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Rating Action:

Moody's downgrades CentralSquare's corporate family rating to Caa2; outlook is negative.

19 Jun 2020

New York, June 19, 2020 -- Moody's Investors Service, ("Moody's") downgraded CentralSquare Technologies, LLC's ("CentralSquare", formerly known as SuperMoose Borrower, LLC) corporate family rating ("CFR") to Caa2 from Caa1, and probability of default rating ("PDR") to Caa2-PD from Caa1-PD. Moody's also downgraded the ratings on the company's first lien credit facilities to Caa1 from B3, and second lien credit facility to Ca from Caa3. The outlook is negative.

The downgrade takes into account the following considerations: 1) weakening liquidity, with a fully drawn revolver as of March 2020 and ongoing negative free cash flow; 2) uncertain timeline to reduce leverage and achieve break-even free cash flow, given the sizeable interest expense burden and a business profile with lower than anticipated margins; 3) ongoing operational challenges since the formation of the company in September 2018, leading to lower than expected revenue, margin, cash flow and cash balances in 2018 and 2019; and 4) incremental headwinds in 2020 due to the COVID-19 recessionary environment, which creates operational difficulties and increases uncertainty around the company's timeline to achieve positive free cash flow.

Downgrades:

..Issuer: CentralSquare Technologies, LLC

.... Corporate Family Rating, Downgraded to Caa2 from Caa1

.... Probability of Default Rating, Downgraded to Caa2-PD from Caa1-PD

....Senior Secured First Lien Bank Credit Facility, Downgraded to Caa1 (LGD3) from B3 (LGD3)

....Senior Secured Second Lien Bank Credit Facility, Downgraded to Ca (LGD5) from Caa3 (LGD5)

Outlook Actions:

..Issuer: CentralSquare Technologies, LLC

....Outlook, Remains Negative

RATINGS RATIONALE

The ratings reflect CentralSquare's very high debt to EBITDA, above 11x as of March 2020, negative free cash flow to debt and lower than anticipated growth and profitability. Aggressive financial policies, evidenced by the debt-funded acquisitions of Lucity in 4Q18 and Tellus in 2Q19, and a lack of operating history as a combined entity also weigh on the credit. We consider the public safety and administration enterprise resource planning (ERP) software market mature and competitive, which limits our growth expectations. A new CEO and leadership team will seek to accelerate the company's timeline to achieve break-even free cash flow, but operational risks remain high.

The credit profile is supported by CentralSquare's recurring revenue sources, which comprise over 70% of total revenue and provide stability. High historical gross retention rates around 95% evidence sticky product solutions that are deeply embedded in its customers' workflows and operations, with average customer tenure over 10 years. The company believes its customers face up to two years to switch to a competitor's product solutions. The customer base is diversified mainly across small and medium public sector customers with low concentration.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. IT budgets and new implementations across CentralSquare's client base will experience delays as a result of the recessionary economic environment and social distancing limitations caused by COVID-19, which will result in lower than expected revenue and reduce cash flow in 2020.

The negative outlook reflects Moody's expectation for low single-digit percentage organic revenue declines in 2020 due to the recessionary environment caused by the COVID-19 pandemic, with positive low single-digit organic growth in the longer term. Debt to EBITDA is expected to remain above 11x (Moody's adjusted excluding deferred revenue add-backs), and free cash flow to debt will remain negative over the next 12 months, which will continue to weaken liquidity.

The individual debt instrument ratings are based on CentralSquare's probability of default, as reflected in the Caa2-PD probability of default rating, and the loss given default expectations of the individual debt instruments. The Caa1 rating on the senior secured first lien revolver and term loan reflects the Caa2-PD probability of default rating and a loss given default assessment of LGD3, reflecting their priority in Moody's waterfall of claims at default ahead of all other obligations of the company. The credit facility is secured by a first lien pledge of substantially all of the domestic assets of the guarantor subsidiaries through secured upstream guarantees. The Ca rating on the senior secured second lien term loan reflects the Caa2-PD PDR and a loss given default assessment of LGD5, reflecting the subordination to the first lien debt and the uncertain support from unsecured obligations in a default scenario. The loan is secured by a second lien pledge of substantially all of the domestic assets of the guarantor subsidiaries through secured upstream guarantees. The first lien revolver, first lien term loan and second lien term loan mature in 2023, 2025 and 2026, respectively.

Liquidity is considered weak. Moody's expects operating cash flow sources will not suffice to support interest expense combined with ongoing restructuring costs and capex over the next 12 months. The company will rely on its unrestricted cash balances ($62 million as of March 2020) to cover the free cash flow deficit, given the $125 million revolving facility is fully drawn. Additional external liquidity may be needed to support a minimum cash balance of approximately $10 million on the balance sheet, if recessionary conditions or operational challenges result in weaker than anticipated operating performance. The revolver includes a springing financial covenant. Moody's anticipates CentralSquare will be in compliance given the generous credit agreement EBITDA add-backs and high first lien net leverage threshold at 8.2x. Moody's expects the timing of collections to result in a stronger 2H20, which will support some free cash flow improvement towards the end of the year. The first lien term loan amortizes 1% annually.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

CentralSquare's ratings could be upgraded (all metrics Moody's adjusted) if Moody's expects 1) debt to EBITDA will remain under 8x; 2) liquidity improvement with free cash flow trending towards break-even; and 3) revenue growth and margin expansion, demonstrating progress on improving operational efficiency.

CentralSquare's ratings could be downgraded (all metrics Moody's adjusted) if 1) liquidity deteriorates further and the risk of default increases; 2) ongoing operational challenges or increased competitive pressure result in lower than anticipated revenue growth or profitability, adding uncertainty to the company's deleveraging capacity or ability to sustain positive free cash flow; 3) the recessionary environment caused by COVID-19 deteriorates, extending the expected timeline to return to break-even free cash flow; or 4) aggressive financial policies and debt-funded M&A contribute to incremental leverage.

CentralSquare is a software provider serving the specialized needs of the small and medium-sized enterprise segment of North American local governments, public safety agencies, universities, research foundations and non-profits. The public safety segment provides computer aided dispatch, records management, jail management and justice systems to streamline communication between multiple agencies; the public administration segment provides finance, human resources, community development, work management and utility billing systems to enable citizen engagement and local government operations. The company was formed in 2018 as a combination of TriTech, Zuercher, Superion and the public sector and healthcare business of Aptean. It is controlled equally by private equity owners Bain and Vista. The company generated $414 million of revenue in fiscal year 2019.

The principal methodology used in these ratings 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.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was 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 office that issued the credit rating is available on www.moodys.com.

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.

Ignacio Rasero
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

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.
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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