S&P: RP Crown Parent LLC 'CCC+' Rating Remains On CreditWatch Positive On Pending Recapitalization; New Debt Ratings Assigned
At the same time, we assigned our 'B' issue-level rating and '3' recovery rating to the company's proposed $1.2 billion secured term loan due 2023 and $125 million secured revolving credit facility due 2021. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%; upper half of the range) of principal in the event of a payment default.
Additionally, we will withdraw our ratings on the company's existing bank debt after the transaction closes and the debt is repaid.
The CreditWatch action followed JDA's announcement that it will receive $570 million in new equity from The Blackstone Group L. P. and New Mountain Capital LLC, which it will use to reduce debt. "After the transaction closes, we expect to raise the corporate credit rating to 'B' from 'CCC+', remove it from CreditWatch, and assign a stable rating outlook if the capital structure is implemented as proposed," said S&P Global Ratings' credit analyst Christian Frank. "The prospective upgrade also reflects the improved cash flow that will result from the expected $70 million in interest expense savings from the proposed transaction and the extension of the company's debt maturities." We expect funds from operations (FFO) cash interest coverage to increase to the high-2x area from 1.4x currently, and annual unadjusted free operating cash flow (FOCF) to increase to the $100 million area or higher from last-12-months FOCF of negative $8 million.
JDA has underperformed our expectations since its leveraged buyout (LBO) almost four years ago due to deep cuts and unexpected attrition within the sales force causing license sales to fall by approximately one-third from pre-LBO pro forma levels. The company is starting to realize the benefits of the sales force reinvestment it began in 2014, with license sales up 37% year-over-year for the first half of 2016. Cloud revenue has grown over the last several quarters, but the segment is still small. Most of the segment remains hosting services for perpetual license software, but software-as-a-service (SaaS) offerings are growing more quickly. We expect the fast growth rate to continue as the company rolls out more SaaS products.
We will monitor developments related to the recapitalization and resolve the CreditWatch placement after the transaction closes. At that time, we expect to raise the corporate credit rating to 'B' from 'CCC+' and remove it from CreditWatch if the capital structure is implemented as proposed. If JDA changes the proposed financing, we could revise the rating differently than we have described, and we could take rating actions on the new debt.
If we raise the rating as we describe, the outlook would be stable and reflect our expectation for EBITDA growth due to better license sales from sales force retooling, FFO cash interest coverage in the high-2x area, and annual unadjusted FOCF of around $100 million or greater.
We could lower the rating during the 12 months following the transaction if sales force changes don't result in improved license sales as we expect, or if economic pressures cause demand to decline, such that the company sustains FFO cash interest coverage in the low-2x area. We could also lower the rating if the company breaches this threshold because of acquisitions or shareholder returns. We estimate that EBITDA would need to fall by $20 million or about 8% to reach these levels.
We don't expect to raise the rating during the 12 months following the transaction due to the company's private equity ownership, which we believe is likely to preclude sustained leverage reduction. Any upgrade would likely be in the context of a public equity offering with leverage below 5x.