S&P: Datapipe Inc. 'B' Corporate Credit Rating Affirmed On Term Loan Add-Ons; Outlook Stable
At the same time, we affirmed our 'B' issue-level rating, with a recovery rating of '3', on the company's senior secured revolving credit facility and first-lien term loan. The '3' recovery rating indicates our expectation of substantial (50%-70%; upper half of the range) recovery for lenders in the event of a payment default.
In addition, we affirmed our 'CCC+' issue-level rating, with a recovery rating of '6', on the company's secured second-lien term loan. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery for lenders in the event of a payment default.
"The stable outlook reflects our expectation that Datapipe's high leverage, expected to be in the low-8x area in 2016, will moderately decline to around 7x in 2017, benefiting from organic EBITDA growth and potential acquisitions," said S&P Global Ratings credit analyst Rose Askinazi. "The stable outlook also incorporates our expectation that liquidity will remain adequate over the next 12 months."
We could lower the rating over the next 12 months if liquidity narrows without a credible path for improvement. Such a scenario would likely result from a degradation in operating performance, resulting from higher churn and pricing pressure due to intensifying competitive pressure in the cloud and managed services space from larger, better-capitalized peers, leading to ongoing negative FOCF and reduced availability under the revolving credit facility. We are willing to tolerate short-term spikes in leverage above 7x for meaningful acquisitions that strengthen the company's competitive position and scale as long as the company maintains adequate liquidity with interest coverage above 1.5x.
Although unlikely over the next 12 months, we could raise the rating if operating performance exceeded our base-case assumptions, leading to a decline in adjusted leverage below 5x on a sustained basis. Given ownership considerations, an upgrade would also require a longer-term financial policy supportive of improved credit metrics.
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