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Rating Action:

Moody's upgrades Reynolds & Reynolds CFR to Ba3; outlook is stable

23 Oct 2013

New York, October 23, 2013 -- Moody's Investors Service upgraded Dealer Computer Services, Inc. (dba Reynolds & Reynolds Company -- "Reynolds") corporate family rating to Ba3 from B3, and upgraded the probability of default rating to Ba3-PD from B3-PD. The rating action concludes the review commenced on September 9, 2013, following the news that the company will not pursue a broad recapitalization of the company's balance sheet, which was to include a sale of over 20% ownership in the company to Centre College and a capital payout to shareholders, which would have increased debt by $3.4 billion. As part of the rating action, Moody's downgraded the company's senior secured term loan rating at Ba3 (LGD3-44%). The rating outlook is stable.

Rating actions:

Corporate Family Rating upgraded to Ba3 from B3

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

Senior Secured Term Loan Rating downgraded to Ba3 (LGD3-44%) from Ba2 (LGD3-31%)

Outlook is stable

Rating Rationale

Although Reynolds' credit profile is expected to be strong, Moody's believes that the cancellation of the substantial debt recapitalization is likely a temporary event, and that Reynolds' controlling shareholder the Brockman trust (Spanish Steps) is likely pursue another capital event in the future. Moody's expects the company to continue generating strong free cash flow, as the importance of its primary automotive services and dealership management systems (DMS) to auto dealerships' daily operations provide a high degree of cash flow stability. Strong customer loyalty produces revenue predictability, while the company's software and systems maintenance fee-driven business model generates high adjusted operating margins in the 42% to 44% range. Coupled with low capital expenditures, Reynolds' operating model results in high rates of conversion of EBITDA to free cash flow, which Moody's expects will be used to pay down debt. However, as the company is predominantly owned and controlled by a single shareholder, event risk remains elevated.

Moody's expects Reynolds to have very good liquidity over the next twelve months, in large part due to expected free cash flow generation in the $350-365 million range. Moody's expects the company to maintain at least $100 million of cash and generate strong free cash flow. The company does not have any external revolving credit facilities.

The assigned Ba3-LGD3 44% ratings of the first lien senior secured credit facilities reflect both the overall probability of default of the company to which Moody's assigns a Probability of Default Rating of Ba3-PD and an average recovery indicated by its senior secured debt capital structure. The rating reflects the first 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.

Given the high event risk associated with a likely capital event in the future, upward rating momentum is limited. The company's financial metrics are very strong for its rating category, and an upgrade would be considered if Moody's gains greater comfort that future leveraging events are unlikely.

Ratings could be lowered if customer and/or market share losses or interest rate swings result in meaningful revenue contraction, margin erosion, or lower free cash flow on a sustained basis. Total adjusted debt to EBITDA above 3.0x could also result in downward rating pressure.

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

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

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.

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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 upgrades Reynolds & Reynolds CFR to Ba3; outlook is stable
No Related Data.
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