OREANDA-NEWS. S&P Global Ratings said today that it assigned its 'B+' corporate credit rating to Camelot UK Holdco Ltd. The rating outlook is stable.

At the same time, we assigned our 'BB-' issue-level rating and '2' recovery rating to the company's proposed senior secured credit facility, which consists of a $175 million revolving credit facility due 2021 and a $1.45 billion term loan due 2023. The '2' recovery rating indicates our expectation for substantial recovery (70%-90%; lower half of the range) of principal and interest for lenders in the event of a payment default.

We also assigned our 'B-' issue-level rating and '6' recovery rating to the company's $600 million senior unsecured notes due 2024. The '6' recovery rating indicates our expectation for negligible recovery (0%-10%) of principal and interest in the event of a payment default.

Camelot Finance S. A. is the borrower of the credit facility and the issuer of the notes.

"Our 'B+' corporate credit rating on Camelot reflects the company's high adjusted debt leverage and financial sponsor ownership, as well as the execution risks associated with the carve-out from its former parent, Thomson Reuters Corp., which will significantly impact its EBITDA margins and cash flow through 2018," said S&P Global Ratings' credit analyst Scott Zari. The rating also incorporates the risk that the company's migration of its databases and information technology (IT) infrastructure to new stand-alone systems could result in service interruptions for customers and potential loss of revenue. However, we believe that the company's strong niche market position and highly recurring subscription-based revenue model will support improving EBITDA margins and free operating cash flow (FOCF) generation, beginning in 2019, if the carve-out is executed without cost overruns or implementation delays. However, we could lower the rating if any client disruption or cost overruns associated with the migration of the company's databases and systems lead us to believe leverage will remain elevated above 7x beyond 2018.

The stable rating outlook reflects our expectation that the company's revenue will grow at a low-single-digit percentage rate annually and it will incur significant charges related to the carve-out process from Thomson Reuters that will meaningfully impact both its annual EBITDA and free operating cash flow through 2018. We expect that leverage will remain elevated through 2018 before cost reductions, and improved cash flow will lead to higher EBITDA margins and debt repayment, beginning in 2019. The outlook also reflects our expectation that there won't be any permanent deterioration in revenue, profitability, or cash flow as a result of any execution missteps related to the carve-out.

We could lower our corporate credit rating if the costs associated with the company operating as a stand-alone entity are greater than anticipated, leading to breakeven FOCF in 2017, with no indication for significant improvement in 2018 and 2019. This could result from greater-than-expected challenges in the carve-out process leading to the need for unanticipated incremental IT or back-office systems, or an execution delay leading to longer-than-expected use of duplicative legacy systems supplied by its former parent. We could also lower the rating if any client disruption or cost overruns associated with the migration of its databases and systems lead us to believe that leverage will remain elevated above 7x beyond 2018.

Although unlikely over the next 12 months, we could raise the rating if the company is able to decrease and maintain its lease-adjusted leverage below 5x. This would likely require adjusted EBITDA margins in the mid-30% range and a reduction in outstanding debt of about $300 million. This is unlikely to occur until the company's cost reduction and technology migration plans are in an advanced stage or completed, and it would likely require a shift in financial policy by the company's private equity ownership.