S&P Lowers Outlook on Solera Holdings (SLH) to Negative Amid Proposed $850M Unsecured Debt Offering

Standard & Poor's Ratings Services said that it revised its rating outlook on Solera Holdings Inc. (NYSE: SLH) to negative from stable. At the same time, we affirmed our 'BB-' corporate credit rating on the company.

We also assigned our 'BB-' issue-level and '4' recovery ratings to the company's proposed $850 million senior unsecured notes, which consists of an add-on to the existing senior unsecured notes due 2023 and newly assigned senior unsecured notes due 2025. The '4' recovery rating indicates our expectation for average recovery (50%-70%; lower half of the range) of principal in the event of a payment default. The borrower of the debt is Audatex North America Inc.

Solera's proposed $850 million senior unsecured note issuance increases its total debt to $3.1 billion and raises leverage pro forma for the issuance and recent acquisitions to 5.4x from roughly 5x as of March 31, 2015. The company made about $900 million of acquisitions in the fiscal year ended June 30, 2015, as well as $100 million of share repurchases. Organic revenue growth has remained in the mid- to high-single-digit percent area, with EBITDA margins in the 40% area, and free operating cash flow generation of $200 million to $225 million in fiscal 2015 and 2014. Solera's leverage level is high for the rating, at above 5x, and it may remain above 5x over the next 12 months, depending on the company's future leverage tolerance.

"The negative rating outlook on Solera reflects the company's pro forma leverage increasing to about 5.4x, which is high for our 'BB-' rating," said Standard & Poor's credit analyst Peter Bourdon. "The rating outlook also reflects the potential for further acquisitions that may result in Solera's leverage remaining above 5x over the next 12 months."

We could lower the rating on Solera if its leverage does not improve from current levels to 5x or below. Given its high growth expectations, a downgrade could occur if the company completes further debt financed acquisitions or if its EBITDA growth stalls.

We could revise the outlook to stable if Solera's business performance proceeds as we expect, with leverage declining to and sustaining at 5x or below.

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