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Rating Action: Moody's affirms Sungard AS's Caa2 CFR; appends limited default designation to PDR; changes outlook to stable from negative; will withdraw ratings for business reasons
Global Credit Research - 22 Dec 2020
New York, December 22, 2020 -- Moody's Investors Service (Moody's) has affirmed Sungard AS New Holdings III, LLC's (Sungard AS) Caa2 corporate family rating (CFR) and Caa2-PD probability of default rating (PDR). Moody's has appended the "/LD" designation to the PDR to signal that a "limited default" has occurred. The designation results from Moody's view that the company's initial issuance of a new $102 million first lien term loan due July 2024 (unrated) and a new $298 million second lien term loan due August 2024 (unrated) in an exchange of debt arrangement for the same amount of existing first and second lien debt is a distressed exchange. Immediately after incurring these new first lien and second lien term loans, Sungard AS made prepayments at par of $5 million and $15 million, respectively, to the new first lien and new second lien lenders. Further, as part of the exchange of debt arrangement process a portion of the new first lien term loan totaling $28 million was effectively re-characterized as a delayed draw term loan by participating lenders, and this $28 million amount was also immediately repaid. Under terms of this delayed draw portion of its new first lien term loan the company may redraw amounts up to the full $28 million through February 3, 2022.
Moody's also affirmed the Caa3 rating on Sungard AS's existing second lien term loan due November 2022, of which only a small portion of around $13 million remains outstanding after completion of the exchange of debt arrangement. Moody's withdrew the B2 rating on the company's first lien term loans -- a first lien term loan and first lien delayed draw term loan, both due in February 2022 -- that were fully paid off after completion of the exchange of debt arrangement. Sungard AS also amended certain terms of its existing $50 million asset-based revolver (unrated).
The outlook change to stable from negative reflects Moody's view of Sungard AS's steady execution of its strategic initiatives, a slowing pace of revenue and EBITDA declines, improved liquidity to address slowly declining cash flow deficits and a strengthened maturity profile over the next two years.
Moody's has decided to withdraw all the ratings of Sungard AS for its own business reasons and will complete the withdrawal as soon as practical. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.
..Issuer: Sungard AS New Holdings III, LLC
.... Probability of Default Rating, Affirmed Caa2-PD /LD (/LD appended)
.... Corporate Family Rating, Affirmed Caa2
....Senior Secured 2nd Lien Bank Credit Facility, Affirmed Caa3 (LGD4)
..Issuer: Sungard AS New Holdings III, LLC
....Senior Secured 1st Lien Bank Credit Facility, Withdrawn , previously rated B2 (LGD2)
..Issuer: Sungard AS New Holdings III, LLC
....Outlook, Changed To Stable From Negative
Moody's will withdraw all of Sungard AS's ratings as soon as practical.
The affirmation of Sungard AS's Caa2 CFR reflects continued execution risks and uncertainties associated with achieving revenue and EBITDA inflection following the company's 2019 exit from bankruptcy. The slowing pace of revenue and EBITDA contraction highlights the company's steady progress on a comprehensive strategic realignment, but the sustainability of Sungard AS's business model evolution is highly dependent on the future success of recently established partnering relationships, including with Dell Inc. (Ba1 stable), Megaport and Unitas Global. Continued improvement in sales force productivity is critical to bookings growth and a future inflection in revenue growth. In time, strengthened access to capital markets will be needed to fund success-based portions of growth objectives. Negative free cash flow and elevated leverage risk is currently offset by an improved liquidity position and a longer turnaround runway with the extension of the bulk of the company's debt maturities.
