Australian Technology Innovators Pty Ltd. 'B' Rating Affirmed After Upsized Loan, Minority Acquisition; Outlook Stable

  • ATI has proposed to acquire a minority 28% shareholding in InfoTrack UK, a related party, for A$50 million; distribute a A$50 million dividend to shareholders; and allocate A$46 million to cash on balance sheet for liquidity purposes.
  • The group will fund this transaction with an incremental A$50 million first-lien term loan facility and a new senior secured A$100 million second-lien term loan facility.
  • Following the transaction, we believe the group will have a reduced ratings buffer over the next 12 months to accommodate any significant deterioration in the Australian property market, and very limited headroom to accommodate additional corporate activity.
  • We are affirming the 'B' long-term issuer credit rating on ATI and the 'B' issue rating on its first-lien debt. We are also assigning our 'CCC+' issue rating to ATI's second-lien debt, reflecting our minimal recovery expectations of (0%-10%) in the event of a payment default.
  • The stable outlook reflects our expectation that the group will maintain its leading market position in the niche legal practice management and integrated search industry.
MELBOURNE (S&P Global Ratings) Nov. 23, 2018--S&P Global Ratings said today 
that it has affirmed its 'B' long-term issuer credit rating on Australian 
Technology Innovators Pty Ltd. (ATI). The outlook remains stable.

We also affirmed our 'B' issue-level ratings on the company's senior secured 
first-lien term loan facility. The '3' recovery rating on the first-lien term 
loan indicates our expectation of meaningful recovery (65%) in the event of a 
payment default. 

At the same time, we assigned our 'CCC+' issue-level rating on the company's 
proposed, senior secured second-lien A$100 million term loan facility. The '6' 
recovery rating on the second-lien loan indicates our expectations of minimal 
recovery (0%-10%) in the event of a payment default. 

Based in Australia, ATI is the parent entity of InfoTrack Pty Ltd. and LEAP 
Legal Software Pty Ltd., which provide legal practice management and 
integrated search software services in the niche legal and conveyancing 
industries.

We affirmed the ratings on ATI to reflect the company's adequate rating 
headroom to fund a minority stake in InfoTrack Group Pty Ltd. (UK) and 
distribute a A$50 million cash dividend. Following the transaction, we believe 
the group will have a reduced ratings buffer over the next 12 months to 
accommodate any significant deterioration in the Australian property market, 
and very limited headroom to accommodate additional corporate activity. 

ATI is raising A$150 million of capital via an incremental A$50 million 
first-lien term loan facility to its existing senior secured A$350 million 
term loan B facility on similar terms, as well as a new A$100 million 
second-lien term loan B facility. The company will use the funds to acquire a 
28% minority interest (A$50 million) in InfoTrack UK, as well as distribute a 
A$50 million shareholder return, with about A$46 million as cash on balance 
sheet after transaction costs. 

The group will require lender consents and approvals on provisions for the 
incremental first-lien and second-lien debt facilities. These include 
provisions for restriction on indebtedness, payments, investments, and 
affiliate transactions. The terms of the second-lien will be based on the 
first-lien with customary amendments to reflect its subordination.

We view the transaction as akin to a dividend recapitalization. ATI will gain 
a 28% minority and non-controlling interest in InfoTrack UK, a related party 
that we believe has reasonable growth prospects. Both ATI and InfoTrack UK 
were founded, and are a currently controlled by, entities owned by Christian 
Beck. InfoTrack UK is currently noncash generating and, in our opinion, 
unlikely to distribute returns for a number of years. We believe the 
independent valuation relies on the successful execution of a highly 
aggressive growth strategy. 

The 'B' rating, while accommodative of this transaction, does not incorporate 
any future material capital contributions to other entities outside the 
guarantor group. 

ATI group has performed in line with our expectations. During the year ended 
June 30, 2018, the group's revenues and EBITDA grew 25% and 34%, respectively. 
This was the result of the group's continued growth in the search and 
analytics market in Australia under InfoTrack and LEAP Legal Software, and its 
increased investment in product innovation. ATI's complementary bolt-on 
acquisitions and investments in smaller competitors, including Practice Evolve 
Group Pty Ltd. and CreditorWatch, would also contribute to the group's growth. 

InfoTrack contributed about two-thirds of the group's EBITDA, although at 
lower margins than the LEAP Legal Software division. We note that ATI's 
respective stakes in Practice Evolve Group Pty Ltd. (Australia) and Sympli 
Australia Pty Ltd. (Australia) are outside of the guarantor group. However, 
ATI intends to restructure its investment in Sympli and Practice Evolve within 
180 days so that the investments are wholly owned by a new subsidiary under 
the guarantor group.

