TEXT-S&P rates TriNet HR Corp 'B'

Mon Dec 17, 2012 1:18pm EST

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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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