Moody's Assigns 'B2' Rating to Project Aurora Holdings (SWI)

Moody's Investors Service, ("Moody's") assigned a B2 corporate family rating to Project Aurora Holdings, Inc. ("SolarWinds") and B1 to its proposed first lien facilities. The holding company and debt facilities are being used to finance the going-private acquisition of SolarWinds (NYSE: SWI) by private equity groups, Thoma Bravo and SilverLake. Approximately 55% of the total transaction is being funded with equity. The ratings outlook is stable.

Ratings Rationale

The B2 corporate family rating reflects SolarWinds very high leverage levels post-closing partially offset by the company's cash demonstrated generating capabilities and unusually strong growth prospects. Proposed debt to trailing cash-based EBITDA (as of September 2015) exceeds 8x but is expected to decline to well under 7x over the next 12 to 18 months driven by a combination of cost cuts, and double digit revenue growth (GAAP closing leverage exceeds 9x). If not for the exceptional growth prospects, the ratings would be lower. The growth is driven by the company's unique business model which emphasizes low priced IT infrastructure management and monitoring software and ability to consistently develop or acquire relevant software tools. The company has achieved this growth while maintaining very high operating margins (cash EBITDA margins over 50%) partly driven by the company's efficient, low cost sales and marketing structure. While the company has consistently achieved double digit organic revenue growth over the past four years, the company will cut costs as part of the transaction, which could negatively impact its growth profile. Given the reliance on cost cuts to meet its plans, and its potential negative impact on the business, the company is considered weakly positioned in the B2 rating category.

SolarWinds has grown revenue, EBITDA and cash flow for the past decade including growing through the last downturn. Over this period revenue and EBITDA have grown at a compound annual rate of 35% and 22% respectively through a combination of organic growth and acquisitions. In addition to the strong growth prospects, the rating is supported by the recurring nature of much of (nearly 65%) SolarWinds revenues. The base of recurring revenues (primarily maintenance and subscription revenue) have grown at double digit rates through this period.

Liquidity is expected to be good based on an estimated $50 million of cash on hand at closing, an undrawn $125 million revolver and modest but positive free cash flow over the next year.

The ratings could be downgraded if growth slows significantly or cash-based leverage is not on track to get well below 7x and free cash flow to debt above 5%. Additional debt funded acquisitions before the company achieves those levels could also cause downward pressure on the ratings. Though unlikely in the near term, the ratings could be upgraded if cash-based leverage is sustained below 5.5x while growth rates remain high.

The following ratings were assigned:

Assignments:

..Issuer: Project Aurora Holdings, Inc.

.... Probability of Default Rating, Assigned B2-PD

.... Corporate Family Rating, Assigned B2

....First Lien Senior Secured Bank Credit Facilities, Assigned B1 LGD3

Outlook Actions:

..Issuer: Project Aurora Holdings, Inc.

....Outlook, Assigned Stable

The ratings on the first lien debt are notched up from the corporate family rating reflecting their senior position in the capital structure. The first lien debt facilities are positioned ahead of the unrated second lien debt on the majority of SolarWinds assets. However, the first lien debt will not rank ahead of the second lien debt on certain intercompany loans.

The principal methodology used in these ratings was Global Software Industry published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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