OREANDA-NEWS. S&P Global Ratings said today that it affirmed the 'B' corporate credit rating on Pre-Paid Legal Services Inc. (d/b/a Legalsheild). The outlook is stable.

We are raising our issue-level rating on the company's first-lien credit facility to 'BB-' from 'B+', which consists of a $380 million (with $275 million outstanding at June 30, 2016) term loan due in 2019 and a $30 million revolving credit facility due 2018. We are revising the recovery rating to '1' from '2', indicating our expectation of very high (90% - 100%) recovery in the event of a payment default. We also affirmed our 'B-' issue-level rating on the company's $175 million second-lien term loan due 2020. The recovery rating remains '5', indicating our expectation of modest (10% - 30%, lower end of the range) recovery in the event of a payment default.

As of June 30, 2016, we estimate the company had $460 million on adjusted debt outstanding.

"The ratings on Pre-Paid Legal Services Inc. reflect our view that the company will maintain stable credit protection measures, despite our expectation for a contraction in EBITDA margins during the next few years as the company increases its sales commissions in order to grow market share," said S&P Global Ratings credit analyst Suyun Qu.

We expect EBITDA margins to contract to slightly below 20% in 2016 and 2017, compared with over 20% in prior years, as its greater reinvestment in first-year commissions are realized. The company's commission plan is structured to pay selling associates a significant portion of first-year membership fees, with membership renewal commission rates declining sharply starting in the second year. As such, we are projecting revenues to grow at a faster rate, closer to the mid-single digits and cash flows and credit measures to in-line with 2015 levels, with debt to EBITDA in the mid-5x area. After years of membership decline, 2015 marks the first year the company has expanded its membership base with the introduction of individual plans and web-based sales channels. This, coupled with the greater reinvestment, should support continued growth momentum during the next 12 to 24 months.

The stable outlook reflects our expectation for the company to continue to invest in the growth of the business and maintain EBITDA margin close to 20%, such that debt-to-EBTIDA will be in the low - to mid-5x range in the next 12 months. We continue to expect the company to generate free cash flow from operations around $30 million.