TEXT-S&P rates TriNet HR Corp 'B'
Overview -- U.S.-based human resources services company TriNet HR Corp. has completed its acquisition of Strategic Outsourcing Inc. (SOI). -- We are assigning a 'B' corporate credit rating to the company and a 'B+' issue-level rating on the senior secured credit facility, with a '2' recovery rating. -- Our stable outlook reflects our view that credit metrics will remain relatively steady over the next year, given the company's solid margins and good cash flow generation. Rating Action On Dec. 17, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate credit rating to San Leandro, Calif.-based TriNet HR Corp. The outlook is stable. We also assigned our 'B+' issue-level rating to the company's $350 million five- to six-year senior secured debt. The facility consists of a $50 million five-year revolving credit facility, $150 million five-year term loan A, and $150 million six-year term loan B. The recovery rating on this debt is '2', indicating our expectation for substantial (70% to 90%) recovery in the event of a payment default. Rationale Our ratings on TriNet reflect Standard & Poor's assessment that the company has an "aggressive" financial risk profile, given its increased leveraged capital structure, its ownership by a financial sponsor, and historic strategy of growing via acquisitions. The ratings also reflect our view of a "vulnerable" business risk profile, supported by the company's narrow product focus in the highly competitive and fragmented outsourced human resource services industry that could be susceptible to weak economic conditions, and its limited geographic diversity. We estimate TriNet's pro forma adjusted debt-to-EBITDA leverage increases to about 3.3x after the transaction, from about 1.6x at Sept. 30, 2012. We estimate adjusted leverage and the ratio of funds from operations (FFO) to total adjusted debt will be near 3x and 25%, respectively, over the next year. Over the same period, we project interest coverage to be over 6x. As such, we believe credit metrics are strong for the indicative financial ratios for the "aggressive" descriptor, which includes adjusted leverage of 4x-5x and FFO to total debt of 12%-20%, but we believe there could be potential volatility in credit metrics in the event of deteriorating operating results given the company's small size. In addition, the SOI acquisition is relatively large and the company could incur difficulties integrating it. We also factor the company's highly acquisitive nature and financial sponsor ownership into our assessment of the company's financial policy. (The company is privately held and does not publically disclose its financials.) Despite sluggish macroeconomic conditions, including unemployment of about 8% in the U.S. and weak wage growth, we expect positive operating performance over the next year. Our assumptions for TriNet's operating performance during this period include: -- Low-double-digit organic sales growth from pro forma numbers, based on an increase in gains from the company's net health care segment, as well as modest increase in service fees from a higher number of worksite employees, in 2012. -- We expect mid-single-digit sales growth, as the gains from net health care moderate in 2013. Combined EBITDA margin in the low-30% area, benefiting from an increase in gains in net health care in 2012. We expect margins to slightly decline next year as the gains from health care decrease in 2013. -- Capital expenditures of about $10 million. -- No debt-financed dividends or acquisitions. TriNet participates in the highly competitive Professional Employer Organization (PEO) industry that could be susceptible to weak economic conditions, such as high unemployment and weak wage growth. Organic growth correlates with the performance of its clients and whether headcount grows or declines. We believe the SOI acquisition will enhance TriNet's scale and market position, with combined sales of about $300 million, up from about $200 million prior to the transaction. While the acquisition does not expand the business beyond the PEO sector, we believe SOI expands TriNet into new client industries and further diversifies the company away from its exposure in the technology and financial services industries. The company's 6,000 client base is spread across various industries. We believe TriNet is the second-largest player by worksite employees after this transaction, with about 160,000 worksite employees post-transaction. Automatic Data Processing Inc. (AAA/Stable/A-1+) is the industry leader with an estimated 268,000 worksite employees, and is a much larger and more diversified company, with about $10.7 billion in revenues. TriNet competes against other PEO's, such as Insperity (not rated) and Oasis (not rated), which are slightly smaller in size per worksite employees. The remainder of the PEO market is highly fragmented. In addition, the company competes with companies with in-house human resource responsibilities and local insurance brokers. Liquidity We view TriNet's liquidity as "adequate," with sources of cash that are likely to exceed uses for the next 12 months. Our assessment of TriNet's liquidity incorporates the following expectations, assumptions, and factors: -- We forecast sources of liquidity to exceed uses of liquidity by more than 1.2x over the next 12 months. -- We estimate net sources would be positive even if EBITDA fell 15%. -- The company's cash on hand was about $46 million at Sept. 30, 2012. The company has a $50 million revolving credit facility maturing in 2017, which was undrawn and fully available at transaction close. The company has minimal working capital needs and does not plan on drawing on its revolver over the next year. -- There are financial covenants under the bank loan agreement, which include maximum leverage and minimum fixed charge, and was set with about 25% headroom. These financial covenants will be tested beginning March 31, 2013. -- The company has manageable required amortization of about $9 million annually and has no debt maturities until 2017 when its $150 million term loan A is due. Recovery analysis The issue-level rating on TriNet's $350 million senior secured credit facility is 'B+' (one notch higher than the corporate credit rating). The recovery rating on the facility is '2', reflecting our expectations of significant (70%-90%) recovery for the lenders in case of a payment default. For the complete recovery analysis, please see Standard & Poor's recovery report on TriNet HR Corp. to be published shortly. Outlook The stable outlook reflects our view that TriNet should be able to maintain credit measures near current pro forma levels over the next year, despite still-soft economic conditions and high unemployment. We believe the company's recurring revenue base will partially offset the weak macroeconomic conditions in the U.S. and that it will be successful integrating the SOI acquisition. At the same time, we expect liquidity to remain adequate and sufficient covenant cushion of about 20%. We could consider an upgrade if the company is able to successfully integrate SOI, further grow its business, and sustain leverage at about 3x. We estimate this could occur if EBITDA increased 8% (assuming pro forma debt levels remained constant). Alternatively, we would consider a downgrade if the economy and unemployment further weakens, leading to a decline in the company's operating performance and profitability, such that leverage increases above 5x and/or liquidity becomes constrained and covenant cushion falls below 10%. We estimate leverage could increase to above 5x if EBITDA declined by 35% (assuming pro forma debt levels remained constant). Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Ratings TriNet HR Corp. Corporate credit rating B/Stable/-- Senior secured $50 mil. revolver due 2017 B+ Recovery rating 2 $150 mil. term loan A due 2017 B+ Recovery rating 2 $150 mil. term loan B due 2018 B+ Recovery rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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