Datto Inc. Assigned 'B' Rating; New Debt Facility Rated 'B'; Outlook Stable

  • Connecticut-based Datto Inc., a provider of data protection and information technology (IT) solutions to small and midsize businesses (SMBs), intends to issue a new first-lien credit facility, including a new $550 million seven-year term loan and a $50 million five-year first-lien revolving credit facility (expected to be undrawn at close), to refinance its debt and put cash on the balance sheet.
  • We are assigning our 'B' issuer credit rating to Datto and our 'B' issue-level and '3' recovery ratings to the proposed first-lien term loan and revolving credit facility.
  • The outlook on the rating is stable, reflecting our view that adjusted debt to EBITDA, estimated to more than 9x as of Dec. 31, 2018, will improve to around 6x or better over the next 12 months, supported by strong revenue growth near 15%-20% improving profitability and positive free operating cash flow (FOCF) over the next 12 months.
On March 14, 2019, NEW YORK (S&P Global Ratings) March 14, 2019—S&P Global 
Ratings today took the rating actions listed above. Our ratings on Datto 
incorporate the company's niche focus on SMBs, fierce competition in the 
rapidly evolving data protection market, a sales-channel-partner-centric 
distribution model, limited scale and high adjusted leverage at near 9x, and 
potential for aggressive financial policies stemming from the company's 
financial sponsor ownership. In our view, these constraints are somewhat 
mitigated by a track record of strong revenue growth over the past 3 years, a 
recurring revenue base that is increasing rapidly,  a well-diversified 
customer base, high customer retention rates for the SMB market, and a highly 
variable cost structure which should improve profitability over the near term.

The stable outlook reflects our view that adjusted debt to EBITDA, estimated 
to more than 9x as of Dec. 31, 2018, will improve to around 6x or better over 
the next 12 months, supported by strong revenue growth near 15%-20% improving 
profitability and positive free operating cash flow (FOCF) over the next 12 
months. 

We could lower our rating on Datto if operating performance is weaker than 
expected or if aggressive financial policies push its S&P Global 
Ratings-adjusted debt to EBITDA to 7x or greater, with limited prospects for 
improvement. We also could lower the rating if the company fails to generate 
positive free cash flow or pursues debt-financed acquisitions that push 
leverage to above 7x.

Although unlikely over the next 12 months, we could raise our ratings on Datto 
if stronger-than-expected operating performance leads to improved credit 
measures, including S&P Global Ratings-adjusted debt to EBITDA below 5x, and 
the company demonstrates a commitment to financial policies that we believe 
support sustaining this leverage.