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Vaco Holdings, LLC -- Moody's assigns Vaco B2 CFR and senior secured ratings; outlook stable

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Rating Action: Moody's assigns Vaco B2 CFR and senior secured ratings; outlook stableGlobal Credit Research - 06 Jan 2022$640 million of new bank credit facilities ratedNew York, January 06, 2022 -- Moody's Investors Service ("Moody's") assigned Vaco Holdings, LLC ("Vaco") a corporate family rating ("CFR") at B2 and probability of default rating ("PDR") at B2-PD . Concurrently, Moody's assigned B2 ratings to the company's proposed $40 million senior secured revolver due 2027 and $600 million senior secured term loan due 2029. The outlook is stable. This is the first time Moody's has rated Vaco.Term loan proceeds along with existing balance sheet cash will be used to repay approximately $200 million of existing indebtedness, pay a $380 million dividend to the company's shareholders, purchase $50 million of minority interests and pay related fees & expenses.Governance risk is a key consideration incorporated in the B2 CFR given Moody's expectation for aggressive financial strategies typically employed by private equity sponsor owners, including debt-funded acquisitions and shareholder returns. Vaco is owned by affiliates of private equity sponsor Olympus Partners ("Olympus").The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Vaco Holdings, LLC.... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD....GTD Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3) ....GTD Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3) Outlook Actions: ..Issuer: Vaco Holdings, LLC ....Outlook, Assigned Stable RATINGS RATIONALE The B2 CFR reflects Vaco's high financial leverage, with debt to EBITDA of 4.9x as of 30 September 2021, pro forma for the proposed transactions. The company operates in the highly competitive temporary staffing and consulting industry that features both large global firms and established niche players which could pressure growth and profitability. The industry is also evolving with increasing automation and changes in employment models that present new opportunities and challenges. The temporary staffing and consulting industry is also subject to cyclical spending and would be impacted during periods of macroeconomic weakness, although downturns in the staffing industry have historically resulted in short term favorable working capital dynamics as companies generate cash from receivables when revenue falls. Vaco has performed well during the last year with 26% revenue growth for the 12-month period ended 30 September 2021, though Moody's expects that this performance will moderate going forward given the rapid employment recovery that began following the initial COVID-19 pandemic wave in early 2020.Vaco's credit profile is supported by its position as an established player in the temporary staffing and consulting industry that Moody's expects will benefit from broad secular trends towards outsourcing across end markets. The company has modest revenue and earnings diversity with a strategic staffing (49% of FY21E revenue), direct hire (10%), managed services (18%), and consulting (23%) segments that provide white collar professionals with skillsets within the IT, finance and accounting, and HR space across broad end markets. The company's EBITA margins in the mid-to-low teens are solid when compared to other high skilled staffing firms such as APFS Staffing Holdings, Inc. (B2 stable, 10% to 12%) and ASGN Incorporated (Ba2 stable, 9% to 10%) and considerably higher than lower skilled staffing companies such as ManpowerGroup, Inc. (Baa1 stable, 2% to 3%) and Employbridge Holding Company (B2 stable, 4% to 5%). The company's margin profile is supported by its higher margin consulting segment that benefits from cross selling and utilization of skilled professionals from its staffing segment. The company's top 10 clients represent 19% of annual revenue, highlighting modest customer concentration. Salespeople generally operate at a local level with clients to enhance relationships and support client retention. EBITA margins in the low-to-mid-teens and a largely variable cost structure with minimal capital expenditure needs result in healthy free cash flow generation.Governance considerations are a key driver of the B2 CFR. Moody's expects that Olympus will employ shareholder-friendly financial policies that will keep leverage high, as evidenced by the proposed dividend recapitalization and the company's history of acquisitions. Vaco acquired MorganFranklin, Inc. in 2019 to establish its consulting business, so the rating considers that the company will pursue the acquisitions as part of its growth strategy.A good liquidity profile is supported by Moody's expectation for at least $60 million of free cash flow, and access to the proposed $40 million senior secured revolving credit facility expiring 2027. Given that the amount of cash expected at close will be minimal, it is possible the company may fund near term working capital needs using its revolver. The company's senior secured term loan has $7 million of annual mandatory debt repayment that is expected to be sufficiently covered by internally generated free cash flow. Moody's reclassifies a recurring cash dividend as operating cash flow because Moody's considers it as a form of compensation tied to employment for managing partners and senior leaders.The B2 rating on Vaco's senior secured credit facilities reflects both the B2-PD PDR and a loss given default assessment of LGD3. The senior secured credit facilities benefit from secured guarantees from its direct parent and all existing and subsequently acquired domestic subsidiaries. As there is no other meaningful debt in the capital structure, the credit facilities are rated in line with the B2 CFR.As proposed, the credit facility is expected to contain covenant flexibility provisions that could adversely impact creditors. Notable terms include: incremental debt capacity up to the greater of $151 million and 100% of consolidated EBITDA, plus unlimited amounts subject to 4.6x senior secured first lien net leverage ratio, or the transaction is leverage neutral (if pari passu secured, or amounts not greater than a net leverage ratio of 4.85x and 5.1x on senior secured junior lien basis and total unsecured basis, respectively). No portion of the incremental may be incurred with an earlier maturity than the initial term loans. The credit agreement permits the transfer of assets to unrestricted subsidiaries, up to the carve-out capacities, subject to "blocker" provisions which prohibit the transfer of material intellectual property to unrestricted subsidiaries. Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, with no explicit protective provisions limiting such guarantee releases. There are no express protective provisions prohibiting an up-tiering transaction.The above are proposed terms and the final terms of the credit agreement may be materially differentThe stable outlook reflects Moody's expectations for mid-single-digit range revenue growth, low-to-mid teens EBITDA margins and debt to EBITDA to decline over the next 12 months towards the low 4x while Vaco maintains free cash flow to debt above 5% and EBITA to interest expense around 3x.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded through sustained revenue and earnings growth at stable margins, along with conservative financial policies, supportive of debt to EBITDA remaining below 4x and free cash flow-to-debt approaching 10% while maintaining good liquidity.Ratings could be downgraded should Vaco experience declines in revenue or profitability rates. An expectation that debt leverage will be sustained above 6x or should liquidity deteriorate including free cash flow to debt below 3% could also lead to a downgrade. Financial policies featuring shareholder returns or aggressive acquisitions would also negatively pressure ratings.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Vaco Holdings, LLC, controlled by Olympus since 2017 and based in Brentwood, Tennessee, is a provider of temporary, full-time and project and consulting professionals specializing in IT, finance & accounting, technology, and healthcare IT services. The company operates out of over 50 offices across the United States. Revenue for the year ending 31 December 2021 is expected to be approximately $950 million.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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Andrew MacDonald Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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