TEXT-S&P assigns RP Crown Parent 'B' corporate credit rating
Overview -- We have received final documentation on U.S. supply chain management (SCM) software provider RP Crown Parent LLC's $1.55 billion first-lien credit facility and its $650 million second-lien credit facility. -- We are assigning a 'B' corporate credit rating to RP Crown Parent, the parent company of RedPrairie Corp. and JDA Software Inc. -- At the same time, we are assigning a 'B+' issue-level rating to the company's first-lien term loan and revolving credit facility with a recovery rating of '2'. We are also assigning a 'CCC+' issue-level rating to the company's second-lien term loan with a recovery rating of '6'. -- The stable outlook reflects our expectation that the company's recurring revenue base will allow it to deliver modest revenue growth despite a challenging selling environment, and that it will realize cost synergies in 2013, resulting in modest deleveraging to the mid- to high-7x area. Rating Action On Jan. 4, 2013, Standard & Poor's Ratings Services assigned a 'B' corporate credit rating to RP Crown Parent LLC. The outlook is stable. In addition, we assigned a 'B+' issue-level rating to the company's $1.45 billion senior secured first-lien term loan due 2018, and $100 million revolving credit facility due 2017. The '2' recovery rating indicates our expectation of substantial recovery (70% to 90%) in the event of payment default. We also assigned a 'CCC+' issue-level rating to the company's senior secured second-lien term loan due 2019. The '6' recovery rating indicates our expectation of negligible recovery (0% to 10%) in the event of payment default. The company used the proceeds, along with cash and new equity, to acquire all outstanding shares of JDA common stock, repay debt at RedPrairie and JDA, and pay transaction costs. Rationale Our ratings on RP Crown Parent reflect the combined company's "fair" business risk profile resulting from its narrow product focus, its competitive market segment, and near-term integration risk, as well as its "highly leveraged" financial risk profile with pro forma leverage above 8x and modest free cash flow expected in 2013. These factors are offset in part by meaningful recurring revenues and the company's diverse and entrenched customer base, which we expect will allow it to deliver modest revenue growth. We expect meaningful cost synergies in 2013 to result in leverage in the mid- to- high-7x area. The merger combines JDA's strength in supply chain planning (demand forecasting and pricing) and RedPrairie's supply chain execution capabilities (warehouse, workforce, transportation, and multichannel management) to create the number three competitor in the market for SCM software and position it as a best-of-breed, end-to-end solution with strength in retail and manufacturing. The company will be led by the JDA CEO, who has a track record of successfully integrating large-scale acquisitions such as Manugistics in 2006 and i2 in 2010. Competition in the SCM software market is intense with SAP and Oracle holding meaningful market share, while the rest of the market is highly fragmented. We view the company's business risk profile as fair, reflecting its narrow focus on the SCM software market; competitive industry dynamics with larger, more diverse competitors and several niche players; and exposure to the cyclical retail and manufacturing industries. In the near term, the company faces integration risk related to an aggressive cost-reduction plan representing nearly 10% of pro forma revenues and combining product platforms. Nevertheless, the company has meaningful recurring maintenance and subscription revenues, modest customer concentration with its top five customers representing less than 15% of revenues, and products that are critical to its customers' operations, resulting in high customer retention. The company has also demonstrated the ability to monetize its customer base with the majority of its license revenue coming from existing customers. In our assessment, the company's management and governance is "fair". Pro forma revenues for the 12 months ended Sept. 30, 2012, were more than $1 billion with EBITDA margins in the mid-20% area. We expect that in 2013, a challenging IT spending environment will result in low-single-digit revenue growth, but that the company will be able to deliver modest margin expansion through realized cost synergies. We anticipate that free cash flow will be modestly positive in 2013 as the company incurs restructuring costs. We view the company's financial risk profile as highly leveraged with adjusted leverage in the low-8x area as of Sept. 30, 2012, excluding expected cost synergies. We expect leverage to peak in the mid-8x area at the end of 2012 as a strong fiscal 2011 fourth quarter rolls off. Furthermore, we anticipate that in 2013, leverage will fall to the mid- to high-7x area as the company realizes cost synergies with the potential to reach the low-7x area if the company captures all anticipated cost savings. Although the CEO has a track record of transformative acquisitions, there is no capacity within the ratings for additional debt-financed acquisitions. Liquidity The company's liquidity is "adequate" in our view, with sources of cash likely to exceed uses during the next 12 to 24 months. Cash sources include a cash balance of about $100 million, $100 million of availability under its revolving credit facility, and expected annual funds from operation (FFO) in the $110 million area (before restructuring costs). We expect uses to include modest working capital investments and capital expenditures near $50 million, $15 million of mandatory debt amortization, and $50 million of restructuring costs over the next 12 months. Our assessment of the company's liquidity profile incorporates the following expectations, assumptions, and factors: -- Sources of liquidity are likely to exceed uses by at least 20% over the next 12 to 24 months. -- Net sources would be positive, even with a 15% decline in EBITDA. -- The company is likely to maintain at least 15% cushion under its springing leverage covenant, which is in force only when the revolver is 25% drawn. Recovery analysis For the complete the recovery analysis, see the recovery report on RP Crown Parent, published on Nov. 30, 2012, on RatingsDirect. Outlook The stable outlook reflects our expectation that the company's recurring revenue base will allow it to deliver modest revenue growth, and that realized cost synergies will result in leverage in the mid- to high-7x area. The possibility of an upgrade is limited by the company's highly leveraged financial profile and modest expected free cash flow in 2013. We could lower the rating if the company does not deleverage from pro forma levels in 2013 due to integration challenges, macroeconomic headwinds, or increased competition. We could also lower the rating if these factors lead to negative free cash flow or inadequate liquidity. 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 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List New Rating; Outlook Action RP Crown Parent LLC Corporate Credit Rating B/Stable/-- Senior Secured US$1.45 bil 1st term bank ln due B+ 2018 Recovery Rating 2 US$650 mil 2nd lien bank ln due CCC+ 2019 Recovery Rating 6 US$100 mil revolver bank ln due 2017 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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