TEXT-S&P cuts Insight Global to 'B'
-- Holding company IG Investments Holdings LLC is putting in place a $300 million first-lien term loan and a $130 second-lien term loan to help fund Ares Corporate Opportunities Fund III L.P.'s leveraged acquisition of Insight Global Inc. and repayment of its existing debt.
-- We lowered our corporate credit rating on Insight Global to 'B' from 'B+' based on the expected increase in financial risk associated with the buyout. The rating outlook is stable.
-- We are assigning the first-lien term loan and revolving credit facility our 'B' issue-level rating with a recovery rating of '3', and the second-lien term loan our 'CCC+' issue-level rating with a recovery rating of '6'.
-- The stable rating outlook incorporates our expectation that operating performance will remain steady, leverage will decline over the intermediate term, and liquidity will remain adequate.
Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Atlanta, Ga.-based Insight Global to 'B' from 'B+' following the company's announcement that it will be acquired by private-equity investor Ares Management LLC. The rating outlook is stable.
At the same time, we assigned holding company IG Investments Holdings LLC our 'B' corporate credit rating. The outlook is stable.
We also assigned IG Investments Holdings' proposed $360 million first-lien credit facilities our 'B' issue-level rating (at the same level as our 'B' corporate credit rating on the company). The recovery rating on this debt is '3', indicating our expectation for meaningful (50% to 70%) recovery for lenders in the event of a payment default. The first-lien facility consists of a $60 million revolving credit facility due 2017 and a $300 million term loan due 2019.
We also assigned IG Investments Holdings' proposed $130 million second-lien term loan due 2020 our 'CCC+' issue-level rating (two notches lower than our 'B' corporate credit rating on the company). The recovery rating on this debt is '6', indicating our expectation of negligible (0% to 10%) recovery for lenders in the event of a payment default.
The downgrade reflects Standard & Poor's view that higher debt and interest expense associated with the Ares' acquisition of Insight Global will weaken the company's financial profile and increase lease-adjusted pro forma debt leverage to the mid-6x area. Still, we expect operating performance will continue to be good over the near-to-intermediate term because of growing demand for information technology staffing, the company's above average growth rates, and relatively high EBITDA margins. The 'B' rating on IG Investments Holdings reflects our expectation that its financial profile will be "highly leveraged" because of its private-equity ownership and substantial debt leverage. Further considerations include the company's likely modest discretionary cash flow as a result of higher interest expense and receivable funding needs, and risks associated with its planned office network expansion. We regard the business profile as "weak" (based on our criteria), weighing its small, niche market position in the highly competitive and fragmented staffing industry, risks related to its rapid organic growth, and vulnerability of revenue to economic cycles. Still, we expect its EBITDA margin will remain above that of peers, based on management's track record of coping with competitive industry conditions.
Insight Global provides IT staffing services to Fortune 1000 companies through 28 regional offices in major metropolitan markets, with a market share of only about 3% in the IT staffing industry. Revenues from the technology, media, and telecommunications sectors account for almost two-thirds of the company's sales, exposing the company to structural trends in those industries. The company faces intense competition from the IT divisions of well-capitalized, general staffing firms, which are cross-selling IT personnel services to their existing client base. The company's top 10 customers account for slightly more than one-third of sales, representing a concentration risk. Engagements are generally short term, lasting a few months, and nonexclusive based on industry practice, hampering operating visibility. Industry consolidation could result in reduced volume from some large clients. Pricing pressures stemming from the competitive nature of the industry make ongoing cost management a key priority.
We expect revenue and EBITDA (adjusted for operating leases, long-term incentive obligations, and the planned elimination of management fees) to increase at above a 30% pace for full-year 2012, based on the company's robust results through the first eight months of 2012. We also expect a moderation in revenue and EBITDA growth in 2013 to about 10% due to more difficult comparisons and competitive pricing. We expect the EBITDA margin to remain healthy, at over 9.5% through the end of 2013. The company plans to continue its organic growth by increasing its office count roughly 50% over the next four years, and by entering larger and more competitive major metropolitan markets. In our view, this could pressure profitability because of it would increase the company's exposure to larger competitors. Our base-case scenario indicates leverage could drop to the low-6x range by year-end 2012 because of EBITDA growth. We believe leverage will decline to the mid-5x area in 2013 because of continued modest EBITDA growth, and interest coverage could rise to the mid- to high-2x range. While leverage will likely continue to decline over the intermediate term, we believe that it will not likely return to the pre-buyout levels because of the magnitude of LBO debt and an aggressive financial policy.
