS Acquisition is stable.

The ratings assigned to SCRS Acquisition reflect Moody's view of the end state capital structure of Securus following the leveraged buyout ("LBO") transaction. Upon close of Platinum's proposed acquisition of Securus, SCRS Acquisition will be merged with and into Securus. At that time, the B3 CFR on SCRS Acquisition will be withdrawn and its ratings will be assumed by Securus.

The B3 rating is in line with the existing CFR at Securus. The company has accumulated significant cushion within its B3 rating to absorb temporary spikes in leverage. Despite higher leverage in the near term and higher interest expense following the LBO, Securus is able to maintain its B3 rating. Securus has been the net gainer in market share within the concentrated correctional facility telephony business over the past several years, which has contributed to a steady growth trajectory. Market share gains coupled with successful acquisitions of product extensions or enhancements, most significantly the 2015 acquisition of JPAY, has resulted in double-digit EBITDA growth rates over the past several years. JPay provides services such as electronic payments, email, and a host of entertainment and educational related apps to the corrections industry space. Moody's expects continued solid growth with likely additional share gains and wider adoption of JPAY and other services within Securus's existing client base.

Assignments:

..Issuer: SCRS Acquisition Corporation

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

.... Corporate Family Rating, Assigned B3

....Senior Secured Revolving Credit Facility, Assigned B1 (LGD 2)

....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD 3)

....Senior Secured 2nd Lien Term Loan, Assigned Caa2 (LGD 6)

Outlook Actions:

..Issuer: SCRS Acquisition Corporation

....Outlook, Assigned Stable

RATINGS RATIONALE

Securus's B3 CFR reflects its small scale, niche industry focus, aggressive financial policy, and strong competitive pressures in a largely duopolistic and mature end market. The ratings are supported by the company's high growth rate and a stable base of contracted and fairly predictable revenues. Providing communications services to corrections facilities remains a low margin business characterized by competitive bidding on contracts, the majority of which include a legacy industry practice requiring relatively high commission fees to be included in inmate phone charges, which are later passed through to state and county prison operators. In addition, Securus and the industry apply transaction-based fees on the phone account deposits of inmates, a practice which resulted in a 2015 Federal Communications Commission ("FCC") ruling reducing and capping the size of those fees going forward. While this pressured Securus's overall gross call and fee revenues, the company responded by increasing rates where possible and negotiating contracted commission expense structures with prison operators down to lower levels.

A remaining potential revenue pressure on the industry involves the FCC's evolving efforts to cap intrastate prison phone rates which represent the largest source of industry revenues. A challenge to a current Circuit Court ruling which stayed existing intrastate rates is expected to be resolved by year end, with the current stay likely remaining permanent under a final ruling for many reasons, including the change in party control of the Executive Branch and the FCC's priorities under new leadership. While such a ruling would provide improved revenue visibility for the industry going forward, Securus is likely well positioned for either outcome due to its efforts to raise rates where possible and reduce some of the commissions paid out to prison operators. In the unlikely event intrastate rates are lowered, intrastate call volume increases are likely to be offsetting given industry historical experience after the FCC mandated interstate rate reductions in 2013.

We anticipate that Securus will have very good liquidity over the next 12 months, supported by $13 million of cash on its balance sheet and positive free cash flow. In addition, the company will benefit from an upsized $150 million revolving line of credit which provides good back up liquidity. We expect the facility will remain mostly undrawn over the next several years. The term loan has no financial covenants while the revolver is subject to a maximum first lien net leverage test of 7x. We believe the company will maintain ample cushion. Further, we don't believe the covenant will be tested given that the revolver will remain under 35% drawn. The company has no near term maturities.

The ratings for the debt instruments reflect both the overall PDR of the B3 CFR, which we assign B3-PD, as well as the average family loss given default ("LGD") which is derived based on the composition of the debt instruments in the capital structure. Moody's assumes a 50% family recovery rate given the mixed capital structure which includes both first lien and second lien bank debt. The super priority first lien revolver is rated B1-LGD2, two notches above the CFR given its priority and the loss absorption from the first and second lien term loan facilities. The first lien term loan is rated B2-LGD3 reflecting its senior position to the second lien term loan, which is rated Caa2-LGD6, two notches below the CFR, reflecting its junior rank within the capital structure. The capital structure also includes nominal amounts of lease rejection claims and trade claims payable which have little to no effect on the instrument-level ratings.

SCRS Acquisition's stable outlook reflects Moody's view that Securus will maintain good liquidity, generate positive free cash flows, maintain existing market shares, and decrease leverage towards 6.5x (Moody's adjusted).

Moody's could upgrade SCRS Acquisition's B3 rating if Securus maintains very good liquidity, continues to generate strong positive free cash flow, and grows EBITDA or reduces debt such that leverage (Moody's adjusted) is sustained below 5x. Moody's could lower SCRS Acquisition's ratings if Securus's leverage exceeds 6.5x (Moody's adjusted) on a sustained basis or free cash flow turns negative.

Based in Dallas, TX, Securus Technologies Holdings, Inc. is one of the largest providers of inmate telecommunication services to correctional facilities, with a presence in 50 states, Washington D.C., and Canada. Securus is in the process of being sold to Platinum Equity from ABRY Partners, which acquired the company in a 2013 LBO transaction.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. 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.

Neil Mack, CFA
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

John Diaz
MD - Corporate Finance
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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