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Rating Action:

Moody's assigns first-time B2 CFR to Blue Coat Systems; outlook stable

25 Jan 2012

Approximately $495 million of new debt rated

New York, January 25, 2012 -- Moody's Investors Service assigned to Blue Coat Systems, Inc. ("Blue Coat") a first-time B2 Corporate Family (CFR) and Probability of Default Rating (PDR), a B1 rating to the proposed $360 million senior secured first-lien term loan and $50 million senior secured revolver, and Caa1 rating to the proposed $85 million senior secured second-lien term loan.

RATING RATIONALE

Blue Coat's B2 Corporate Family Rating (CFR) reflects the company's high pro forma financial leverage, as we calculate adjusted total debt to EBITDA, of around 6.5x at closing. Nonetheless, the rating is supported by our expectation that Blue Coat's cash flows will be solid and fairly knowable owing to its contractual maintenance and support services model with high renewal rates of about 90% and a fairly diverse, blue chip and loyal customer base. Notwithstanding the company's product-line concentration, Blue Coat's clients are heavily reliant on its "mission-critical" web-filtering software and appliances that help protect their Internet-connected PCs and mobile devices from web-based security threats. Moody's expectation for consistent cash flow is based on Blue Coat's leading market position in the Anti-Virus/Web/Malware appliance segment, track record of profitable growth as a public company, and its relatively stable customer base which generates high recurring revenue.

The rating also considers Blue Coat's modest size and free cash flow generation following the increased debt burden. Further, it reflects our expectation for slowing revenue growth (relative to historical levels) in low-to-mid single digits. This will likely keep financial leverage in the range of 4x to 5x adjusted total debt to EBITDA (with mid-single digit free cash flow to debt ratios) over the intermediate term. These credit metrics are comparable to other software issuers currently rated at the B2 rating level. The CFR also reflects our expectation that the new equity owner will refrain from extracting dividends and apply excess cash flow towards debt reduction and building balance sheet cash.

Blue Coat maintains adequate liquidity as evidenced by its cash flow from operations (projected annual free cash flow of around $25 million), about $40 million of cash at closing and available external liquidity consisting of a $50 million revolver, which will be drawn by $35 million at closing. Blue Coat has a track record of generating positive free cash flow and enjoys predictable revenue due to its contractual maintenance and support services model with high renewal rates. Over the next twelve months, Moody's expects that the company will comfortably meet cash needs from cash flow generation and cash-on-hand.

The stable rating outlook reflects the good predictability of Blue Coat's contractual maintenance and support services business model, high renewal rates as well as our expectation that the company will retain its incumbent market leadership in "mission-critical" network security software and appliances. We believe enterprises' increasing demand for web filtering, security and malware detection solutions support continued organic revenue growth in the low-to-mid single digit range.

Upward rating pressure could occur if the company were to demonstrate organic revenue growth consistent with historical double digit rates, free cash flow to debt of at least 15% and the likelihood of adjusted debt to EBITDA being sustained below 4.5x. Ratings could be downgraded if financial leverage increases above 7x adjusted debt to EBITDA for a sustained period or liquidity deteriorates due to a decline in profitability or aggressive financial policies.

Net proceeds from the $495 million senior secured (first- and second-lien) credit facilities together with $402.5 million of Blue Coast's cash and $520.5 million of cash equity from the private equity sponsor (Thoma Bravo) will be used to purchase Blue Coat in a $1.3 billion public-to-private leveraged buyout transaction.

Assignments:

Corporate Family Rating -- B2

Probability of Default Rating -- B2

$ 50 Million Senior Secured Revolver due 2017 -- B1 (LGD-3, 38%)

$360 Million Senior Secured First Lien Term Loan due 2018 -- B1 (LGD-3, 38%)

$ 85 Million Senior Secured Second Lien Term Loan due 2018 -- Caa1 (LGD-5, 89%)

The assigned ratings are subject to review of final documentation and no material change in the terms and conditions of the transaction as advised to Moody's.

Moody's subscribers can find additional information in the Blue Coat Credit Opinion published on www.moodys.com.

The principal methodology used in rating Blue Coat was the Global Software Industry Methodology published in May 2009. 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.

With headquarters in Sunnyvale, CA and revenue of $467 million for the latest twelve months ended October 31, 2011, Blue Coat, is a leading provider of Internet security and wide area network (WAN) acceleration solutions that permit enterprises to secure and optimize their IT networks.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Gregory A. Fraser
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

Richard J. Lane
Senior Vice President
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 first-time B2 CFR to Blue Coat Systems; outlook stable
No Related Data.
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