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Rating Action:

Moody's rates iPayment's new debt; affirms B2 CFR with stable outlook

26 Apr 2011

Approximately $975 million of debt affected

New York, April 26, 2011 -- Moody's Investors Service affirmed iPayment, Inc.'s ("iPayment" or the "Company") B2 Corporate Family Rating (CFR) and assigned a Ba2 rating to the Company's $450 million of senior secured credit facilities, a B3 rating to its $375 million of senior unsecured notes and a Caa1 rating to $150 million of senior notes being issued by its direct parent, iPayment Holdings, Inc. As part of the ratings action, Moody's changed iPayment's ratings outlook to stable from negative and raised the Company's liquidity rating to SGL-2 from SGL-3, reflecting improved liquidity and extension of debt maturities upon closing of the proposed refinancing. The Company plans to use the net proceeds of about $909 million, including a partial draw under its new revolver, to refinance $748 million of existing debt, redeem the indirect equity interest held in the Company by its majority shareholder for $118.5 million, and pay transaction fees and expenses.

RATINGS RATIONALE

The affirmation of iPayment's B2 CFR reflects Moody's expectations that the Company's management will prioritize deleveraging over the next 12-to-24 months and drive Debt-to-EBITDA leverage towards its target of 5.0x over the intermediate term. The proposed transaction will result in an increase in leverage by slightly more than one turn to 6.7x (incorporating Moody's standard analytical adjustments). Moody's expects the Company to commit a sizeable portion of its free cash flows of about 5%-to-7% of total debt to reduce debt, which coupled with the expected EBITDA growth should drive leverage to less than 6.0x by year-end 2012. Although the proposed transaction results in higher debt levels, in Moody's view, the Company's ownership structure will simplify with clear direction and control by its sole shareholder.

iPayment's CFR is weakly positioned in the B2 rating category, characterized by its high Debt-to-EBITDA leverage, the Company's small scale relative to a number of large scale transaction processors, and its highly competitive operating environment. While iPayment's focus on small- and medium-sized merchant customers allows the Company to capture attractive operating margins per transaction, small merchants have high attrition rates and are more susceptible to failures in economic downturns than large merchant customers. iPayment also has limited asset protection from a small base of tangible assets, though this risk is mitigated by a liquid market for merchant portfolios.

The rating is supported by the Company's track record of good business execution reflected in growth in EBITDA margins over the past several years, including during the recent recession, and consistent levels of free cash flow generation. The rating benefits from iPayment's predominantly transaction-based recurring revenues and its highly diverse customer base with low revenue concentration by size as well as industry.

The stable outlook reflects Moody's expectations that iPayment's leverage will progressively decline towards 6.0x at year-end 2012 and that the Company will generate stable free cash flows in the range of 5%-to-7% of total debt driven by revenue growth and healthy EBITDA margins in the 40% range.

The SGL-2 liquidity rating incorporates Moody's belief that iPayment will maintain good liquidity over the next 12 months, comprising availability under the new revolving credit facility, projected annual free cash flow of in excess of $55 million, and ample cushion under financial covenants in the new credit facilities.

Moody's could downgrade iPayment's ratings or revise ratings outlook to negative if liquidity becomes weak or deleveraging is postponed as a result of operating performance falling short of expectations or changes in financial policies. Specifically, downward rating pressure could develop if Debt-to-EBITDA leverage remains above 6.0x for an extended period.

Given the increase in debt in connection with the equity redemption, Moody's does not anticipate positive ratings movement in the near term. However, Moody's could change iPayment's ratings outlook to positive or raise its ratings if the Company could reduce leverage and sustain it at less than 4.5x while maintaining EBITDA growth.

Moody's assigned the following ratings:

..Issuer - iPayment, Inc.

....$75 million senior secured revolving credit facility due 2016 -- Ba2 (LGD2, 19%)

....$375 million senior secured term loan due 2017 -- Ba2 (LGD2, 19%)

....$375 million senior unsecured notes due 2018 -- B3 (LGD4, 68%)

..Issuer - iPayment Holdings, Inc.

....$150 million HoldCo senior PIK notes due 2018 -- Caa1 (LGD6, 92%)

The following ratings were affirmed:

..Issuer - iPayment, Inc.

....Corporate Family Rating -- B2

....Probably of Default Rating -- B2

..Outlook Actions:

....Outlook, Changed To Stable From Negative

..Outlook Assignments:

....iPayment Holdings, Inc. -- Stable

.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

The following ratings will be withdrawn upon closing of the proposed transaction:

....$60 million senior secured revolving credit facility due 2012 at B1 (LGD3, 35%)

....$421 million senior secured term loan due 2013 at B1 (LGD3, 35%)

....$195 million senior subordinated notes due 2014 at Caa1 (LGD5, 88%)

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

The principal methodology used in rating iPayment, Inc. was the Global Business & Consumer Service Industry Rating Methodology, published October 2010. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Headquartered in Nashville, Tennessee, iPayment, Inc. is a merchant acquirer/processor that provides credit and debit card-based payment processing services to small business merchants located across the United States. The Company provides services such as card authorization, data capture, settlement, risk management, fraud detection and chargeback services. iPayment generated net-revenues (net of interchanges fees) of $316 million in 2010.

REGULATORY DISCLOSURES

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

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Raj Joshi
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates iPayment's new debt; affirms B2 CFR with stable outlook
No Related Data.
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