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Rating Action:

Moody's upgrades Aptos' CFR to B3 from Caa1; outlook stable

05 Apr 2021

New York, April 05, 2021 -- Moody's Investors Service, ("Moody's") upgraded Aptos Canada Inc.'s ("Aptos") Corporate Family Rating (CFR) to B3 from Caa1, Probability of Default Rating (PDR) to B3-PD from Caa1-PD, and its senior secured credit facility (revolver and term loan) rating to B3 from Caa1. The outlook was changed to stable from negative.

The upgrade reflects Aptos' resilient performance in fiscal 2020, such that earnings and cash flow generation exceeded Moody's expectations in the midst of challenges posed by the coronavirus pandemic. A portion of the cost actions taken in response to the pandemic are expected to be permanent, which combined with our expectation for return to positive topline growth in the second half of 2021 will further support the positive trajectory of Aptos' earnings over the next 12-18 months. Moody's believes that digital transformation will support technology investments in the retail sector and provide longer-term growth for Aptos.

Aptos' debt-to-EBITDA (Moody's adjusted and pro forma for recent acquisitions) has improved since the March 2020 leveraged buyout, to around 7.5 times as of December 31, 2020, from mid-8.0 times driven by timely cost actions and earnings contribution from recent acquisitions. Although the pandemic has yet to be contained and the global economic recovery will vary across different regions, Moody's views Aptos' liquidity profile as good, such that the company is expected to generate annual free cash flow of at least $20 million and maintain full availability under its $40 million revolving credit facility.

In February 2021, Aptos issued new $125 million of senior secured floating rate notes due 2027 (unrated ), along with modest sponsor equity contribution, to finance the purchase of LS Retail, a leading developer and provider of mid-market and enterprise software for retail, hospitality, food service, pharmacy and forecourt businesses. Despite modest increase in leverage ensued from the largely debt-funded transaction, Moody's view the acquisition of LS Retail strategically positive because it provides for end-market and geographic diversification, greater presence with mid-market customers, a meaningful channel partner base, as well as potential for cost saving opportunity.

Upgrades:

..Issuer: Aptos Canada Inc.

.... Corporate Family Rating, Upgraded to B3 from Caa1

.... Probability of Default Rating, Upgraded to B3-PD from Caa1-PD

....Senior Secured Bank Credit Facility, Upgraded to B3 (LGD3) from Caa1 (LGD4)

Outlook Actions:

..Issuer: Aptos Canada Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

Aptos' B3 CFR reflects the company's highly leveraged capital structure, small scale relative to its enterprise software peers as well as the company's acquisition appetite. Moody's anticipates the company will deleverage from currently elevated levels as a result of modest EBITDA growth, decline in one-time expenses and realization of acquisition synergies. As such, we expect debt-to-EBITDA (Moody's adjusted) to decline below 6.0x over the next 12-18 months. Historically, the company had limited organic growth due to transition from license revenue to SaaS and looked to strategic acquisitions for growth and improved market position. Given anticipated gradual recovery in the retail sector, Moody's projects Aptos' organic revenue to grow in the low-single digit percentage range over the next 12-18 months. The rating is constrained by the highly competitive nature of the enterprise software market, the company's niche position as a provider of retail software solutions to mid-market and large specialty retailers, and the uncertainty around the pandemic and global economic recovery.

Aptos' credit profile benefits from its leading market position in the niche retail enterprise software market, geographic diversification with deployments to over 60 countries, and high customer renewal rates. Aptos' recurring subscription and support revenue is approximately 65%, a level that is below that of many rated enterprise software companies but which nevertheless provide good revenue and operating cash flow stability.

The stable outlook reflects Moody's expectation for an incremental improvement in operation performance and free cash flow stemming from the gradual recovery in the retail sector, as well as realization of planned cost savings. The stable outlook also reflects expectation that a good liquidity will be maintained.

Moody's expects Aptos to maintain good liquidity over the next 12-15 months. Sources of liquidity include approximately $30 million of projected balance sheet cash as of March 31, 2021, expectation for annual free cash flow of at least $20 million over the next 12-15 months, as well as full availability under its $40 million revolving credit facility due 2025. There are no financial maintenance covenants under the first lien term loans but the revolving credit facility is subject to a springing net first lien leverage ratio of 7.35x when the amount drawn exceeds 35% of the revolving credit facility. Moody's does not expect that Aptos will utilize its revolver over the next 12-15 months and projects the company will remain well in compliance with its financial covenant, if tested.

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

Given Aptos' small scale and relatively high proportion of professional service revenues compared to many rated enterprise software peers, upgrade leverage hurdles are tighter than for many other B3 rated enterprise software companies. The ratings could be upgraded if debt-to-EBITDA (Moody's adjusted) is expected to remain consistently under 5.5 times and free cash flow to debt greater than 7%.

The ratings could be downgraded if Aptos faces top-line and earnings pressure such that debt-to-EBITDA (Moody's adjusted) is sustained above 8.0 times, or liquidity deteriorates, including increased revolver usage or an inability to sustain positive free cash flow generation.

Aptos is a leading provider of retail software solutions including point of sale software for mid-market retail. Aptos is majority owned by Goldman Sachs Merchant Banking Division, with remaining shares held by management. The company generated annual pro forma revenue of approximately $300 million in fiscal 2020.

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_1243406.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Oleg Markin
Asst Vice President - 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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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