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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,
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to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
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Please see www.moodys.com for any updates on changes to
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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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