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ECI Macola/Max Hld, LLC (Leonard Green Prt.) -- Moody's assigns B3 CFR to ECi under Leonard Green ownership; outlook stable

·14 min read

Rating Action: Moody's assigns B3 CFR to ECi under Leonard Green ownership; outlook stable

Global Credit Research - 22 Dec 2020

New York, December 22, 2020 -- Moody's Investors Service, ("Moody's") assigned a B3 Corporate Family Rating ("CFR") and B3-PD Probability of Default Rating ("PDR") to ECI Macola/Max Holding, LLC (Leonard Green Partners) ("ECi") post the acquisition of a controlling share by private equity firm Leonard Green Partners, LLC ("LGP"). Moody's also affirmed the B2 ratings on the existing first lien debt facilities and the Caa2 ratings on the existing second lien notes. LGP is acquiring ECi from private equity firm Apax Partners, the former majority shareholder, who will retain a minority stake, and The Carlyle Group. The existing debt is portable to the new owners and will remain in place post-closing. The CFR and PDR for the company under Apax ownership will be withdrawn at closing. The outlook is stable.

RATINGS RATIONALE

ECi's B3 CFR reflects its high leverage, small business scale relative to competitors, the company's exposure to cyclical end markets and small customer business risk. ECi's pro forma leverage is approximately 8.9x excluding certain one-time costs (or 7.9x including planned synergies) based on June 30, 2020 trailing EBITDA.

ECi's acquisition appetite and aggressive financial policies under private equity ownership also weigh on the ratings. Moody's expects the company to maintain debt-funded acquisition-based growth strategy, which will likely sustain the high leverage and limit free cash flow generation.

The rating is supported by ECi's strong operating track record and successful integration of prior acquisitions. ECi benefits from its differentiated product positioning for its ERP software deployments in the manufacturing, distribution, building & construction and field services end markets. Configurable functionalities tailored to each verticals' requirements make ECi's offerings more cost effective for the end customers, creating a sticky relationship that results in barriers to entry for competitors and high retention rates for the company of over 90%. This combined with a high portion of recurring revenue provides a degree of resilience to the economic downturn and predictability of revenue and cash flow.

Although the pandemic and the economic recession modestly impacted ECi's 2020 performance we expect organic revenue growth in the low to mid-single digits in the next 12 to 18 months. As a result, the company could reduce its leverage toward 7.5x debt/EBITDA during this period in the absence of additional debt funded acquisitions.

The stable outlook reflects Moody's expectation for deleveraging toward 7.5x and the maintenance of adequate liquidity supported by estimated cash balance of $16 million at the close of the transaction, an undrawn $70 million revolver and positive free cash flow in the next 12 months. It also reflects Moody's expectation that the company will limit M&A transactions prior to reducing its leverage well below 8x.

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

Although unlikely in the near term, Moody's could upgrade ECi's ratings if leverage is expected to sustain below 6.5x and free cash flow to debt is in the mid-to-high single digits.

Moody's could downgrade ECi's ratings if revenue declines for an extended period of time and free cash flow falls to near breakeven level. The ratings could also be downgraded if operating challenges or more aggressive financial policies leads to leverage sustained above 8x or liquidity weakens.

Assignments:

..Issuer: ECI Macola/Max Hld, LLC (Leonard Green Partners)

.... Corporate Family Rating, Assigned B3

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

Affirmations:

..Issuer: ECI Macola/Max Holding, LLC (Apax Partners)

....Senior Secured 1st Lien Term Loan, Affirmed B2 (LGD3)

....Senior Secured Revolving Credit Facility, Affirmed B2 (LGD3)

....Senior Secured 2nd Lien Regular Bond/Debenture, Affirmed Caa2 (LGD5)

Outlook Actions:

..Issuer: ECI Macola/Max Hld, LLC (Leonard Green Partners)

....Outlook, Assigned Stable

..Issuer: ECI Macola/Max Holding, LLC(Apax Partners)

....Outlook, Remains Stable

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.

ECi is a provider of vertical-focused ERP systems and related products primarily to small and medium-sized enterprises (SME). Pro forma for recent acquisitions, run rate revenue as of June 30, 2020 was approximately $340 million. ECi is being acquired by private equity firm, Leonard Green Partners, LLC ("LGP").

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

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.

Matthew B. Jones VP - Senior Credit Officer 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 Stephen Sohn 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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