Auction.com, LLC — Moody’s affirms Auction.com’s B3 CFR and downgrades first lien secured rating to B3; outlook stable
Rating Action: Moody’s affirms Auction.com’s B3 CFR and downgrades first lien secured rating to B3; outlook stableGlobal Credit Research – 18 Jan 2022New York, January 18, 2022 — Moody’s Investors Service (“Moody’s”) affirmed Auction.com, LLC’s (“Auction.com”) B3 corporate family rating (“CFR”) and B3-PD probability of default rating (“PDR”). Concurrently, Moody’s downgraded Auction.com’s first lien secured rating to B3 from B2. The outlook is stable.In the third quarter of 2021, the company raised $300 million of non-convertible senior preferred equity and $500 million of convertible junior preferred equity. The proceeds were used to repay the existing $110 million senior secured second lien term loan, pay down the fully drawn $45 million revolver, fund a $500 million dividend to existing shareholders, and pay related fees and expenses. The remaining proceeds were added as cash to the balance sheet. The first lien secured term loan and revolver will no longer benefit from the subordinated debt cushion that the second lien debt provided and, as a consequence, the first lien instrument ratings are aligned with the B3 CFR.Governance considerations for this action include private equity ownership and a financial strategy prioritizing shareholders’ returns as evidenced by the use of proceeds largely being used to pay a $500 million dividend. These risks are somewhat offset by an improved liquidity position with cash being added to the balance sheet and the full paydown of the second lien debt and revolver, which will lead to a reduction in leverage and lower interest payments (approximate reduction of $1 million per month).Affirmations:..Issuer: Auction.com, LLC…. Corporate Family Rating, Affirmed B3…. Probability of Default Rating, Affirmed B3-PDDowngrades:..Issuer: Auction.com, LLC ….Senior Secured First Lien Bank Credit Facility, Downgraded to B3 (LGD3) from B2 (LGD3) Outlook Actions: ..Issuer: Auction.com, LLC ….Outlook, Remains Stable RATINGS RATIONALE In an effort to support homeowners hurt by the coronavirus outbreak, a series of federal and state programs were introduced since the onset of the pandemic that included forbearance and foreclosure relief. The foreclosure moratorium, which expired on July 31, 2021, and eviction moratoriums, which expired on October 2, 2021, reduced the transaction pipeline moving into Auction.com’s foreclosure auctions stage. Auction.com’s revenue, earnings and cash flows temporarily diminished materially as a result, but revenues have increased on a monthly basis by 50% in the fourth quarter of 2021. Despite the foreclosure moratorium expiration, Moody’s expects revenue and earnings pressure to continue until foreclosure volumes reach pre-pandemic levels again, which the company expects will be in the third quarter of 2022. Assuming a gradual volume recovery and return to pre-pandemic levels by the third quarter of 2022, Moody’s expects Debt/EBITDA will decline to below 8x by FYE2022. (All metrics cited include Moody’s standard adjustments unless noted otherwise. EBITDA and EBITA are also adjusted to include the expensing of capitalized software costs.) For FYE2023, Moody’s expects that a full year of pre-pandemic foreclosure volumes further supported by the continued secular shift of foreclosures to online auctions will result in revenue greater than FYE2019 levels and leverage declining below 5x.Auction.com’s B3 CFR reflects the company’s status as a category leader in a niche market and its consistent performance despite ongoing market pressures, balanced by its still high regulatory risk. Moody’s expects that the secular shift of foreclosures to online auctions and a return to pre-pandemic foreclosure volumes by the third quarter of 2022 will support profitability and earnings growth for Auction.com after a period of near-term earnings pressure. Governance risks that Moody’s considers in the company’s credit profile include an aggressive financial strategy that exposes the company to event risk and a high likelihood of periodic releveraging to support sponsor returns under private equity ownership.Moody’s views Auction.com’s liquidity as very good, largely supported by the company’s cash on hand ($285 million as of September 30, 2021) and a lack of funded debt maturities until 2024, but constrained by diminished cash flows that are not expected to recover to pre-pandemic level until at least late 2022. The company’s cash balances, internally generated cash flow from the real estate owned (“REO”) auction business in combination with cost savings, are more than sufficient to support possible operating losses and earnings volatility as foreclosure volumes recover to pre-pandemic levels. Auction.com’s debt service consist of $4.5 million first lien debt amortization as well as interest payments.The company’s $45 million revolver, which expires on September 29, 2022, was fully drawn as of September 30, 2021 but was fully repaid in January 2022. The revolver has a springing maximum first lien net leverage ratio of 6.75x when the revolver is more than 35% used. Given the generous EBITDA add-back in the covenant leverage ratio calculation, Moody’s expects the company will have sufficient cushion over the requirement in the next 12-18 months. Moody’s also anticipates that Auction.com will take the necessary steps to extend the revolver’s maturity ahead of its expiration date.The B3 rating of the senior secured first lien credit facility, consisting of a $45 million revolving credit facility expiring September 2022 and a $433 million term loan B due September 2024, reflects a PDR of B3-PD and a loss given default (“LGD”) of LGD3. The senior secured first lien rating is in line with the B3 CFR and reflects its position as the vast majority of debt in the capital structure. Moody’s does not include the $300 million of non-convertible senior preferred equity and $500 million of convertible junior preferred equity in the Loss Given Default assessment or for analytical credit metrics.The stable outlook reflects Moody’s expectation of a rebound in operating performance in 2022 as foreclosure volumes return to pre-pandemic levels. The stable outlook also incorporates Moody’s expectation that the company will maintain at least adequate liquidity, generate break-even to positive cash flow and maintain strong cash balances over the next 12 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Auction.com demonstrates sustained Debt/EBITDA of under 4.0x (Moody’s adjusted) and sustained free cash flow-to-debt in the mid-single digit percentage range while maintaining good liquidity. Achieving a greater scale as measured by revenue and demonstrated ability to sustain profitable growth through real estate cycles would also be viewed positively for the ratings.The ratings could be downgraded if free cash flow is negative for an extended period of time without supporting liquidity or Moody’s no longer expects a significant rebound in operating performance and EBITDA to occur this year. A significant market share loss, debt financed shareholder distributions or acquisitions, or a loss of a significant customer could also likely lead to a downgrade.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Auction.com, LLC provides asset sale services for the US residential real estate markets. The company enables auction-based sales of bank-owned and foreclosure residential properties using either the company’s online transaction site or via live local auctions in counties throughout the US. The company is majority-owned by affiliates of Thomas H. Lee Partners L.P. and co-investors. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Sean Cray Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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