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Rating Action:

Moody's changes Ancestry's outlook to stable on dividend reduction; B2 CFR affirmed

19 Aug 2019

New York, August 19, 2019 -- Moody's Investors Service ("Moody's") affirmed Ancestry.com, Inc.'s (Ancestry) ratings, including its B2 Corporate Family Rating, B2-PD Probability of Default Rating, and the B2 ratings on the senior secured first lien credit facilities issued by its operating subsidiary, on the announcement of a reduction in its partially debt-funded dividend. The outlook was changed to stable from negative.

Ancestry has decided to decrease the size, and the associated debt financing, of its previously announced dividend. Incremental debt proceeds have been reduced from $550 million to $350 million. This, coupled with $387 million of cash on hand, will be used to pay an approximately $712 million dividend (down from $912 million previously). As part of the transaction, the company still plans to refinance approximately $600 million of the existing $1.75 billion term loan maturing in 2023 into the new term loan maturing in 2026, and to extend the expiration of the $100 million revolver to 2024 from 2021.

"The debt-funded dividend remains aggressive, but Ancestry's commitment that they will not undertake any further leveraging transactions that would push debt-to-EBITDA above 5.0x on their basis will keep leverage within our expectations for the rating," according to Harold Steiner, Moody's lead analyst for Ancestry.

Moody's took the following rating actions:

Affirmations:

..Issuer: Ancestry.com Inc.

.... Corporate Family Rating, Affirmed B2

.... Probability of Default Rating, Affirmed B2-PD

..Issuer: Ancestry.com Operations Inc.

....Senior Secured First Lien Revolving Credit Facility due 2024, Affirmed B2 (LGD4)

....Senior Secured First Lien Term Loan due 2026, Affirmed B2 (LGD4)

....Senior Secured First Lien Revolving Credit Facility due 2021, Affirmed B2 to (LGD4) from (LGD3)

....Senior Secured First Lien Term Loan due 2023, Affirmed B2 to (LGD4) from (LGD3)

Outlook Actions:

..Issuer: Ancestry.com Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Ancestry.com Operations Inc.

....Outlook, Changed To Stable From Negative

Moody's plans on moving the company's CFR and PDR to the borrower, Ancestry.com Operations Inc., following this action. The rating on the 2021 revolver will be withdrawn upon the successful closing of the transaction as proposed.

RATINGS RATIONALE

The change in outlook to stable from negative and the affirmation of the B2 CFR reflects Moody's expectation for lower leverage and stronger free cash flow-to-debt than the originally proposed transaction as a result of the revised deal terms. Pro forma debt-to-EBITDA leverage will now be approximately 6.4x, down from 7.0x as previously contemplated. Over the next 12 to 18 months, Moody's expects the company to now deleverage into the mid- to low-6.0x debt-to-EBITDA range while maintaining FCF-to-debt solidly in the mid- to upper-single digits because of earnings growth. Lower incremental debt gives Moody's more comfort in Ancestry's ability to maintain credit metrics expected for the B2 CFR in spite of recently weakening operating trends. The company still plans to obtain covenant flexibility to utilize future cash flow to pay out a one-time dividend of approximately $150 to $160 million in December 2019 or January 2020 without reducing the restricted payments basket, but Moody's does not expect the company to go through with it if performance remains soft or if it would cause debt-to-EBITDA based on the company's calculation to exceed 5.0x.

Ancestry.com, Inc.'s B2 CFR broadly reflects the company's strong market position in its family history research niche and its robust cash flow, balanced by its very high leverage and recently weakening demand for DNA kits. Ancestry operates the largest family history website and has sold more genealogical DNA kits to consumers than its closest competitor, 23andMe (unrated). Ancestry's family history website, which boasts close to 3.4 million subscribers, provides a relatively steady and robust stream of cash flow with which it can service its very high debt burden (PF Moody's-adjusted debt-to-EBITDA of 6.4x) and invest in its DNA kit business. None of its peers have this advantage, which has in Moody's opinion, forced competitors to increasingly focus on the monetization of consumer genetic data, a touchy area in today's privacy-focused society. Moody's expects recently weak demand for DNA kits to persist over the next year but believes that upcoming product launches, including a robust health and wellness offering, should support kit sales enough to perpetuate low-to-mid-single digit percentage range subscriber growth. Increased investment in product development and marketing will likely lift leverage modestly over the next six months but Moody's expects debt-to-EBITDA leverage will decline back into the mid- to low-6.0x range by the end of 2020.

The ratings could be upgraded if Ancestry is likely to sustain mid-single digit percentage revenue growth, debt-to-EBITDA below 4.5x, and FCF-to-debt in the high single-digits. A commitment by the ownership group to maintain conservative financial policies would also be needed.

The ratings could be lowered if there is a deterioration in business fundamentals as evidenced by slowing subscriber or revenue growth, declining profitability, debt-to-EBITDA sustained above 6.5x, or FCF-to-debt sustained below 3%. A deterioration in liquidity could also lead to a downgrade.

Moody's expects that the covenant package for both tranches of the first lien term loan maturing in 2023 and 2026 will be the same. The credit agreement still provides covenant flexibility for transactions that could adversely affect creditors, including incremental facility capacity of at least $300 million, the ability to release a guarantee when a subsidiary is not wholly-owned, lack of a "blocker" provision providing additional restrictions on top of the covenant carve-outs to limit collateral leakage through asset transfers to unrestricted subsidiaries, and step downs in the asset sale prepayment requirement to 50% and 0% based upon the First Lien Leverage Ratio.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Lehi, UT, Ancestry.com Inc. is the market leader in the family history and consumer genomics industries. The company is privately held by Silver Lake, GIC, Permira Advisers, Spectrum Equity Investors, LP and Ancestry's management. Revenues surpassed $1.3 billion in 2018.

REGULATORY DISCLOSURES

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.

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.

Harold Steiner, CFA
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 E. Puchalla, CFA
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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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

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