SCS Holdings I Inc. Rating Affirmed On Proposed LBO By CD&R; New Debt Rated

  • Clayton, Dubilier, & Rice (CD&R), a private equity sponsor, is acquiring San Antonio, Texas-based technology solutions provider SCS Holdings I Inc. (the holding company of Sirius Computer Solutions Inc.), for approximately $1.5 billion, partially funding the transaction with $1.05 billion of debt.
  • The leveraged buyout (LBO) will result in pro forma leverage around 6.7x by year-end 2019, higher than our previous expectation for a leverage decline to the low-6x area by year-end 2019, but within our current rating threshold.
  • We affirmed our 'B' issuer credit rating on SCS Holdings I Inc. (Sirius). The outlook is stable.
  • We also assigned a 'B' issue-level rating and '3' recovery rating to Sirius' proposed first-lien senior secured credit facilities, consisting of $750 million term loan and $190 million revolver, and a 'CCC+' issue-level rating and '6' recovery rating to the proposed $300 million senior unsecured notes.
  • The stable outlook reflects our forecast that Sirius will likely grow revenue in the low- to mid-single digits over the next two years, supported by the company's positioning in fast-growing cybersecurity solutions and managed services. Our base-case expectation for the next 12 months is for adjusted debt to EBITDA in the mid- to high-6x area, due to additional debt to fund the LBO by CD&R.
NEW YORK (S&P Global Ratings) May 14, 2019—S&P Global Ratings today took the rating actions listed above. The affirmation primarily reflects our expectation that adjusted leverage, pro forma for the proposed LBO debt financing, will remain within our leverage threshold at the 'B' rating. Following the transaction, we estimate that pro forma S&P Global Ratings-adjusted debt to EBITDA will increase to the high-6x area, up from the high-5x area for the 12 months ended Dec. 31, 2018.
The stable outlook reflects our forecast that Sirius will likely to grow revenue in the low- to mid-single-digit area over the next two years, supported by the company's positioning in fast-growing cybersecurity solutions and managed services. Our base-case expectation for the next 12 months is for adjusted debt to EBITDA in the mid- to high-6x area, due to additional debt to fund the LBO by CD&R.
We could lower the rating if Sirius experiences revenue declines due to weak demand for products from key suppliers, or the company experiences declines in profitability due to increased competition, leading to diminished operating earnings such that it sustains leverage above 7x, or has FOCF to debt in the low-single-digits, without prospects for improvement. This could also result from the company assuming a more aggressive financial policy through further acquisitions or dividends.
Although unlikely given its financial sponsor ownership, we could raise the rating if EBITDA growth or debt repayment results in sustained leverage below 5x. This would most likely be due to better performance from the company's largest product suppliers and contingent on management's commitment to maintain leverage at or below these levels.
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