OREANDA-NEWS. Fitch Ratings has assigned Eden Acquisition 5 Limited (Top Right Group or TRG) a final Issuer Default Rating (IDR) of 'B' with Positive Outlook.

The agency has also assigned a senior secured rating of 'B+'/'RR3' to the company's term loan B. Specifically the following instrument ratings have been assigned:

EUR300m term loan B1 maturing April 2022 available to Eden Bidco Limited: assigned 'B+'/'RR3'
USD323m term loan B2 maturing April 2022 available to TRG Financing LLC and Eden Financing S.a.r.l: assigned 'B+'/'RR3'

The assignment of the final ratings follows receipt of final documents relating to the recently closed term loan B.

TRG's ratings reflect the group's well-diversified portfolio of B2B businesses, positive revenue exposure to subscriptions and B2B events, and improving cash flow generation. While its size is a constraint on its ratings, its leveraged capital structure is the key driver of its speculative-grade rating. Its overall revenue size is small relative to peers, but its market position in its chosen niches is strong, with its events and information services businesses showing some cyclical resilience.

Forecast cash flow provides the potential for deleveraging over the near term. M&A risk and somewhat loose structural protections in its financing documentation, however, provide the scope for re-leveraging, which Fitch views as event risk.

KEY RATING DRIVERS
Diversified Portfolio of B2B Businesses
TRG has a well-diversified portfolio of B2B professional publishing and events businesses. Exposure to print publishing/advertising has been managed well with customer renewal rates (trade publications and data analytics) and consistently high re-bookings (events). A strategy focusing on niche data segments where strong market position, and somewhat high entry barriers (given the complexities of replicating the company's depth of content and data analytics) gives its information services businesses the "must-have" and embedded qualities necessary to ensure a degree of cyclical resilience.

Although scale is a limiting factor for the ratings, being able to establish leading market positions in niche data services leads to a degree of competitive protection, ie niche markets can be too small for larger, financially stronger competitors to consider entering.

Events & Subscriptions Revenue Mainstay
Events and subscription revenues now account for 85% (2014) of total revenue. Subscriptions (32% of total revenue) tend to enjoy high renewal rates with the company's increasing introduction of automatic renewal across its trade publications and data analytic tools, which we expect to continue supporting these trends.

Its events businesses (primarily i2i and Lions) accounted for 53% of 2014 revenue, the group's single largest revenue contribution. Lions, the global advertising industry award event, is a good example of an entrenched event that would be extremely difficult for a competitor to replicate. The potential for geo-cloning and creation of lateral events across the events portfolio, offers above average growth relative to many media peers, albeit with some execution risk.

Cyclicality, Margin Resilience
Advertising exposure has been reduced to 9% of total revenue from 20% between 2008 and 2014, minimising exposure to the company's most cyclical risk. Events, nonetheless is cyclically exposed with the wider sector exhibiting high single/low double digit declines in the post-Lehman recession of 2009. B2B events are, in Fitch's view, more resilient than consumer-facing exhibitions, while the sector generally is high margin, its costs scalable and earnings therefore somewhat resilient in a downturn. This was evident in the company's sound performance in 2009 given the fragile state of the global economy during that period.

Leveraged Capital Structure
While Fitch considers that TRG's overall size and operating profile limits its ratings to speculative-grade regardless of its capital structure, its leveraged balance sheet is a key driver of its ratings. Fitch's base case envisages unadjusted (net debt/EBITDA) leverage of 4.3x and funds from operations (FFO) net leverage of 4.8x by FY15 - metrics which place the company on an improving trend in the 'B' category.

A limited degree of cyclicality and the potential for M&A add further risk. The business is though generating sound levels of free cash flow (FCF); Fitch forecasts low double digit and rising FCF-to-sales in 2015 and that in the absence of M&A, the business has the potential to deleverage fairly well. Fitch's rating case assumes a consistent level of deleveraging, a trend which is considered important in the context of both the ratings and Outlook.

Strategy Well Executed
M&A and portfolio management is fairly active. Acquisitions appear well chosen and made at realistic valuations; a good example being the acquisition of Stylesight (fashion industry work flow tools), a key competitor to WGSN, made at end-2013. This transaction, in Fitch's view, improves the embedded nature and visibility of WGSN revenues and is expected to lead to further synergy benefits. The sale of CAP Motor research in 2012 at a multiple of 13x helped improve unadjusted leverage by 0.9x to 5.1x.

M&A Risk, Limited Structure Protections
Management has taken a strategic approach to acquisitions with TRG investing (buying) in adjacent businesses where the business model is well understood or consolidating existing market positions and achieving cost savings within an existing franchise or division (eg. Stylesight).

Acquisition valuations appear reasonable, and purchase considerations structured with a significant earn-out element. The timing and size of deals may, however, lead to leverage spikes or re-leveraging. A GBP75m RCF with a fairly loose covenant structure, in Fitch's view, provides scope to fund acquisitions. However, a restricted payment provision in the senior debt until senior secured first lien leverage ratio falls below 4.5x provides moderate protection against dividend outflow/recap.

KEY ASSUMPTIONS
-Revenues to grow at low-mid single digits in 2015 following strong 17% increase (in part acquisition-related) in 2014
-Growth to accelerate to mid-to-high single digits beyond 2015, driven by geo-cloning and the launch of sister events within the events businesses, along with stronger subscription revenues and an enhanced pricing strategy
-EBITDA and margin expansion in 2015, benefitting from residual synergies associated with the Stylesight acquisition and from operating leverage across divisions
-EBITDA margin to expand to the low-to-mid 30s over the next three to four years
-Capex-to-sales to fall back to sustainable levels of around 3.5%
-Acquisitions to be treated as event risk with earn-out payments forecast in line with management guidance
-No dividend payments - although these are permitted subject to a restricted payment test under the documentation - and net debt/EBITDA leverage to fall to 3.0x within the next two to three years in line with management targets

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to positive rating action include:
- FFO net leverage that is expected to remain below 4.5x
- FFO fixed charge cover trending above 2.75x
- Strengthening FCF trends (measured by FCF after capex and dividends, to revenues), with metrics broadly in line with Fitch's rating case. Excluding the arrangement and break fees associated with the refinancing, Fitch's rating case expects a FCF margin in the low double-digits in 2015, before expanding thereafter
- Ongoing strength of operating performance (after accounting for potential divisional variability/volatility) and maintained competitive position

Future developments that may, individually or collectively, lead to negative rating action include:
- FFO net leverage that is expected to remain above 6.5x
- FFO fixed charge cover trending below 2.0x
- FCF margin trending towards mid-single digits; at these levels cash flow performance would not support the deleveraging envisaged in the rating case.