S&P Places AVG Technologies (AVG) Ratings on Watch for Downgrade

S&P Global Ratings said it has placed its 'BB' long-term corporate credit and issue ratings on AVG Technologies N.V. (NYSE: AVG) on CreditWatch with negative implications.

The CreditWatch placement follows AVG's announcement that it has entered into an agreement to be acquired by its competitor, Avast, for a total consideration of $1.3 billion. Avast is planning to fund this transaction through committed debt financing of $1.685 billion, which we understand will also include an undrawn revolving credit facility and the refinancing of both Avast and AVG's outstanding debt.

We expect the pro forma S&P Global Ratings-adjusted leverage for the combined group to peak at 4.5x-5.0x in 2016, before accounting for any potential cost synergies of merging the two businesses.

Therefore, we have placed our current ratings on Avast on CreditWatch with negative implications, reflecting a potential downgrade to 'B+'. We anticipate that AVG will be a core subsidiary to Avast as it will be fully owned, debt will be refinanced at the Avast level, and we expect both businesses to merge their operations in order to gain the benefits of increased scale and merger-related synergies. As a result, we will most likely cap our ratings on AVG at the level of the rating on Avast when the transaction completes.

We aim to resolve the CreditWatch within the next 90 days. The resolution will include our review of the business plan for the combined group, including the expected cost synergies and how quickly they can materialize, potential short-term deleveraging, and the group's long-term financial policy.

We could lower our long-term corporate credit rating on AVG by up to two notches, depending primarily on:

• Our base case for the group's combined credit metrics and cash flow generation, based on our assessment of revenue growth prospects, synergy creation, and the related implications for the ratings on Avast; and
• Our assessment of AVG's importance to and expected integration within the group.

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