Rating Action: Moody's assigns a B3 CFR and stable outlook to Consilio; rates proposed LBO and merger financingGlobal Credit Research - 21 Apr 2021New York, April 21, 2021 -- Moody's Investors Service ("Moody's") assigned a B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) to GI Consilio Parent LLC ("Consilio", initially, Skopima Merger Sub Inc.) following the announcement of a business combination between two eDiscovery providers. At the same time, Moody's assigned a B2 rating to the company's proposed $1,085 million first lien senior secured credit facility (including $1,010 million term loan and $75 million revolver) and a Caa2 rating to the proposed $300 million second lien senior secured term loan. The outlook is stable.The proceeds from the proposed debt financing along with new equity will be used to fund a leveraged buyout of Consilio by Stone Point Capital LLC ("Stone Point") and its affiliates from GI Partners. The proceeds will also be used to buy Xact Data Discovery ("Xact" or "XDD"), which is concurrently being acquired by Aquiline Capital Partners ("Aquiline"). Upon close of the transaction, Consilio will be combined with Xact, creating the largest pure-play (by revenue) global eDiscovery data provider. Aquiline will roll its equity into the combined company, which will operate under the Consilio brand. Consilio will be majority owned by Stone Point, with Aquiline and management retaining a minority stake.The business combination between Consilio and Xact, two complementary businesses, creates the market leader in the highly fragmented and competitive global eDiscovery and legal services market with more than $650 million in combined pro forma annual revenue as of December 31, 2020. The merger is expected to provide Consilio with long-term strategic benefits including, greater access to mid-market corporate clients and law firms, more revenue stability by diversifying away from larger engagements, lower customer concentration, and opportunities for acquisition synergies. Despite management's past integration challenges related to the 2018 purchase of Advanced Discovery and DiscoverReady, Moody's does not anticipate significant integration issues since there is very little customer overlap, similar corporate cultures, and management expects to take a measurable approach integrating acquired sales teams.At the same time, the transaction involves a very high level of debt and leverage and Moody's expects that Consilio will continue to find value in new opportunities to expand its customer base, diversify revenue and add additional technological capabilities, which may be funded with incremental debt, As such, Consilio has high governance risk associated with private equity ownership, tolerance for high leverage and the potential for a more aggressive growth strategy or shareholder distributions. Additionally, Moody's believes that tech-enabled data providers, especially ones that host critical and sensitive information, will remain prime targets for cyber criminals, creating various degree of cyber reputational risk for these firms.Assignments:..Issuer: GI Consilio Parent LLC.... Corporate Family Rating, Assigned B3.... Probability of Default Rating, Assigned B3-PD....Senior Secured 1st Lien Bank Credit Facility, Assigned B2 (LGD3)....Senior Secured 2nd Lien Bank Credit Facility, Assigned Caa2 (LGD6)Outlook Actions:..Issuer: GI Consilio Parent LLC....Outlook, Assigned StableThe assigned 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 Q2 2021.RATINGS RATIONALEConsilio's B3 CFR reflects the company's high pro forma debt-to-EBITDA leverage, estimated at 7.4 times (Moody's adjusted and excluding acquisition synergies) at December 31, 2020, integration risk associated with the business combination, operations in an intensely competitive and fragmented eDiscovery market with some customer concentration, and its acquisitive growth strategy. The event driven nature of Consilio's business segments create short term earnings and working capital volatility that limits visibility. Despite its relatively modest scale, Consilio will be the industry's largest pure-play global provider of eDiscovery. 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 to below 6.0x by end of 2022 based on earnings growth and realization of acquisition synergies. The company is also exposed to event risks under private equity ownership including debt-funded acquisitions and shareholder distributions.The rating favorably considers Consilio's enhanced scale and competitive position in the global eDiscovery and legal services market, diversified revenue by customer and matters with combined more than 4,000 upper and middle market customers, good profitability, and continued to ability to win new clients across various industry verticals. Consilio's long-term relationships with blue-chip corporate and law firm clients, augmented by a track record of high revenue retention provide support for the rating. In addition, favorable macro industry dynamics for the eDiscovery market driven by exponential growth of data created and stored, the potential for regulatory changes in the US and the pandemic related litigation support Moody's expectation for stable organic topline growth in the low-to-mid single digit percentages over the next two years.The stable outlook reflects Moody's expectations that management will successfully integrate both businesses and achieve synergy benefits with limited business disruptions. Moody's projects Consilio will generate low-to-mid-single digit organic revenue growth, some expansion of the EBITDA margin from realization of synergies and operating leverage, steady deleveraging to below 6.0 times and maintenance of good liquidity.Consilio's good liquidity will be supported by a pro forma cash balance of approximately $20 million at closing and full availability under a new $75 million revolving credit facility due 2026 (undrawn at closing). Moody's expects that Consilio will generate normalized annual free cash flow (excluding anticipated earnout of around $50 million due in April 2022) above 5% of total debt over the next 12-18 months. These cash sources provide good coverage for required annual term loan amortization of approximately $10 million, paid quarterly. 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 7.5x, tested quarterly, if the amount drawn exceeds more than 35% ($26.25 million ) of the revolving credit facility. The company is expected to maintain covenant compliance over the next 12-15 months even if the covenant utilization threshold is triggered.The B2 rating assigned to Consilio's first lien credit facility (revolver and term loan), one notch above the company's B3 CFR, reflects their senior position in the capital structure relative to the second lien term loan and other unsecured claims. The first lien credit facility is secured by first priority perfected lien on substantially all of the present and future acquired assets of the borrower and the guarantors (including all fee-owned property, with some exclusions). The Caa2 rating on the second lien term loan, two notches below the company's B3 CFR, reflects lien subordination to the first lien credit facility. The second lien term loan is secured by a second priority perfected lien on collateral securing the first lien credit facility. The senior secured credit facility and second lien term loan are unconditionally guaranteed jointly and on a senior secured basis by holdings, each existing and subsequently acquired direct or indirect wholly-owned U.S. restricted subsidiary of the borrower.As proposed, the first lien revolver, first lien term loan and second lien term loan are expected to provide covenant flexibility that if utilized could negatively impact creditors.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's could upgrade Consilio's ratings if profitable revenue growth leads to a material reduction in leverage such that debt-to-EBITDA (Moody's adjusted) leverage is sustained below 6.0 times, free cash flow to debt is sustained above 5%, while maintaining balanced financial policies and at least good liquidity.Moody's could downgrade Consilio's ratings if the company cannot translate planned synergy benefits into higher EBITDA, weak topline growth or margin compression, or if the company fails to generate positive free cash flow. Quantitatively, the rating could also be downgraded if the company's debt-to-EBITDA (Moody's adjusted) is sustained above 7.5 times or liquidity deteriorates for any other reason.The principal methodology used in 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.Headquartered in Washington, D.C., Consilio provides electronic discovery, document review and consulting services to corporations and law firms globally. Moody's expects pro forma revenue of more than $650 million in 2020. Following the business combination, Consilio will be majority owned by Stone Point Capital LLC, with a minority stake held by Aquiline Capital Partners and management.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 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. 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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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Oleg Markin Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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