Moody's assigns Sovos Compliance B3

Moody's Investors Service said it assigned first-time ratings to Sovos Compliance LLC, including a B3 corporate family rating, B3-PD probability of default rating and B3 instrument ratings to the first-lien senior secured credit facilities, which include a new $100 million first-lien senior secured revolving credit facility, a new $1.245 billion first-lien senior secured term loan and a new $215 million first-lien senior secured delayed-draw term loan.

“The B3 corporate family rating reflects the company's very high debt/EBITDA of roughly 8.5x (Moody's adjusted as of June 2021, pro forma for the proposed funded capital structure, acquisitions announced or under LOI as of July 2021, and change in deferred revenue add-backs); or above 9x, including the proposed delayed draw term loan capacity (plus incremental EBITDA assumptions from future targets). Weak free cash flow to debt metrics, with expected FCF/Debt below 3% over the next 12 months, as well as the expectation for ongoing aggressive financial policies also weigh on the credit. Sovos' scale, with roughly $409 million of pro forma revenue in fiscal year 2021, is modest for the rating category,” Moody’s said in a press release.

Proceeds from the first-lien term loan, along with $425 million from the issuance of new preferred equity shares, will be used to pay a $225 million dividend to private equity owners Hg Capital, the majority owner, and TA Associates, repay $1.265 billion of debt, finance an acquisition target and pay breakage and other transaction-related fees and expenses.

The outlook is stable.

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