Deerfield Dakota Holding LLC Outlook Revised To Stable From Negative; Ratings Affirmed

U.S.-based business consulting firm Deerfield Dakota Holding LLC (Duff & 
Phelps) is borrowing an incremental $280 million senior secured first-lien 
term loan to fund its acquisition of Prime Clerk LLC. We expect pro forma 
adjusted debt leverage for the acquisition to increase to 6.7x from 6.6x 
(before one-time transaction charges) as of Dec. 31, 2018. The proposed 
acquisition will modestly improve Duff & Phelps' business diversity by adding 
a new counter cyclical service.
  • S&P Global Ratings revised its outlook on Duff & Phelps to stable from negative and affirmed the 'B' issuer credit rating.
  • We are also assigning our 'B' issue-level rating and '3' recovery rating to the proposed senior secured term loan. In addition, we are affirming our 'B' issue-level rating and '3' recovery rating on the company's existing senior secured credit facility.
  • The stable rating outlook reflects our view that Duff & Phelps' debt leverage will decline and remain under 6.5x and free operating cash flow to debt will remain above 5% by mid-2019 due to stable revenue and earnings growth. We expect credit metrics will improve steadily over the next 12 months as the company benefits from organic and inorganic growth and cost synergies from recent acquisitions.
NEW YORK (S&P Global Ratings) Feb. 15, 2019--S&P Global Ratings today took the 
rating actions listed above. The outlook revision to stable reflects our view 
that the company will be able to reduce and maintain its adjusted debt 
leverage under 6.5x and free operating cash flow to debt above 5% in 2019. The 
pro forma 6.7x adjusted debt leverage as of Dec. 31, 2018, excludes about $60 
million of one time transaction costs from recent acquisitions, which we 
expect to roll off by the second quarter of 2019. In our view, its financial 
sponsor, Permira Advisers LLC, has a high tolerance for debt leverage and 
aggressive growth agenda. Therefore, we expect debt leverage to remain high as 
the company funds its acquisition growth strategy with debt to increase its 
service offerings and scale. Nevertheless, Duff & Phelps' integration 
expertise, improving business diversity, and new opportunities for revenue and 
cost synergies from recent acquisitions modestly offset this aggressive 
financial strategy. 

Prime Clerk is a bankruptcy claims and noticing agency that focuses on 
restructuring and bankruptcy administration. The company's revenue is 
relatively small compared to Duff & Phelps. However, Prime Clerk's strong 
growth trajectory from market share gains, high EBITDA margin, and strong 
competitive position in its market will enable Duff & Phelps to diversify its 
service offerings, particularly increasing its countercyclical revenue streams 
(non-merger and acquisition related).

The stable rating outlook reflects our view that Duff & Phelps' debt leverage 
will decline and remain under 6.5x and free operating cash flow to debt will 
remain above 5% by mid-2019 due to stable revenue and earnings growth. We 
expect credit metrics will improve steadily over the next 12 months as the 
company benefits from organic and inorganic growth and cost synergies from 
recent acquisitions.

We could lower the issuer credit rating if the company's operating performance 
deteriorates or the company experiences difficulties integrating its 
acquisitions and we expect adjusted debt leverage to remain above 6.5x and 
free operating cash flow to debt below 5%. Additionally, we could lower the 
rating if the company pursues additional acquisitions or shareholder dividends 
that keep leverage above 6.5x. 

We view the probability of an upgrade as low over the next 12-18 months 
primarily because of the sponsor's aggressive growth strategy and our 
expectation that debt leverage will remain above 6x. An upgrade would require 
the company to implement a more conservative financial policy, decrease its 
adjusted debt leverage to below 5.5x and increase its free operating cash flow 
to debt to about 10% on sustained basis through a combination of EBITDA growth 
and debt repayment.
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