Severin Acquisition, LLC -- Moody's places PowerSchool's B3 CFR and facility ratings under review for upgrade following IPO plans

Rating Action: Moody's places PowerSchool's B3 CFR and facility ratings under review for upgrade following IPO plansGlobal Credit Research - 23 Apr 2021Nearly $1.4 billion of rated debt on review for upgradeNew York, April 23, 2021 -- Moody's Investors Service, ("Moody's") placed Severin Acquisition, LLC's (dba "PowerSchool") B3 corporate family rating, B3-PD probability of default rating ("PDR"), and respective B2 and Caa2 first- and second-lien debt ratings on review for upgrade. The outlook has been revised to rating under review, from stable.On April 6th, PowerSchool announced the submission of a draft registration statement on Form S-1 with the Securities and Exchange Commission outlining its plan for a proposed IPO, which Moody's anticipates will be undertaken by mid-2021[1].On Review for Upgrade:..Issuer: Severin Acquisition, LLC.... Corporate Family Rating, Placed on Review for Upgrade, currently B3.... Probability of Default Rating, Placed on Review for Upgrade, currently B3-PD....Senior Secured 1st Lien Bank Credit Facility, Placed on Review for Upgrade, currently B2 (LGD3)....Senior Secured 2nd Lien Bank Credit Facility, Placed on Review for Upgrade, currently Caa2 (LGD5)Outlook Actions:..Issuer: Severin Acquisition, LLC....Outlook, Changed To Rating Under Review From StableRATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings review reflects Moody's expectation that PowerSchool will use the IPO proceeds primarily for debt repayment, including retiring a $320 million bridge loan assumed for a late-March 2021 acquisition, and then, in order according to which the amount of proceeds will allow, a $365 million second-lien term loan and $829 million of first-lien term loan debt. (As of year-end 2020, PowerSchool also had in place a $180 million revolving credit commitment, under which $40 million had been outstanding.) While the amount of proceeds is not speculated in the S-1 filing, Moody's assumes proceeds will be at least enough to retire PowerSchool's bridge loan, which was raised to make an all-debt-financed acquisition in March 2021.The review for upgrade is based on the clear message conveyed in the S-1 that PowerSchool's primary objective is deleveraging. Employing an assumed wide range of IPO proceeds, Moody's estimates that PowerSchool's debt-to-EBITDA leverage could improve moderately, to a still high 7.3 times, or, if proceeds approached $1.0 billion, substantially, to below 4.0 times, from above 9.0 times at present. Moody's expects that after the IPO there will not be a material change to the current heavy ownership position of private equity sponsors Vista and Onex. (All financial metrics cited reflect Moody's standard adjustments.)Given the still aggressive leverage levels that may result after the IPO, the ongoing PE control, and Moody's expectations for a continued active acquisition platform, Moody's anticipates the ratings review will conclude with no more than a one-notch upgrade, to a B2 CFR. Moody's expects to conclude the review upon completion of the IPO and reasonable assurance as to the quantum of debt that will be repaid. If, however, only a minimum amount of proceeds is raised such that leverage remains at roughly 6.5 times or higher, it is possible that Moody's would confirm PowerSchool's B3 CFR upon completion of the review. Additionally, individual debt-instrument ratings will depend upon the allocation of proceeds and the final composition of senior versus junior debt in PowerSchool's post-IPO capital structure.With improved albeit still modest free cash flow and balance sheet cash through 2021, PowerSchool, in Moody's view, continues to have adequate liquidity.The ratings could be upgraded if, after the IPO, Moody's expects PowerSchool's debt-to-EBITDA leverage will be sustained near 6.0 times; if acquisitions are integrated successfully (requiring lesser earnings adjustments), and if the size and scope of the business, as well as profits, expand, and; if Moody's anticipates that the company will generate free cash flow representing mid- to upper-single-digit percentages of debt.Given that the ratings are under review for upgrade, a negative rating action is unlikely in the near term. However, the ratings could be downgraded if: leverage fails to remain below 8.0 times over the next 12 to 18 months; if liquidity deteriorates, reflective, perhaps, of an aggressive acquisition strategy, or; if planned synergy execution fails to translate into improved EBITDA and positive free cash.With Moody's-expected 2021 revenues of about $600 million, pro-forma for the early 2021 acquisition of certain business lines of Hobsons, PowerSchool provides SIS, ERP and LMS software that facilitates the management, operations, communications, and teaching functionality for kindergarten through twelfth-grade educational institutions largely in North America. Vista Equity Partners acquired PowerSchool's core SIS business from Pearson Plc in 2015, and has executed many acquisitions since then.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. 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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.REFERENCES/CITATIONS[1] United States Securities and Exchange Commission, Form S-1 Registration Statement. PowerSchool Holdings, Inc., April 6, 2021Please 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. 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