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Rating Action: Moody's assigns first time B3 rating to Concorde Midco Limited; stable outlookGlobal Credit Research - 08 Feb 2021London, 08 February 2021 -- Moody's Investors Service (Moody's) has today assigned a first-time B3 Corporate Family Rating (CFR) and a B3-PD Probability of Default Rating (PDR) to Concorde Midco Limited (CDKI or the company), the holding company of the automotive software vendor CDK International. Concurrently, Moody's has assigned a B2 rating to the proposed E515 million ($632 million equivalent) senior secured first lien term loan B and the E60 million ($74 million equivalent) senior secured revolving credit facility (RCF), due in 2028 and 2027 respectively, to be issued by Concorde Lux S.a.r.l.. The outlook is stable.Proceeds from the first lien term loan and a GBP125 million ($171 million equivalent) second lien term loan, as well as shareholder equity, will be used primarily to fund the acquisition of CDKI by Francisco Partners from CDK Global, Inc. (Ba1 stable) for a total consideration of approximately $1.5 billion. The transaction was initially announced in November 2020 and is expected to close later this month."The B3 rating reflects CDKI's leading positioning in the automotive Dealer Management Systems (DMS) market, supported by a sticky customer base and a high share of recurring revenues. The rating also benefits from the moderate organic growth prospects of the company together with the expected cost savings as part of the LBO transaction" says Luigi Bucci, Moody's lead analyst for CDKI."At the same time, the rating also reflects CDKI's aggressive financial policy with a very high Moody's-adjusted starting leverage of 9.6x which is expected to reduce toward 7x by fiscal 2022, ending June 2022. The rating is also constrained by the structural changes ongoing in the automotive sector which will have a gradual negative impact on CDKI's customer base" adds Mr. Bucci.A full list of affected ratings is provided towards the end of this press release.RATINGS RATIONALECDKI's B3 CFR primarily reflects: (1) the company's leading positioning as a provider of technology and services to automotive dealers and automakers, with strong DMS market shares in its core countries; (2) low tendency of dealers to change DMS software leading to very low churn rates; (3) Moody's expectation of revenue and, particularly, EBITDA growth, supported by upselling and layered applications growth together with the identified cost savings initiatives, respectively; and (4) adequate liquidity supported by positive free cash flow (FCF) generation by fiscal 2022 and access to a E60 million RCF.Counterbalancing these strengths are: (1) the company's very high Moody's-adjusted leverage of around 9x after the closing of the LBO by Francisco Partners, which is likely to reduce towards 7x by fiscal 2022; (2) significant reliance on cost savings to achieve deleveraging; (3) organic growth mainly relying on layered applications, with core DMS products expected to have a broadly flat evolution; (4) uncertainties related to the long term impact of coronavirus and, separately, the potential shift towards electric vehicles and agency sales models on CDKI's customer base; and (5) execution risks associated to the carve-out from the former parent CDK Global.CDKI benefits from its positioning as one of the largest DMS software vendors in Europe and a number of countries globally. The company mainly focuses on the offering of integrated ERP services and CRM solutions to automotive dealerships, single or multi-brand. CDKI's solutions are considered as critical for its customer base due to its extended range of industry specific features together with their ability to interface with the required automakers' systems. The majority of customers purchase products and services on a subscription basis, with 83% of revenues derived from subscriptions indicating a high degree of revenue predictability.Moody's expects CDKI's revenues to grow at around 2%-3% over fiscal 2021 and 2022 largely supported by growth in layered applications (ie. solutions aimed at integrating and complementing Core DMS products), continued shift to cloud-based solutions together with contractual price increases. Recurring revenues will likely grow at 3%-4% in fiscal 2021, benefitting from weak comparatives in the second half of fiscal 2020, before normalizing to around 2%-3% a year. In terms of non-recurring revenues, the rating agency anticipates a continued decline in fiscal 2021 (-2% - -3%) before being broadly flat in fiscal 2022 (0%-1%).The rating agency forecasts Moody's-adjusted EBITDA, pre-restructuring costs, to grow towards $115-$120 million in fiscal 2022, driven by top-line growth and, to a larger extent, by the cost savings to be achieved post LBO by Francisco Partners. Moody's notes that the private equity company presents a clear track-record of achieving synergies and cost savings in its investments, as demonstrated for SonicWALL Holdings Limited (B3 stable) or Seahawk Holdings Limited (B3 stable) amongst others.FCF is expected to be impacted by restructuring charges and one-off costs post LBO in fiscal 2021 and fiscal 2022, with EBITDA improvements to be fully crystallized only in fiscal 2023. These charges will result in a slightly negative Moody's-adjusted FCF/debt (-2%/-3%) in fiscal 2021 before returning to marginally positive levels (0%-1%) in fiscal 2022.The rating agency anticipates Moody's-adjusted leverage at closing at around 9.6x or 7.8x when taking into account the run-rate impact of the potential cost savings. Under Moody's current expectations, CDKI's Moody's-adjusted leverage is likely to decline toward 7x by fiscal 2022 driven by EBITDA growth. Moody's notes that deleveraging largely relies on identified cost savings over the next 24 months, which entail a certain degree of execution risk and uncertainty in relation to the actual phasing of these savings.