TEXT - S&P cuts CCC Information Services Inc to 'B'
Overview -- Leonard Green & Partners plans to acquire a controlling interest in U.S. provider of solutions for the auto claims industry CCC Information Services Inc. (CCC) from Investcorp. The transaction will be funded through a combination of new equity, senior secured debt, and mezzanine debt. -- The transaction will result in an increase in expected pro forma leverage to approximately 7.5x from 4.6x in fiscal 2012. -- We are lowering our corporate credit rating on the company to 'B' from 'B+' with a negative outlook. -- In addition, we are assigning a 'B+' issue-level rating with a recovery rating of '2' to the company's proposed $50 million senior secured revolving credit facility and $470 million first-lien term loan. -- The negative outlook reflects a significant increase in pro forma leverage and weak debt protection metrics. Rating Action On Dec. 6, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Chicago, Ill.-based CCC Information Services Inc. to 'B' from 'B+'. The outlook is negative. In addition, we are assigning our 'B+' issue-level rating with a recovery rating of '2' to the company's proposed $50 million senior secured revolving credit facility (unfunded at closing) and $470 million first-lien term loan. The '2' recovery rating indicates our expectation for substantial (70% to 90%) recovery for lenders in the event of payment default. The company is using the loan proceeds together with $260 million of mezzanine notes (which we do not rate) and sponsor's equity contribution to fund the proposed transaction, including refinancing existing debt. Rationale The rating on CCC reflects the company's "weak" business risk profile, characterized by its narrow product focus within a mature niche market, and what we view as a "highly leveraged" financial risk profile. The company's significant base of recurring revenues, high barriers to entry, and solid operating margins partly offset these factors. Standard & Poor's base-case rating assumptions over the outlook horizon include: revenue growth in the mid-single digit range, mainly reflecting add-on product sales; a modest improvement in EBITDA margins due to scale-related operating efficiency; and leverage improvement driven by both EBITDA growth and debt repayments. CCC is the leading provider of integrated software, analytics, and workflow management systems for the auto claims industry, serving approximately 350 insurance carriers and 21,000 repair facilities in the U.S. We are maintaining our "weak" business risk profile evaluation on CCC. The niche market for software and services designed to automate the automobile insurance claims process is a concentrated, approximately $1 billion market, dominated by CCC, Mitchell International, and Solera. While CCC has relationships with many of the top insurance carriers, some dating back more than 20 years, continued execution on service and investment in product development will be important in this highly competitive marketplace. Access to CCC's proprietary database, which includes about $500 billion of claims data, has helped to create CCC's long-term customer relationships. We expect the company's revenues to grow in mid-single digits in 2013 and 2014, mainly reflecting up-selling to existing customers of products that will include predictive analytics and Open Shop tools. In addition, we believe that revenue growth will be supported by CCC's recently launched, cloud-based total repair platform, which will allow the company to roll out updates more frequently and to sell add-on services and packages. Furthermore, we expect CCC's EBITDA margin to improve toward the mid 30% area over the next year, reflecting modest operating scale improvements, as well as lower operating expenses resulting from the completion of the CCC One cloud-based platform. We revised our view of CCC's financial risk profile to "highly leveraged" from "aggressive," incorporating the increase in leverage following the transaction. In our assessment, the company's management and governance is "fair". We expect CCC's pro forma lease adjusted debt to adjusted EBITDA to increase to approximately 7.5x from 4.6x in fiscal year ended 2012. Our adjusted EBITDA incorporates a full year of earnings from a recently signed contract with Allstate, as well as other one-time adjustments. We believe that the company's highly recurring revenue base and solid EBITDA margins will result in steady free cash flow generation, and that discretionary cash flow will be used to repay debt. As a result, we expect leverage to improve to about 7x over the next year. Liquidity CCC has "adequate" liquidity. Cash sources include full availability under a $50 million revolving credit facility, as well as modest free cash flow generation. We expect uses to include minimal working capital requirements, and modest annual capital expenditures of about 5% of revenues. Other expectations in terms of the liquidity analysis include: -- We project sources of cash will exceed uses by more than 1.2x over the next year, reflecting positive cash flow generation. -- Net sources are likely to be positive, even if EBITDA declines by 20%. -- The current rating does not incorporate any material acquisitions or shareholder payments that could stress liquidity. -- CCC's credit agreement is expected to contain one financial covenant, a total net leverage ratio, which will be in effect only when the revolver's usage exceeds $10 million. Recovery analysis We are assigning our 'B+' issue-level rating with a recovery rating of '2' to the company's proposed $50 million senior secured revolving credit facility (unfunded at closing) and $470 million first-lien term loan. The '2' recovery rating indicates our expectation for substantial (70% to 90%) recovery for lenders in the event of payment default. For the complete recovery analysis, see the recovery report, to be published shortly on RatingsDirect. Outlook The negative outlook is based upon pro forma leverage increasing to 7.5x, which we view as high for the rating. Although we expect leverage to decline to about 7x by year-end 2013, acquisitions, dividends, or a loss of a major customer may forestall the expected reduction in leverage. We could revise the outlook to stable if the company meets our 2013 year-end leverage target through expected EBITDA growth and debt repayment. We would lower the corporate credit rating to 'B-' if heightened competition, debt-funded acquisitions, or debt-funded dividends preclude an improvement in leverage by 2013 year-end. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Downgraded; CreditWatch/Outlook Action To From CCC Information Services Inc. Corporate Credit Rating B/Negative/-- B+/Stable/-- New Rating CCC Information Services Inc. Senior Secured US$50 mil var rate revolver bank ln B+ Recovery Rating 2 US$470 mil var rate term B bank ln B+ Recovery Rating 2