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CommerceHub, Inc. -- Moody's affirms CommerceHub's B3 CFR on proposed refinancing and dividend recap; outlook stable

·16 min read

Rating Action: Moody's affirms CommerceHub's B3 CFR on proposed refinancing and dividend recap; outlook stable

Global Credit Research - 11 Dec 2020

New York, December 11, 2020 -- Moody's Investors Service, ("Moody's") affirmed CommerceHub, Inc.'s (CommerceHub) B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR). Moody's also assigned a B2 rating to the new first lien credit facilities, which comprises of a $50 million revolving credit facility and a $530 million term loan facility, and a Caa2 rating to the $210 million second lien term loan facility. The outlook is stable.

Net proceeds from the new debt issuance along with $606 million of new cash equity from Insight Partners (Insight) and $609 million of rollover equity from the company's existing sponsors, GTCR LLC (GTCR) and Sycamore Partners (Sycamore), will be used to refinance existing debt, partially fund a dividend payment to the existing sponsors, and pay fees and expenses related to the transaction. Pro forma for the transaction, Insight will own 49.9% of the company through preferred equity with GTCR and Sycamore each retaining a 25% stake of common equity. The rating on the existing first lien credit facility that will be repaid as part of this refinancing will be withdrawn upon repayment.

The rating affirmation reflects Moody's view that although CommerceHub's leverage (Moody's adjusted) will increase materially to 8.8x pro forma for the LTM period ended September 30, 2020 as a result of this transaction, the continued secular shift of retail sales into E-commerce will drive CommerceHub drop-shipping order growth over the next several years and supports Moody's expectation of at least 10% revenue growth and deleveraging towards 6.5x over the next 12 months. The company's high proportion of recurring revenue and strong retention rates also support the rating profile.

Assignments: ..Issuer: CommerceHub, Inc.

....Gtd Senior Secured 1st Lien Term Loan B, Assigned B2 (LGD3)

....Gtd Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)

....Gtd Senior Secured 2nd Lien Term Loan, Assigned Caa2 (LGD5)

Affirmations:

..Issuer: CommerceHub, Inc.

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

Outlook Actions:

..Issuer: CommerceHub, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

CommerceHub's B3 CFR reflects its established market position as a third-party drop shipping provider to top US retailers, the company's mission critical role within the retailer and supplier network, a high recurring revenue stream supported by high order retention and subscription fees, and the company's deep retailer integration and high switching costs. The credit is constrained by CommerceHub's high financial leverage, small scale and limited operating scope in the retail e-commerce industry.

Moody's expects CommerceHub to maintain revenue growth of at least 10% over the next 2 years supported by retailers' increasing reliance on CommerceHub's drop ship software to increase inventory availability, reduce warehousing costs and minimize delivery times to end consumers. CommerceHub's platform enables brick-and-mortal retailers to effectively compete with online-only e-commerce companies. The ongoing retail shift to online channels was further driven in 2020 by the coronavirus pandemic, resulting in 77% order-volume growth and over 50% revenue growth year-over-year for 3Q20. For 2021, Moody's expects annual revenue growth of at least 10%, driven by drop ship volume growth from existing and new retail customers, and strong EBITDA margins of at least 55%. Moody's expects that debt leverage (Moody's adjusted) will approach 6.5x by FYE2021 and free cash flow to adjusted debt will increase towards 5%. Moody's expects good liquidity over the next 12 months, supported by at least $50 million of free cash flow and a fully available revolver. Moody's expects that the company will use most of its free cash flow to invest into growing the business, which may include small tuck-in acquisitions, rather than voluntarily paying down debt.

CommerceHub is subject to governance risk as the business is owned by private equity investors and is expected to maintain an aggressive financial strategy prioritizing shareholders as evidenced by the dividend recap and the high leverage levels associated with the proposed transaction.

The ratings for CommerceHub's debt instruments reflect both the overall Probability of Default of the company, to which we have assigned a B3-PD, and a loss given default assessment of the individual debt instruments. The B2 ratings on the $530 million first lien term loan maturing 2027 and $50 million first lien revolver expiring 2025, one notch above CommerceHub's CFR, reflects the facility's priority position in the capital structure, ahead of the $210 million second lien loan maturing 2028. The Caa2 rating on the second lien loan reflects its contractual subordination to the first lien credit facility. The first lien debt has precedence of payments, relative to the second lien loan, from the proceeds of any default- or bankruptcy-related liquidation. The first lien credit facility is secured by a first lien pledge of substantially all the assets of CommerceHub, Inc. and its domestic subsidiaries. The first lien credit facility and second lien term loan also have a guarantee from Great Dane Parent, LLC, an intermediate holding company.

The stable outlook reflects Moody's expectation for leverage (Moody's adjusted) to decrease below 7x and the maintenance of good liquidity supported by full revolver availability and positive free cash flow over the next 12 months.

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

Moody's could upgrade CommerceHub's ratings if strong revenue growth along with debt repayment and margin expansion lead to leverage (Moody's adjusted) sustained below 6x and free cash flow to debt remaining above 5%.

Moody's could downgrade CommerceHub's ratings if organic revenue growth slows to low single-digits, reflecting increased competition, customer losses, or shifts in the e-commerce business model, or if leverage (Moody's adjusted) is sustained above 7x. EBITDA margin declines or free cash flow to debt sustained below 2%, and deterioration in liquidity, including negative working capital trends or limited revolver availability, could also result in a downgrade .

CommerceHub, Inc., with headquarters in Albany, NY, provides SaaS cloud-based software that integrates retailers with suppliers to expand their e-commerce-based drop-shipping programs primarily in the U.S. and Canada. The company reported net revenue of $141 million for the LTM period ended September 30, 2020.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. 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.

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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_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

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.

Sean Cray 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

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