S&P Raises Web.com (WWWW) to 'B+'; Cites Subscriber, Revenue Growth
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Standard & Poor's Ratings Services today raised its long-term corporate credit rating on Jacksonville, Fla.-based Web.com Group Inc. (Nasdaq: WWWW) to 'B+' from 'B'. The rating outlook is stable.
In addition, we revised our recovery rating on the company's senior secured $355.1 million first-lien term loan and $70 million revolving credit facility to '1', indicating our expectation for very high (90% to 100%) recovery for lenders in the event of a payment default, from '2' (70% to 90% recovery expectation). We subsequently raised our issue-level rating on this debt to 'BB' (two notches above the 'B+' corporate credit rating) from 'B+', in conjunction with our notching criteria.
The upgrade reflects an improvement in the company's credit metrics as a result of subscriber and organic revenue growth, especially in its higher-margin "do it for me" services (for which Web.com builds, maintains, and promotes the customer's Web site), debt repayment, and our expectation that these trends will continue in 2014. We believe the subscriber growth is a result of marketing investments and easy solutions designed to manage customer's online presence.
Our corporate credit rating reflects our expectation that the company will generate positive discretionary cash flow and steadily reduce debt. We assess Web.com's business risk profile as "weak," because of tough competition among Web services providers for small and midsize business marketing spending. We view the financial risk profile as "aggressive" based on our expectation for Web.com's lease-adjusted debt to EBITDA to decline below 5x on a GAAP basis, consistent with the indicative ratio of 4x to 5x that we associate with an aggressive financial risk profile. In our assessment, the management and governance score for the company is "fair."
Web.com is a full-service, Web-based marketing service provider focusing on helping small and midsize businesses establish, design, maintain, host, promote, and optimize their online presence. The successful integration of Network Solutions LLC has given the company the ability to cross-sell and upsell higher-margin "do it for me" Web.com services to existing domain name customers at Network Solutions. In our view, despite its recent success, Web.com will face ongoing stiff competition from the market leader, Go Daddy Operating Co. LLC, and others for domain name services, Web site hosting, and online marketing. We also see the risk that if the economy weakens, small and midsize businesses could reduce spending and the company's revenue growth could slow.
Leverage increased significantly after the acquisition of Network Solutions. At Dec. 31, 2013, the company's debt to EBITDA fell to 5.1x, from 11.5x a year ago, primarily from EBITDA growth and debt repayment. Strong operating performance, lower debt balances, and lower interest from successive debt repricing transactions improved the company's cash flow generation. Discretionary cash flow increased to $88.7 million in 2013 from $55.7 million a year ago. We believe that leverage will continue to decline from voluntary and mandatory debt repayments and management's commitment to decrease its leverage.
In addition, we revised our recovery rating on the company's senior secured $355.1 million first-lien term loan and $70 million revolving credit facility to '1', indicating our expectation for very high (90% to 100%) recovery for lenders in the event of a payment default, from '2' (70% to 90% recovery expectation). We subsequently raised our issue-level rating on this debt to 'BB' (two notches above the 'B+' corporate credit rating) from 'B+', in conjunction with our notching criteria.
The upgrade reflects an improvement in the company's credit metrics as a result of subscriber and organic revenue growth, especially in its higher-margin "do it for me" services (for which Web.com builds, maintains, and promotes the customer's Web site), debt repayment, and our expectation that these trends will continue in 2014. We believe the subscriber growth is a result of marketing investments and easy solutions designed to manage customer's online presence.
Our corporate credit rating reflects our expectation that the company will generate positive discretionary cash flow and steadily reduce debt. We assess Web.com's business risk profile as "weak," because of tough competition among Web services providers for small and midsize business marketing spending. We view the financial risk profile as "aggressive" based on our expectation for Web.com's lease-adjusted debt to EBITDA to decline below 5x on a GAAP basis, consistent with the indicative ratio of 4x to 5x that we associate with an aggressive financial risk profile. In our assessment, the management and governance score for the company is "fair."
Web.com is a full-service, Web-based marketing service provider focusing on helping small and midsize businesses establish, design, maintain, host, promote, and optimize their online presence. The successful integration of Network Solutions LLC has given the company the ability to cross-sell and upsell higher-margin "do it for me" Web.com services to existing domain name customers at Network Solutions. In our view, despite its recent success, Web.com will face ongoing stiff competition from the market leader, Go Daddy Operating Co. LLC, and others for domain name services, Web site hosting, and online marketing. We also see the risk that if the economy weakens, small and midsize businesses could reduce spending and the company's revenue growth could slow.
Leverage increased significantly after the acquisition of Network Solutions. At Dec. 31, 2013, the company's debt to EBITDA fell to 5.1x, from 11.5x a year ago, primarily from EBITDA growth and debt repayment. Strong operating performance, lower debt balances, and lower interest from successive debt repricing transactions improved the company's cash flow generation. Discretionary cash flow increased to $88.7 million in 2013 from $55.7 million a year ago. We believe that leverage will continue to decline from voluntary and mandatory debt repayments and management's commitment to decrease its leverage.
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