Although Insight Global's results through the end of August have been good, the momentum of growth is subject to risks, in our view. Revenue grew 43% in the three months ended June 30, 2012, as billable hours and net sales per hour for the period grew by 24% and 15%, respectively. EBITDA grew at a slower pace of 35% during this period because of higher long-term incentive plan accruals. The EBITDA margin for the 12 months ended Aug. 31, 2012, was slightly down, at 9.1%, compared with 9.3% last year. Discretionary cash flow for the 12 months ended Aug. 31, 2012, represented a healthy conversion of EBITDA into discretionary cash flow of roughly one-third.
Pro forma for the transaction, total debt to EBITDA more than doubled to 6.5x as of Aug. 31, 2012, from an actual level of 3.2x. Pro forma lease-adjusted leverage was in line with the 5x and above debt-to-EBITDA range that we associate with a highly leveraged financial profile under our criteria. For the same period, pro forma EBITDA coverage of interest was 2.1x, down from 3.2x as result of the higher interest expense associated with higher debt.
The company's higher interest burden will significantly reduce the discretionary cash flow, but we expect it to continue to remain positive, at least through the end of 2013.. In 2012, we estimate the company's conversion of EBITDA to discretionary cash flow be in the 20% to 25% range. Given the company's rapid growth, we expect credit metrics to improve in 2013.
We believe Insight Global has "adequate" liquidity (as per our criteria) to cover needs over the next 12 to 18 months. Our assessment of its liquidity profile incorporates the following expectations and assumptions:
-- We expect that the company's sources will be sufficient to cover uses for the next 12 to 18 months by 1.2x or more.
-- We expect net sources to be positive even with a 15% to 20% drop in EBITDA over the next 12 months.
-- The company has the capacity to absorb high-impact, low-probability events over the next 12 months.
-- We expect that the company would be able to maintain compliance with its new revolving credit facility covenants, even with a 15% decrease in EBITDA. The term loans do not have maintenance financial covenants.
-- We believe the company currently has good relationships with its banks.
Liquidity sources include pro forma cash balances of $14 million as of Aug. 31, 2012, and full availability under the new $60 million revolving credit facility maturing in 2017. We expect healthy revenue growth over the next year and that working capital will continue to be a significant user of cash. For 2012, pro forma for higher interest expense, and 2013, we expect the company to generate about $10 million to $20 million of discretionary cash flow, after modest capital expenditures of roughly about $4 million to $5 million in 2012 and 2013. Debt maturities are modest over the next few years, as the company's new term loan amortizes at roughly 1% annually or $3 million per year.
The new credit agreement includes a maximum net first-lien leverage covenant of 5.5x, which initially steps down to 5.25 on June 30, 2013 and 5.0x on Dec. 31, 2013. It applies only when the company borrows 20% ($12 million) or more of the availability of its revolving credit facility. Net first lien leverage, as defined in the credit agreement, was 3.7x at Aug 31, 2012, providing roughly a 30% headroom. We expect that the company will be able to maintain an adequate margin of compliance despite step-downs over the next few years.
Recovery analysis For the complete recovery analysis, please see our recovery report on Insight Global, to be published on RatingsDirect following this release.
The stable outlook reflects the company's consistent operating performance and our view that debt leverage will gradually moderate over the next few years. We could consider raising the rating to 'B+' over the intermediate-to-long term if we become convinced that the company will be able to reduce and maintain lease-adjusted leverage below 5.5x, and if it demonstrates consistently good revenue and EBITDA growth, while generating meaningful positive discretionary cash flow.
Although somewhat less likely, we could lower the rating if revenue and EBITDA drop 10% and 30%, respectively, resulting in EBITDA coverage of interest falling below 1.5x; or if the margin of compliance with the net senior leverage covenant drops below 10%.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List Downgraded To From Insight Global Inc. Corporate Credit Rating B/Stable/-- B+/Positive/-- Senior Secured B B+ Recovery Rating 4 4 New Rating IG Investments Holdings LLC Senior Secured $60M revolver due 2017 B Recovery Rating 3
$300M 1st-lien term ln due 2019 B
Recovery Rating 3
$130M 2nd-lien term ln due 2020 CCC+
Recovery Rating 6
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)