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Renaissance Holding Corp. -- Moody's affirms Renaissance Learning's B3 CFR following Nearpod acquisition; outlook Stable

·17 min read

Rating Action: Moody's affirms Renaissance Learning's B3 CFR following Nearpod acquisition; outlook StableGlobal Credit Research - 18 Feb 2021New York, February 18, 2021 -- Moody's Investors Service ("Moody's") affirmed Renaissance Holding Corp.'s (dba Renaissance Learning) B3 Corporate Family Rating ("CFR") and B3-PD Probability of Default Rating ("PDR") following the company's proposed acquisition of Nearpod. Moody's also affirmed the B2 rating for the company's first lien senior credit facilities including revolver and term loan, and affirmed the Caa2 rating for the second lien term loan. Additionally, Moody's assigned a B2 rating to the proposed $140 million of new revolver (upsized and extended from the existing $80 million revolver due 2023). The outlook remains stable.The $650 million acquisition of Nearpod along with related fees and expenses will be financed with an additional $358 million first lien term loan and $135 million second lien term loan, as well as equity contribution from its equity sponsor, Francisco Partners. Moody's views this primarily debt funded acquisition as very aggressive financial policy because it will increase Moody's adjusted debt-to-EBITDA leverage to in excess of 10.0x pro forma for the transaction (vs low 9.0x for the trailing twelve months ended September 30) due to the high acquisition multiple the company is paying for Nearpod.Given the very high pro forma leverage, Moody's views the company as weakly positioned in the B3 category. However, Moody's affirmed the ratings based on the expectation that Renaissance Learning will be able to de-lever to below 9.0x debt-to-EBITDA by year end 2022 with solid earnings growth including realization of synergies from the Nearpod acquisition. The affirmation also reflects the company's track record of successfully integrating acquisitions in the past. Pro forma for the transaction, the company will have good liquidity with $71 million cash on balance sheet to fund seasonal working capital needs and is expected to generate positive free cash flow of over $30 million over the next year, which also supports the affirmation of the B3 CFR. The company is upsizing its revolver from $80 million to $140 million, which Moody's expects will primarily be used to fund working capital needs for the year. The acquisition will further increase Renaissance Learning's scale with Nearpod's content delivery platform as well as additional content from the existing learning products on Nearpod's platform. Additionally, the educational technology industry is experiencing high growth accelerated by the coronavirus pandemic and the increase in distance learning.Moody's took the following ratings actions:Issuer: Renaissance Holding Corp.Ratings Affirmed:.... Corporate Family Rating, affirmed at B3.... Probability of Default Rating, affirmed at B3-PD.... Gtd Senior Secured First Lien Revolving Credit Facility, affirmed at B2 (LGD3).... Gtd Senior Secured First Lien Term Loan, affirmed at B2 (LGD3).... Gtd Senior Secured Second Lien Term Loan, affirmed at Caa2 (LGD5)Ratings Assigned.... New $140 million Gtd Senior Secured first lien revolver, assigned B2 (LGD3) Outlook Actions: ....Outlook, Remains Stable Moody's expects to withdraw the B2 rating on the existing revolver expiring in 2023 once the transaction closes and the new revolver is in place.RATINGS RATIONALERenaissance Learning's B3 CFR broadly reflects its very high leverage as the result of aggressive growth strategy with debt funded acquisition. Pro forma Moody's adjusted debt-to-EBITDA exceeds 10.0x (after deducting software development costs). Debt-to-EBITDA leverage would be in the 8.0x range if the change in deferred revenue is included in the calculation of EBITDA. Although Moody's expects leverage will decline to below 9.0x due to earnings growth over the next 12 to 18 months including through the realization of synergies, Renaissance Learning's leverage is expected to remain high over the longer term given its private equity ownership and a growth strategy that incorporates strategic debt funded acquisitions. The leverage weakly positions the company within the rating category. The rating is also constrained by the competitive nature of the industry with other participants in the relatively fragmented K-12 digital learning and assessment market. High investment needs will consume cash as the company continues to enhance content and product features to maintain competitiveness. However, the rating is supported by Renaissance Learning's established brand name with a portfolio of well-recognized product offerings in the digital education market, and solid growth prospects driven by favorable industry fundamentals such as the transition of educational services to more digital-oriented delivery. The rating also benefits from the company's relatively stable cash generating capability due to a high level of recurring revenue and good margins.Moody's views Renaissance Learning's governance risk as high due to its private equity ownership by Francisco Partners. Given this, Moody's expects an aggressive financial and acquisition strategy that tends to favor shareholders.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Renaissance Learning is experiencing positive demand growth from school districts related to societal trends toward digital learning tools that is being bolstered by distance learning during the pandemic. This is more than offsetting the drag the company's orders and sales from pressure on school budgets from lower tax revenues.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's expectation that the company will be able to de-lever rapidly with solid earnings growth over the next 12 to 18 months as well as maintain good liquidity with free cash flow generation of about $30 million over the next year.The ratings could be downgraded if growth is weaker than expected and leverage is not declining rapidly, market share declines, EBITA-to-interest expense less than 1.0x, free cash flow to debt is below 1%, or liquidity deterioratesThe ratings could be upgraded if the company delivers sustained organic revenue and earnings growth, with Moody's adjusted debt-to-EBITDA maintained well below 6.5x and free cash flow as a percentage of debt sustained above 5%.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.Renaissance Learning is a provider of subscription-based educational practice and assessment software and school improvement programs for kindergarten through senior high (K-12) schools. The company has been owned by private equity firm Francisco Partners since 2018. Pro forma for the acquisition, total billings (revenue proxy) is expected to be about $400 million in 2020.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. Joanna O'Brien 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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