Rating Action: Moody's assigns a B3 CFR and stable outlook to Endure Digital; rates proposed LBO and merger financing
Global Credit Research - 20 Jan 2021
NOTE: On January 26, 2021, the press release was corrected as follows: The following was added as the eighth paragraph of the REGULATORY DISCLOSURES section: At least one ESG consideration was material to the credit rating action(s) announced and described above. Revised release follows.
New York, January 20, 2021 -- Moody's Investors Service, ("Moody's") assigned a first time B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) to Endure Digital, Inc. ("Endure Digital") in connection with private equity firm Clearlake Capital Group, L.P.'s ("Clearlake") proposed acquisition of EIG Investors Corp. ("Endurance") and subsequent merger with Web.com Group, Inc. ("Web.com"). At the same time, Moody's assigned a B2 rating to the company's proposed first lien senior secured credit facility, consisting of a $275 million revolving credit facility and $2.295 billion term loan B. The outlook is stable.
The new credit facility is being issued as part of several concurrent transactions. First, Clearlake will acquire 100% of the common stock of Endurance for $9.50 per share, representing a total enterprise value of approximately $3.0 billion. Second, Clearlake will use incremental proceeds from the proposed financing and new equity contribution to buy Web.com from Siris Capital Group, LLC ("Siris") for a total enterprise value of approximately $2.2 billion. Third, Endurance will be merged with Web.com to form Endure Digital. Siris will roll its existing equity from Web.com and become an equal share partner with Clearlake in the combined company. Finally, the sponsors will spin out Endurance's digital marketing software business ("Constant Contact") into a standalone company with separate financing that is not part of this capital structure. Moody's also expects Endure Digital to issue an additional $640 million of unsecured debt to complete the funding of the transaction in the near term. Moody's will withdraw all existing ratings of Endurance and Web.com upon the repayment of debt.
The rating action reflects the merging of Web.com and Endurance complimentary businesses, highly visible and well-respected brands, and strengthened competitive position in the web services market with pro forma revenues in excess of $1 billion in 2020. At the same time, the transaction involves very high level of debt and leverage as well as elevated execution risks around integrating Endurance, a larger company with lower profitability and historically higher customer churn than Web.com. The macro economic uncertainty and weak topline growth also weigh in on the rating. Finally, the rating action incorporates the company's high governance risk associated with private equity ownership, tolerance for high leverage and potential for an aggressive growth strategy or shareholder distributions.
..Issuer: Endure Digital, Inc.
.... Corporate Family Rating, Assigned B3
.... Probability of Default Rating, Assigned B3-PD
....Senior Secured First Lien Revolving Credit Facility, Assigned B2 (LGD3)
....Senior Secured First Lien Term Loan B, Assigned B2 (LGD3)
..Issuer: Endure Digital, Inc.
....Outlook, Assigned Stable
The assigned first-time ratings remain subject to Moody's review of the final terms and conditions of the proposed financing and merger transaction that is expected to close in February 2021.
Endure Digital's B3 CFR reflects the company's high pro forma debt-to-EBITDA leverage, estimated at 8.8x (Moody's adjusted, expensing all capitalized software costs but excluding future cost savings and synergies not yet implemented for the combined company) at September 30, 2020 and elevated integration risk associated with the combination of two businesses, Endurance and Web.com, which historically experienced challenges in sustaining revenue and earnings growth amid ongoing revenue attrition for the company's legacy brands. The scale of the two companies and the considerable restructuring initiatives that are planned could create business disruptions and slow pace of deleveraging in the context of the competitive industry dynamic and weak macro-economic outlook. Although closing leverage is high, Moody's estimates that the company will be able to improve on this measure over the next 12-18 months, with debt-to-EBITDA expected to moderate towards mid-7.0x by the end of 2022 based on cost savings realization and improved operating margin. However, these leverage projections assume Endure Digital achieves the majority of its planned synergies and cost savings from the merger, while maintaining stable topline. The company is also exposed to event risks under majority private equity ownership including debt-funded acquisitions and shareholder distributions.
