Rating Action: Moody's assigns Ba1 to GoDaddy's incremental term loan; affirms Ba2 CFR; outlook stable
Global Credit Research - 06 Aug 2020
New York, August 06, 2020 -- Moody's Investors Service, ("Moody's") assigned a Ba1 rating to Go Daddy Operating Company, LLC's ("GoDaddy") proposed incremental first lien senior secured term loan B due 2027. At the same time, Moody's affirmed the company's Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), Ba1 rating on the first lien senior secured credit facility (revolver and term loan) due 2024 and B1 rating on the senior unsecured notes. The Speculative Grade Liquidity Rating (SGL) is unchanged at SGL-1. The outlook remains stable.
Net proceeds from the proposed incremental term loan, together with balance sheet cash, will be used to settle all future obligations pursuant to five Tax Receivable Agreements (TRAs) with pre-IPO owners. Payments under the TRAs were payable only to the extent actual cash savings from the step-up basis were realized. The agreement to settle the TRAs for approximately $850 million represents more than a 50% discount to the maximum undiscounted value of $1.8 billion as of June 30, 2020, eliminating future cash flow payments that were expected to begin in 2023. GoDaddy will not become a meaningful tax payer until later this decade.
Moody's views the proposed transaction as credit negative on balance because it involves a material increase in debt and leverage at a time when macro-economic outlook remains uncertain. On a pro forma basis as of June 30, 2020, GoDaddy's debt-to-EBITDA (Moody's adjusted) will increase to 6.2x from 4.9x or (to 4.8x from 3.7x when adjusted for deferred revenue). Moody's also notes that the company is executing the transaction within the limits of management's long-term net debt to cash EBITDA target of 2.0x-4.0x (at 3.0x pro forma for the transaction as defined by the company).
Nevertheless, Moody's affirmed GoDaddy's Ba2 CFR despite the incremental debt, as the higher leverage is largely offset by the company's strong and consistent operating performance and proven track record of deleveraging through earnings. GoDaddy remains largely resilient to the negative effects of the COVID-19 pandemic, benefiting from an unintended acceleration of the digital transformation of ecommerce. The company has seen a significant uptick in new customers count and demand for its online products in Q2 2020, while renewal rates and churn have remained stable. Moody's expects the company's debt-to-EBITDA (Moody's adjusted) will improve to levels that are more commensurate with the Ba2 rating category over the next 12-18 months, primarily driven by expectation for organic revenue and EBITDA growth in the high-single digits. Moody's also anticipates the company will maintain very good liquidity, including generating free cash flow-to-debt (Moody's adjusted) in excess of 15% over the same period.
Moody's affirmed the Ba1 rating on the existing first lien senior secured debt despite the material increase in the proportion of the secured to total debt in the capital structure. Moody's views GoDaddy's first lien senior secured rating as having very little cushion to absorb additional amounts of senior secured debt. As the senior secured credit class becomes a larger proportion of GoDaddy's total debt, the instrument rating will likely migrate closer to the Ba2 CFR.
..Issuer: Go Daddy Operating Company, LLC
.... Corporate Family Rating, Affirmed Ba2
.... Probability of Default Rating, Affirmed Ba2-PD
....Senior Secured Bank Credit Facility, Affirmed Ba1 (LGD3)
....Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD6)
..Issuer: Go Daddy Operating Company, LLC
....Senior Secured Term Loan B, Assigned Ba1 (LGD3)
..Issuer: Go Daddy Operating Company, LLC
....Outlook, Remains Stable
The Ba2 CFR reflects GoDaddy's solid free cash flow and earnings growth, strong brand in the US with growing international presence, and market position as the largest domain name registrar with a leading web-hosting services offering. The rating is further supported by GoDaddy's growing scale and recurring revenues derived from high customer retention rates that have exceeded 85% over the last five years. Moody's expects GoDaddy to maintain balanced financial policies between creditor and equity holder interests and to remain within management's long term net debt to cash EBITDA target of 2.0-4.0x (as defined by the company; 3.0x pro forma for the transaction as of June 30, 2020). Moody's also projects GoDaddy's will generate annual free cash flow in excess of $550 million over the next 12-15 months and maintain free cash flow-to-debt (Moody's adjusted) above 15%.
Conversely, GoDaddy's rating is constrained by its high pro forma debt-to-EBITDA leverage (Moody's adjusted), estimated at 6.2x at June 30, 2020 (4.8x when adjusted for deferred revenue), which is projected to decline towards low 5.0x over the next 12-18 months through earnings growth. The rating also incorporates the company's operations within the mature and intensely competitive web-services industry that has low barriers to entry. In addition, GoDaddy produces operating margins that trail rated industry peers. The uncertainty related to the COVID-19 pandemic and economic recession and GoDaddy's significant exposure to SME client base also weigh on the rating. Moody's assumption for new customer additions reflects moderately slower growth in 2020 relative to the historical levels due to the current economic uncertainty.
The stable outlook reflects Moody's expectation of organic revenue growth in the high-single digit percentages, debt-to-EBITDA (Moody's adjusted) to decline towards the low 5.0x, and annual free cash flow in excess of $650 million over the next 12-15 months. The outlook also considers that the business will remain resilient despite challenges presented by COVID-19.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if the revenue growth rate decelerates, market share weakens, subscriber churn increases, or free cash flow declines below 10% of total debt for an extended period of time from weakening operating performance or aggressive financial policies.
GoDaddy's ratings could be upgraded if the company were able to maintain strong organic topline and earnings growth, meaningfully increase scale and diversification and management establishes a more conservative financial policy.
Moody's expects GoDaddy to have very good liquidity over the next 12-18 months as reflected in the Speculative Grade Liquidity (SGL) rating of SGL-1. The company's liquidity is supported by strong balance sheet cash and Moody's expectation for annual free cash flow in excess of $650 million, along with full availability under a $600 million revolving credit facility expiring in 2024. Pro forma for the TRA transaction, estimated cash balances of approximately $670 million as of June 30, 2020 do not incorporate a $215.9 million cash paid for the acquisition of Neustar, Inc. registry business in August 2020. Nevertheless, the company's cash sources provide very good coverage of required term loan amortization that is modest at approximately $32.5 million annually, paid quarterly. There are no financial maintenance covenants under the term loan but borrowings under the revolving credit agreement are subject to a maximum net debt-to-EBITDA leverage ratio of 5.75x if utilization exceeds 20% of the maximum capacity. Moody's does not expect the company to utilize its revolving credit facility over the next 12-18 months and there is good cushion within the required leverage ratio if the covenant is triggered.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Given GoDaddy's exposure to the global economies and SME client base, the company remains vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
Go Daddy Operating Company, LLC, is an indirect subsidiary of publicly-traded GoDaddy Inc. GoDaddy Inc. is a leading provider of domain name registration, web hosting and other services to small business. GoDaddy generated revenues of approximately $3.1 billion in the last twelve months ended June 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.
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.
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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.
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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
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