The rating reflects our assessment of ATI's solid market position in the niche 
legal practice management and integrated search industry with modest barriers 
to entry and good free cash flows to meet fixed obligations. Offsetting the 
above factors are the group's market concentration in the legal and 
conveyancing industry and sensitivity to the property market cycle. 

In addition, the group has a geographic concentration to Australia and New 
Zealand, a narrow revenue and earnings base, smaller scale compared with 
global peers', and a majority shareholder under its private ownership. In our 
opinion, the group's limited scale, scope, and diversification are likely to 
weigh on the rating for the foreseeable future, despite our expectation of 
solid earnings growth. 

ATI's financial risk profile is a constraint on the rating. The group has a 
highly leveraged capital structure following the incremental A$50 million 
first-lien term loan and A$100 million second-lien term loan issuances. We 
expect ATI's debt-to-EBITDA ratio (after S&P Global Ratings' adjustments) to 
be above 6.0x post the transaction, before reducing to the low-mid 5.0x range 
in fiscal 2020. This level reflects a highly leveraged financial risk profile, 
albeit at the stronger end of the range. 

The company's deleveraging path is subject to management's representations and 
assumes a 50% excess cash to debt repayment sweep, before dividend payments of 
60%-70% of net profit after tax (NPAT), along with a 1% debt amortization. 

As technology continues to evolve, the group would need to innovate its 
platforms and operations in order to remain competitive. In May 2018, ATI and 
the Australian Stock Exchange Ltd. (ASX; AA-/Stable/A-1+) entered into an 
equal joint venture to create Sympli, an electronic property settlement 
service for lawyers, conveyancers, and financial institutions. Sympli competes 
directly with the market incumbent, Property Exchange Australia (PEXA; 
unrated). While ATI's current platforms integrate with PEXA, the competitive 
landscape continues to evolve, presenting both risks and opportunities for ATI 
over the longer term. 

ATI's reliance on LEAP Developments is a potential risk to the rating. LEAP 
Developments demerged as a separate entity in order for its owner to mitigate 
risks associated with offshore expansion. However, we view the two entities 
have sufficient alignment of interests to allay our concerns, including a 
shared equity holder who ultimately controls both businesses, as well as some 
track record of these businesses operating as stand-alone businesses. The 
source code is held in escrow and LEAP has a discretionary right to cause the 
source code to be released under certain circumstances. We note that lenders 
have security over the license agreement.

The stable outlook reflects our expectation that InfoTrack and LEAP will 
maintain their strong positions in the legal practice management and 
integrated search markets. We expect the group to continue to grow its 
customer base by expanding its product suite and further integrating its 
product offering. The rating does not incorporate any anticipated material 
capital contributions to other entities outside the guarantor group.

We expect the group to steadily reduce its debt-to-EBITDA ratio (after S&P 
Global Ratings' adjustments) to the low-mid 5x by fiscal 2020 from the low 6x 
level after the transaction. This reduction would be primarily through the use 
of its cash flow sweep mechanism and scheduled amortization.

We could lower the rating if the company adopts a more-aggressive capital 
structure or financial policies than our base-case assumptions. Downward 
rating action could also occur if our growth expectations for the group do not 
materialize, such that the company's deleveraging path is materially slower 
than we expect. Such a scenario is likely to result from a property market 
downturn or higher-than-expected competition leading to lower margins or a 
material loss in market share. 

We could also lower the rating if material related-party payments occur, 
including capital expenditure payments to LEAP Developments.

We believe rating upside is limited given the company's ownership structure, 
relatively small scale, and limited track record of deleveraging.

Our recovery analysis for ATI's debt contemplates a hypothetical simulated 
default in the first half of 2021. The recovery rating of '3' and issue rating 
of 'B' on the senior secured first-lien term loan facility reflect our 
expectations for meaningful recovery (65%) in the event of a default. We also 
assigned a recovery rating of '6' and an issue rating of 'CCC+' on the senior 
secured second-lien term loan facility, reflecting our expectation of minimal 
recovery prospects (0%-10%) in the event of a payment default.

At the time of the hypothetical default, we expect weaker macroeconomic 
conditions to pressure the group's operations, coupled with the emergence of a 
strong competing service that erodes the group's competitive position and 
customer base. This results in lower renewal rates and forces the group to 
materially reduce prices and margins to retain customers, placing pressure on 
EBITDA. At the same time, the group's capital expenditure is limited to the 
maintenance portion and has limited options to sell nonviable or challenging 
business segments.  

In our view, ATI will be sold as a going concern because we expect that 
following a payment default, the company is likely to be reorganized and 
consolidated due to the longer-term value in its niche services and brand. We 
have applied a 5.5x valuation multiple to an estimated distressed emergence 
EBITDA of around A$52.5 million to estimate a gross enterprise value of about 
A$289 million.
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