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Rating Action:

Moody's lowers Reynolds & Reynolds CFR to B3 on partial sale and recapitalization

Global Credit Research - 23 Jul 2013

New York, July 23, 2013 -- Moody's Investors Service lowered Dealer Computer Services, Inc. (dba Reynolds & Reynolds Company -- "Reynolds") corporate family rating to B3 from Ba2, and lowered the probability of default rating to B3-PD from Ba2-PD, due to a significant increase in debt. As part of the rating action, Moody's assigned a Ba3 rating to its proposed $2,325 billion first lien term credit facilities and a Caa1 rating to Reynolds' proposed $1,100 million second lien term loan. The company's ultimate parent will also raise $900 million through a PIK note, which Moody's does not rate. The rating outlook is stable.

Rating actions:

Corporate Family Rating downgraded to B3 from Ba2

Probability of Default downgraded to B3-PD from Ba3-PD

First Lien Revolving Credit Facility Ba3, LGD-2, 22%

First Lien Term Loans -- Ba3, LGD2, 22%

Second Lien Term Loan -- Caa1, LGD4, 66%

Outlook is stable

RATINGS RATIONALE

As part of a broader recapitalization of the company's balance sheet and capital payout to shareholders, Reynolds' controlling shareholder the Brockman trust (Spanish Steps) is selling over 20% ownership in the company to Centre College. The proposed transaction will increase Reynolds' debt by over $3.4 billion, including the $900 million PIK debt at the parent holding company. The high financial leverage, with adjusted debt to EBITDA expected to exceed 8.0 times at closing (about 6.5 times at the operating company level), and reduced interest coverage associated with the company's recapitalization expose the company to much greater interest rate risk and considerably reduced flexibility. Although the company has a leading position in providing auto dealership management software and counts on significant recurring revenue streams, the mature nature of its business leads to modest opportunities to delever through revenue and EBITDA growth. Therefore, rising interest rates may drain the company's cash generating capacity and its ability to delever through debt paydowns. Moreover, while the $900 million parent PIK note preserves the company's liquidity in the near term, Moody's believes that Reynolds will most likely pay out that note through additional debt raises at the rated entity.

Moody's expects Reynolds to have good liquidity over the next twelve months, in large part due to expected free cash flow generation in the $280 million range. Moody's expects the company to maintain at least $100 million of cash and generate strong free cash flow. The company will have a $25 million revolving credit facility, which Moody's expects to be undrawn.

The Ba3 rating on the proposed first lien senior secured credit facilities reflects both the overall probability of default of the company, to which Moody's assigns a Probability of Default Rating of B3-PD, and a loss given default of (LGD 2, 22%). The rating reflects the first priority lien on all property and assets. The Caa1 rating on the proposed second lien senior secured term loan reflects its second priority lien on all property and assets. Further, the term loans benefit from upstream guarantees of the borrower's present and future direct and indirect domestic subsidiaries.

The stable rating outlook reflects the company's leading dealership management systems market share, the good revenue visibility and recurring nature of its software maintenance business and the importance of automotive services and DMS to the day-to-day operations of the automotive dealership industry.

Ratings could be upgraded if Reynolds generates organic revenue growth, especially from the successful expansion of its products outside its traditional DMS business, expands margins, and maintains total adjusted debt to EBITDA to under 6.5 times (including the parent holdco PIK note and incorporating Moody's standard adjustments).

Ratings could be lowered if customer and/or market share losses or interest rate swings result in revenue contraction, margin erosion, or lower free cash flow on a sustained basis. Total adjusted debt to EBITDA remaining above 8.0x (including the parent holdco PIK note) could also result in downward rating pressure.

The principal methodology used in this rating was Global Business & Consumer Service Industry 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.

The Reynolds and Reynolds Company, headquartered in Dayton, Ohio, is an automotive dealership computer services and forms management company.

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.

Gerald Granovsky
Senior Vice President
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 lowers Reynolds & Reynolds CFR to B3 on partial sale and recapitalization
No Related Data.

 

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