S&P Raises Go Daddy (GDDY) to 'B+'; Sees Debt Leverage Continuing to Decline

Standard & Poor's Ratings Services said today that it raised its corporate credit rating on Go Daddy Operating Co. LLC (NYSE: GDDY) to 'B+' from 'B' and removed the ratings from CreditWatch, where we had placed them with positive implications on March 20, 2015. The rating outlook is stable.

At the same time, we raised our issue-level rating on the company's senior secured first-lien credit facility to 'BB-' from 'B'. We also revised our recovery rating on the secured debt to a '2' from a '3', indicating our expectation for substantial recovery (70%-90%; low end of the range) of principal in the event of a payment default.

"The upgrade reflects our expectation that GoDaddy Inc. will be using most of its IPO proceeds to repay $300 million in debt, including prepayment premiums and accrued interest associated with the repayment, and that its debt leverage will continue to decline," said Standard & Poor's credit analyst Elton Cerda. We expect that the company will use its internally generated cash flow for investments and acquisitions. This in turn would support Go Daddy Operating Co. international expansion and new product rollout. We also expect the company to make tuck-in acquisitions without additional debt leverage.

Our stable rating outlook reflects our view that Go Daddy will be able to generate healthy discretionary cash flow and maintain discretionary cash flow to debt above 10% over the next 12-24 months.

An upgrade would likely entail the company adopting a more conservative financial policy, likely in conjunction with a reduction in private equity ownership. Additionally, we could raise the rating if Go Daddy's EBITDA margin improves from cross-selling to existing clients and international market expansions.

We could lower the rating if Go Daddy reverts to a more aggressive financial policy, driven by debt-funded dividends or a large debt funded acquisition. Additionally, we could lower the rating if price competition or market share loses, causes discretionary cash flow to drop below $100 million and leverage to trend higher.

Key points:

• U.S. web-based service provider GoDaddy Inc., the parent company of Go Daddy Operating Co. LLC, recently completed an IPO. We expect the company to use the IPO proceeds to, among other things, repay debt and for general corporate purposes.
• We are revising our comparable rating analysis assessment on Go Daddy to "positive" from "neutral."
• We are also raising our corporate credit rating on Go Daddy to 'B+' from 'B' and our issue-level rating on the company's secured debt by one notch to 'BB-', and removing the ratings from CreditWatch positive. We are also revising our issue-level rating on the debt to '2' from a '3'.
• The stable outlook reflects our expectation that the company will maintain its leadership position in the domain name registration business, with low-double-digit revenue growth and a less aggressive financial policy. Our base case scenario does not incorporate any large debt funded acquisition or dividend distribution.

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