The rating favorably considers Endure Digital's enhanced scale as the third largest by revenue provider of web services, highly diversified revenue base with more than 6.8 million paid-subscribers, the mission-critical nature of its offerings servicing small-medium-sized businesses (SMB), a largely recurring and predictable revenue base driven by annual contracts with auto-renew options, and above market average customer retention rates. The business combination creates opportunities for the company to cross-sell and up-sell solutions across a larger and diversified subscriber base and realize significant cost savings through improved capacity utilization in data centers, elimination of redundancies, offshoring operating platforms and consolidating infrastructure and technology platforms. The transaction contemplates large cost synergies that the company expects to realize within 2-3 years of closing. Web.com's management team, which will be retained as part of this transaction, has significant expertise and good track record in platform consolidation and cost savings implementation. The rating is also supported by the company's asset-light operating model with highly variable cost structure, favorable working capital profile and limited capital requirements. Moody's expects the company will maintain good liquidity, including free cash flow generation in excess of $150 million over the next 12-18 months.
The stable outlook reflects Moody's view that Endure Digital's credit metrics will improve over the next 12-18 months as the company realized significant cost savings and large integration expenses abate, while topline remains stable over the same period. Moody's also expects Endure Digital will maintain good liquidity, including free cash flow-to-debt (Moody's adjusted) in the low-to-mid single-digit percentages of total debt.
Endure Digital's good liquidity will be supported by a pro forma cash balance of approximately $70 million at closing and full availability under a new $275 million revolving credit facility due 2026 (undrawn at closing). While one-time integration costs associated with the integration of the two businesses could weigh on the free cash flow generation over the near term, Moody's expects that Endure Digital will generate normalized annual free cash flow of nearly 5% of total debt over the next 12-18 months. There are no financial maintenance covenants under the new credit facility (revolver and term loan), but the revolver is subject to a springing maximum first lien leverage ratio of 7.1x if the amount drawn exceeds more than 35% of the revolving credit facility. The company is expected to maintain covenant compliance over the next 12-15 months even if the covenant is triggered.
The B2 rating assigned to Endure Digital's senior secured first lien credit facility (revolver and term loan) is one notch higher than the company's B3 CFR, reflecting the expected moderate amount of junior support in the capital structure, in the form of unsecured debt (unrated) and other non-debt obligations. The first lien credit facility is unconditionally guaranteed jointly and severally on a senior secured first-lien basis by the holdings and the borrower's direct and indirect, existing and future, wholly-owned domestic subsidiaries. The first lien credit facility is secured by a perfected first-priority pledge on all material assets of the borrower and guarantors.
The first lien credit facility is expected to contain covenant flexibility for transactions that could adversely affect creditors, including incremental facility capacity. The credit agreement requires 100% of non-ordinary course asset sales to be used to repay the credit facility, stepping down to 50%, 25% and 0% if secured net leverage is below 3.4x, 3.15x and 2.9x, respectively, subject to a reinvestment opportunity of 100% of these proceeds. There are no unrestricted subsidiaries preventing potential collateral leakage to unrestricted subsidiaries. Only wholly-owned subsidiaries must provide guarantees, raising the risk of potential guarantee release; partial dividends of ownership interests could jeopardize guarantees.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgrade if Endure Digital cannot translate planned cost savings and synergy benefits into higher EBITDA, weak topline growth or margin compression, or if the company fails to generate free cash flow. The ratings could also be downgraded if debt-to-EBITDA (Moody's adjusted) remains elevated or liquidity deteriorates for any other reason.
Successful integration of Endurance, including achieving synergy targets and meaningfully reducing leverage, while maintaining stable topline are required for an upgrade. Quantitatively, the ratings could be upgraded if Moody's believes that the company will maintain debt-to-EBITDA (Moody's adjusted) below 6.5x and free cash flow-to-total debt at 5% or better.
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.
Endure Digital (Web.com and Endurance), is a leading provider of internet domain name registrations, web hosting and website building tools to small businesses. The combined company will have an expanded portfolio of leading web services brands, which include Bluehost, Network Solutions, and Web.com as well as other regional and complimentary brands. Moody's projects pro forma revenue in excess of $1 billion in 2020. Clearlake and Siris will be majority shareholders of the combined company.
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.
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