SciQuest Inc. Assigned #B# Corporate Credit Outlook $410M Refinancing Rated #B# (Recovery Rating: 3)

Stocks and Financial Services Press Releases Tuesday December 12, 2017 10:05
S&P Global Ratings--12 Dec--S&P Global Ratings
On Dec. 11, 2017, S&P Global Ratings assigned a 'B' corporate credit rating to Morrisville, N.C.-based SciQuest Inc. The outlook is stable.

At the same time, we assigned our 'B' issue-level rating and '3' recovery rating to Jaggaer's first-lien senior secured credit facilities, consisting of a $25 million revolver due 2022 and a $385 million first-lien term loan due 2024. The '3' recovery rating indicates our expectation for meaningful (50% to 70%; rounded estimate: 50%) recovery in the event of a payment default.

The transaction, which will refinance Jaggaer's debt to partly fund its acquisition of BravoSolution, is expected to close on Dec. 29, 2017, subject to customary closing conditions.

The rating on Jaggaer reflects the company's niche product offerings focused on spend management and procurement solutions, small scale relative to software peers, and historically weak cash flow generation. Partly offsetting these risks are the company's high recurring revenue stream, diversified customer base, and high net recurring revenue retention. The rating also incorporates our expectation of high pro-forma leverage, which we expect to remain above 6x through 2018. Although the acquisition of BravoSolution will initially depress Jaggaer's EBITDA margins in 2018, we expect margins for the combined company to trend higher in 2019.

Jaggaer provides a number of cloud-based business automation solutions for spend management and procurement across a number of verticals including higher education, life sciences, health care, public sector, consumer packaged goods, manufacturing, retail, and transportation. Jaggaer generates the majority of its revenues in North America (82%), and the company's revenues are primarily concentrated in the higher education (47%) and commercial (35%) end markets.

Jaggaer has over 900 customers with the vast majority generating more than $1 billion in revenue each. Jaggaer's solutions help customers to reduce procurement spend, enhance auditability, and mitigate risk through increased compliance. The company's full product suite covers procurement, sourcing, contract life-cycle management (buy-side), spend analysis, accounts payable invoicing, services procurement, supplier network, and supplier risk and performance management. BravoSolution, founded in 2000, is a leading global end-to-end cloud-based technology and services provider for the procurement function. The company provides a full product suite to support end-to-end source-to-pay management with revenues concentrated in the commercial end market, which consists of construction and oil and gas, and also participates in the public sector.

We view the agreement to acquire BravoSolution as improving Jaggaer's competitive position as the acquisition will nearly double the firm's revenue scale and will provide a complimentary suite of products, as well as significantly greater diversification across end markets and geographies. Furthermore, the acquisition creates meaningful cross-selling opportunities, as Jaggaer's strengths historically have been in the downstream segments (e.g., sourcing, spend analysis, and supplier risk management), compared to BravoSolution's historical strength in the upstream segments of spend management (e.g., goods procurement, services procurement, and contract life-cycle management). These positives are partly offset by BravoSolution's lower recurring revenue and shorter term contracts of one to three years associated with the commercial segment. The combined company will have a fairly well diversified end market exposure, although exposure to higher education remains high at approximately a quarter of revenue.

Our financial risk profile assessment reflects expected pro forma leverage below 7x and an expectation for deleveraging over the next 12 months primarily from margin expansion. Our financial risk profile also reflects that Jaggaer will be able to generate significant cash flows over subsequent reporting period.

Our base-case scenario assumes the following:
  • U.S. GDP growth of 2.2% in 2017 and 2.3% in 2018. We expect mid-single-digit percentage growth from the software market over the next 12 months.
  • Low-single-digit percentage pro forma revenue growth for Jaggaer in 2017 and 2018.
  • Increasing EBITDA margins in 2017 and 2018.
  • Capital expenditures around 2.5% of sales (excluding capitalized software development costs).
  • Acquisitions will be limited to smaller tuck-in transactions.
Based on these assumptions we arrive at the following credit metrics:
  • Pro forma adjusted debt to EBITDA of about 6.5x at Dec. 31, 2017, declining to the low-6x area in 2018.
  • Pro forma EBITDA interest coverage of 3x.
We view Jaggaer's liquidity to be adequate. For the next 12 months, sources are likely to exceed uses and we expect net sources to remain positive, even if EBITDA declines by 15%.
Principal Liquidity Sources:
  • Cash and cash equivalents of approximately $11.5 million, pro forma for the transaction.
  • $25 million revolving credit facility, limited by a springing maximum net leverage covenant on the facility.
  • Cash funds from operations of approximately $35 million.
Principal Liquidity Uses:
  • Mandatory term loan amortization of approximately $3.9 million annually.
  • Capital expenditures (excluding capitalized development costs) of approximately $6 million.

Our stable outlook reflects our expectation that Jaggaer will sustain leverage below 7x and successfully integrate BravoSolution. We expect the combined company to generate significant cash flows and leverage to decline primarily from improving margins at BravoSolution. While we believe that there is significant upside potential for Jaggaer to benefit from revenue synergies from BravoSolution, we do see execution risk associated with the realization of cost synergies.

We could lower the rating if Jaggaer's leverage is sustained above 7x or if the company is not successful in integrating BravoSolution, leading to a disruption of the business. An inability to generate meaningful cash flows and EBITDA margins could also lead to a downgrade.

Although unlikely over the next 12 months, over the longer term we would look to leverage sustained below 5x and greater revenue diversity and scale as potential factors for an upgrade.

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