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSIn terms of governance, post LBO closing and spin-off from its current parent CDK Global, CDKI will be a private company fully owned by the private equity firm Francisco Partners. Financial policy is likely to be very aggressive as evidenced by the very high starting leverage which will decrease only moderately over the rating horizon. The rating agency is also expecting CDKI to undertake some small bolt-on M&A to strengthen its product line.LIQUIDITYMoody's sees CDKI's liquidity as adequate, based on the company's cash flow generation, available cash resources of $30 million at closing and a E60 million committed RCF, as well as an extended maturity profile. Moody's expects the company to be FCF positive in fiscal 2022 supporting the overall liquidity of the business.The company's RCF has a springing leverage covenant (set at 40% buffer to opening EBITDA), which will be tested only if the facility is drawn by more than 40%. The rating agency expects the headroom under the covenant to be adequate and to increase over time. Moody's notes that over the first 12 months post-closing as a consequence of cash-flows related to cost savings initiatives and one-off costs, CDKI might temporarily draw-down part of the RCF to maintain a robust cash balance.STRUCTURAL CONSIDERATIONSThe B3-PD PDR reflects Moody's assumption of a 50% family recovery rate, which is standard in cases with more than one class of debt. The B2 ratings on the first-lien term loan and the pari passu RCF reflect their first priority claim on the transaction security, ahead of the second-lien term loan. The instruments are guaranteed by material subsidiaries representing a minimum of 80% of consolidated EBITDA and security includes shares, material bank accounts, intercompany receivables and assets in England & Wales through a featherweight floating charge. Moody's sees the security package as weak.RATIONALE FOR STABLE OUTLOOKThe stable rating outlook reflects Moody's view that CDKI's EBITDA will grow over the next 12-18 months driven by identified cost savings together with moderate revenue growth. As a result, Moody's-adjusted debt/EBITDA will decline gradually from very high levels and FCF generation will be positive. The stable outlook also incorporates the rating agency's assumption that there is no transformational M&A and no deterioration in the liquidity profile of the company.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA rating upgrade would depend on a consistent and sustainable improvement in the underlying operating performance of the company together with the successful execution of the carve-out from the former parent, CDK Global. Positive pressure on CDKI's ratings could arise if: (1) Moody's-adjusted debt/EBITDA declines to below 6.5x on a sustainable basis; and (2) Moody's-adjusted FCF/debt sustainably reaches the mid-single digits in percentage terms.Moody's would consider a rating downgrade if CDKI's operating performance were to weaken or if the company were not to reduce restructuring charges after fiscal 2021-2022 such that: (1) Moody's-adjusted leverage remains above 8x for a sustained period; or (2) FCF, excluding impact of LBO-related exceptional charges in fiscal 2021 and 2022, turns negative; or (3) liquidity weakens.LIST OF AFFECTED RATINGS..Issuer: Concorde Lux S.a.r.l.Assignment:....Senior Secured Bank Credit Facility, Assigned B2 (LGD3)Outlook Action:....Outlook, Assigned Stable..Issuer: Concorde Midco LimitedAssignments:.... Probability of Default Rating, Assigned B3-PD.... LT Corporate Family Rating, Assigned B3 Outlook Action: ....Outlook, Assigned Stable PRINCIPAL METHODOLOGY 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.COMPANY PROFILEHeadquartered in Hungerford (UK), Concorde Midco Limited (CDKI) is a global provider of DMS solutions to the automotive sector. Focusing primarily on automotive retailers and automakers, the company product offering includes integrated core ERP and CRM solutions. Over LTM December 2020, the company generated $325 million and $92 million, in revenue and management reported EBITDA, respectively.REGULATORY DISCLOSURESFor 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.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. Luigi Bucci Analyst Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Richard Etheridge Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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