Guidehouse LLP Ratings Affirmed, Outlook Revised To Negative On Lower-Than-Expected Earnings

  • Since separating from its former parent company, Guidehouse LLP's revenues and earnings have been lower than expected, resulting in credit ratios worse than we had previously forecast. However, we expect ratios to improve over the next 6-12 months.
  • On March 12, 2019, we affirmed our 'B' issuer credit rating on Guidehouse LLP and revised the outlook to negative from stable.
  • At the same time we affirmed our 'B' issue-level rating on the company's first lien-debt facility including the $315 million term loan ($313 million outstanding) and $50 million revolver. The '3' recovery rating is unchanged.
  • We also affirmed our 'CCC+' issue-level rating on the company's $105 million second-lien term loan. The '6' recovery rating is unchanged.
  • The negative outlook reflects our expectation that debt to EBITDA will remain above 7x in 2019 because of operational difficulties before improving in 2020.
NEW YORK (S&P Global Ratings) March 12, 2019—S&P Global Ratings today took the 
above listed rating actions. The negative outlook reflects our expectation 
that debt leverage will remain high in fiscal-year 2019 because of 
weaker-than-expected top line revenue growth and lower-than-anticipated EBITDA 
margins. We do not believe this is a result of any long-term operational 
issues, but rather the split from PricewaterhouseCoopers (PwC) is taking more 
time to add value than previously expected. While recent earnings have been 
below our forecast due to lost contracts and higher-than-expected operating 
costs, we expect both revenues and earnings to improve in coming months as 
Guidehouse wins new business and replaces subcontractors with its own 
employees. We now expect debt to EBITDA of 7.1x-7.5x in 2019, improving to 
5.3x-5.7x in 2020. 

The negative outlook reflects our expectation that debt leverage will remain 
high in fiscal-year 2019 as Guidehouse has had some difficulty replacing large 
contracts that have ended, while using a higher percentage of subcontracted 
labor than previously anticipated. We now expect a longer anticipated 
adjustment period as the company continues to separate from its former parent, 
with leverage declining slowly. We expect debt to EBITDA to be 7.1x-7.5x in 
2019, before improving to 5.3x-5.7x in 2020.

We could lower the rating on Guidehouse if debt to EBITDA does not decline 
below 7x in the next 6-12 months. This could result from a failure to win new 
business to replace recently lost contracts, or weak margins due to continued 
reliance on subcontractors. Leverage could also increase if the company 
pursues a large, debt-financed acquisition.

We could revise the outlook to stable if the company's debt to EBITDA drops 
below 7x in the next 6-12 months and we expect it to stay below that level 
even with possible debt-financed acquisitions. This would likely be the result 
of improving margins as Guidehouse progresses in its restructuring 
post-separation from PwC. It would also likely require new contracts to ramp 
up to replace lost revenues from the expiration and partial loss of previous 
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