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LI Group Holdings, Inc. -- Moody's affirms Liaison's B2 CFR, assigns B2 first-lien term loan rating; outlook stable

·16 min read

Rating Action: Moody's affirms Liaison's B2 CFR, assigns B2 first-lien term loan rating; outlook stableGlobal Credit Research - 23 Feb 2021$315 million of rated debt affectedNew York, February 23, 2021 -- Moody's Investors Service, ("Moody's") affirmed LI Group Holdings, Inc.'s (dba "Liaison") B2 corporate family rating ("CFR"), B2-PD probability of default rating, and B2 instrument ratings on an existing first-lien revolving credit facility. Moody's also assigned B2 instrument ratings to the admissions-management-software provider's new, $300 million first-lien senior secured term loan. Proceeds from the new term loan will be used to pay down an existing $273 million first-lien term loan, add $23 million of cash to Liaison's balance sheet, and pay transaction fees. The outlook remains stable.Moody's expects to withdraw ratings on the existing $273 million term loan upon closing of the proposed $300 million loan.Assignments:..Issuer: LI Group Holdings, Inc.....Senior Secured First Lien Term Loan, Assigned B2 (LGD4)Affirmations:..Issuer: LI Group Holdings, Inc..... Probability of Default Rating, Affirmed B2-PD.... Corporate Family Rating, Affirmed B2....Senior Secured First Lien Revolving Credit Facility, Affirmed B2 (LGD4)....Senior Secured First Lien Term Loan, Affirmed B2 (LGD4)Outlook Actions:..Issuer: LI Group Holdings, Inc.....Outlook, Remains StableRATINGS RATIONALEThe refinancing transaction will relever Liaison to a Moody's-adjusted level of just above 6.0 times, or just above 7.0 times when expensing substantial capitalized software development costs. Current favorable credit markets will allow the company to refinance its existing debt at rates that make its absolute annual interest expense a couple million dollars lower than the current level, while adding $23 million of cash to its balance sheet.The leverage measures from the proposed transaction are approximately where they were in September 2020, when Liaison took on incremental financing to acquire TargetX, and they are about a half turn lower than when Moody's originally rated the credit in late 2019. During the interim Liaison has grown its revenues at slightly better than 10% and its cash position (as of year-end 2020) has tripled to over $71 million. Even during a challenging, COVID-19-affected operating environment, Liaison has seen strong volumes of application submissions from its centralized application service ("CAS") customers. Liaison is, moreover, well along in integrating TargetX, which has enabled it to diversify beyond facilitating professional-graduate-school applications, and into customer relationship management, including targeting prospective students and improving retention of enrolled students. High leverage and a small revenue base relative to issuers with a similar rating continue to constrain Liaison's credit profile, whose offsetting strengths include a clear market-leading position as a provider of CASs for graduate education programs, strong cash flow, good quality of earnings, and good growth prospects.Moody's expects steady, growth- and profitability-driven deleveraging, towards 6.5 times and toward 5.5 times with and without the software-development-cost adjustments, respectively, by the fiscal year ended March 31, 2022. Moody's also expects free cash flow as a percentage of adjusted debt, an alternative leverage measurement, of at least 10% by March 2022, quite strong for the B2 CFR. Moody's considers owner Meritage as an atypical private equity investor that has no defined fund life. Meritage's and management's equity contribution to Liaison's total capitalization, when adjusting for the slightly dilutive effects of the TargetX acquisition, is nearly 70%.Moody's views Liaison's liquidity as very good, as revenue and margin growth will produce steadily accumulating balance sheet cash and annual free cash flows building from low-double-digit percentages of adjusted debt. Opening cash of $71 million, supplemented with $23 million of proceeds from the proposed term loan, is strong, but Moody's notes the company's stated aim to pursue tuck-in acquisitions using cash. The company collects application fees quickly, through credit card payments, and working capital has historically been a modest source of funds annually. However, the seasonality of an academic year suggests there may be the need to draw intermittently under the $15 million revolver, whose size is modest relative to annual interest expense and capital expenditures. Moody's considers the single financial covenant, a springing first-lien net leverage test for the benefit of revolver lenders only, applicable when at least 35% of the facility is drawn and set at 8.5 times, to be so loose as to provide little protection for lenders.Liaison faces moderate Environmental, Social, and Governance ("ESG") issues, primarily regarding social risks related to higher education institutions, which are under intense social and potentially regulatory scrutiny because of their admissions practices, high costs, and perceived utility. A distinct socioeconomic shift over the past several decades towards a greater share of employment opportunities becoming available only to persons with a minimum level of higher education, is plainly in Liaison's favor. Governance considerations include financial strategy risks, such as the employment of high leverage, as well as the potential for substantial dividends to be paid out in lieu of deleveraging. The revised credit agreement allows for unlimited restricted payments as long as total pro-forma net leverage does not exceed 4.5 times, and allows for other restricted payments up to the greater of $30 million and 50% of EBITDA.The stable outlook reflects Moody's expectations for revenue growth of about 5% over the next two years, driven by continued volume growth in applications and embedded price increases. Moody's also expects steadily building cash balances, and moderately declining leverage. While the inclusion of the TargetX acquisition will cut into margins initially, Moody's expects scale efficiencies and synergy realization to keep margins very healthy.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would consider an upgrade to Liaison's ratings if the company: can substantially and profitably grow its revenue base to be more in line with issuers in the upper-B rating category; expands successfully into non-healthcare-related universities; maintains good customer retention; sustains debt-to-EBITDA (with our capitalized software adjustment reducing EBITDA) below 5.0 times; and sustains free cash flow-to-debt in the teen percentages (including Moody's standard adjustments).The ratings could be downgraded if anticipated revenue growth slows, liquidity weakens substantially, or if Moody's expects that free cash flow as a percentage of debt will fall towards 5%. Although unforeseen, any successful, disruptive competing technology that threatens Liaison's market position will also put pressure on the ratings.LI Group Holdings, Inc., doing business as Liaison, is a comprehensive SaaS-based marketplace technology, applications, and analytics platform supporting the US higher education market. The company was acquired in early December 2019 by private investor Meritage and current management.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.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.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. Kevin Stuebe Vice President - Senior 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 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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