The company's operating trends are the result of a combination of factors, including historically poorly executed business evolution strategies in a rapidly changing and competitive industry, pricing pressures, underinvestment and weak sales force productivity. Sungard AS has reduced its capital spending levels as reflected in its steady mix shift to less capital-intensive service offerings in disaster recovery as a service, including in partnership with Amazon's AWS segment, as well as other asset-light managed services and consulting offerings. Revenue declines contribute to persistent cash flow deficits, but the company's sales wins in the third quarter of 2020 included strong progress with both new customers and existing customer renewals and upsells across multiple products and a range of industry verticals. Sungard AS's revenue base is supported by contractual relationships, a recognizable brand, solid market positioning in the recovery business and relatively low customer concentration. Sungard AS's new management team is updating and evolving its business strategy with a comprehensive focus on value creation over a longer time period.
Moody's expects high but generally steady debt/EBITDA (Moody's adjusted) of around 5.5x in 2020 and 2021. Inconsistent bookings growth and other turnaround complications could drive leverage higher. Moody's expects slow EBITDA margin improvement in 2021 as continued cost cutting actions offset revenue contraction, with aggregate headcount reductions since June 2019 expected to result in at least $50 million of annual run-rate labor savings. Moody's expects a mid-teens rate contraction in revenue growth for full year 2020 and a steady and slowing pace of contraction in 2021. Moody's believes the potential for revenue inflection remains unlikely until mid-2022. The company's pre-Chapter 11 revenue had been in steady decline for several years as well. At the time of its bankruptcy exit in mid-2019 Moody's had expected flattening revenue in 2020 predicated on a faster and more successful execution of a multi-year turnaround plan that focused on churn reduction, bookings growth improvement and continuous cost cutting initiatives. Despite Sungard AS's efforts to date, we expect negative free cash flow of around $30 million in 2020 with negative free cash flow near $20 million in 2021. While this negative free cash flow reflects some non-recurring spending that will enable longer term costs savings, visibility into sustained improvement in free cash flow in 2022 and beyond is limited.
As of September 30, 2020, Sungard AS had $135 million of cash on hand, or about $170 million pro forma for the late October draw of $35 million remaining under its first lien delayed draw term loan. This pro forma available liquidity had been boosted by the company's sale-leaseback of two data center properties in Atlanta and Toronto during Q3 2020 which raised net proceeds of $48 million. Post its completion of the exchange of debt arrangement, Sungard AS had about $120 million of pro forma balance sheet cash as of Q3 2020. Accommodating payment-in-kind portions of both its new first lien and second lien debt will be supportive during the company's continued turnaround. Moody's projects the company to have negative free cash flow over the next 12 to 18 months and adequate liquidity from the combination of its existing cash balances and availability under its $50 million asset-based first lien revolver due August 2024 (unrated). Moody's expects Sungard AS to be in compliance under the terms of its new credit agreements.
The instrument ratings reflect both the probability of default of Sungard AS, as reflected in the Caa2-PD/LD PDR, an average expected family recovery rate of 50% at default, and the loss given default (LGD) assessment of the debt instruments in the capital structure based on a priority of claims. The remaining existing second lien term loan is rated Caa3, one notch below the Caa2 CFR and reflects subordination to the company's asset-based revolver (unrated) and new first lien term loan (unrated), and the elimination of security in AS's foreign subsidiaries which subordinates the existing second lien term loan to the new second lien term loan (unrated) with respect to the foreign subsidiaries. The asset-based senior secured revolver (unrated) has a first-priority claim on US accounts receivable and unrestricted US cash balances.
The stable outlook reflects Moody's view of Sungard AS's steady execution of its strategic initiatives, declining pace of revenue and EBITDA contraction, improved liquidity to address slowly declining cash flow deficits and strengthened maturity profile over the next two years.
Moody's could consider a rating upgrade if revenue growth turns positive, free cash flow approaches 5% of debt and leverage (Moody's adjusted) is below 4.75x (all on a sustained basis).
The rating could be downgraded if the probability of default increases or expected recoveries in a default scenario decline due to further profitability or liquidity erosion.
The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Sungard AS New Holdings III, LLC is a provider of disaster recovery services and managed IT services.
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.
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.
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.
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Neil Mack, CFA 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 Lenny J. Ajzenman 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
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