On Assignment (ASGN) Ratings Affirmed by Moody's Amid Creative Circle Acquisition

Moody's Investors Service affirmed On Assignment's (NYSE: ASGN) ("On Assignment") Ba2 Corporate Family Rating (CFR), Ba3-PD Probability of Default Rating, and assigned Ba2 ratings to the company's proposed $975 million of senior secured credit facilities. Moody also affirmed On Assignment's SGL-2 Speculative Grade Liquidity rating. The ratings have a stable outlook. On Assignment will use the proceeds from the $875 million of Term Loan B to refinance existing debt and complete the acquisition of Creative Circle for $600 million, including up to $30 million of contingent consideration.

RATING RATIONALE

Pro forma for the acquisition, On Assignment's total debt to LTM 1Q 2015 EBITDA (Moody's adjusted, including stock-based compensation expense and capitalized operating leases) will increase from 2.3x to 3.7x (including $30 million of earn out obligations). Although leverage is expected to remain at the higher end of the tolerance range for the Ba2 CFR over the next 12 months, Moody's affirmed On Assignment's Ba2 rating to reflect the company's commitment to reduce leverage from a combination of EBITDA growth and accelerated debt repayment, and the company's track record of deleveraging after the Apex acquisition in 2012. Moody's expects On Assignment's total debt to EBITDA (Moody's adjusted) to decline to about 3x by year-end 2016.

Moody's analyst Raj Joshi noted, "Excluding acquisitions, growth rates for On Assignment's legacy Oxford and Apex segments have decelerated over the recent quarters." Moody's expects On Assignment's revenues to grow by about 6% to 7% (pro forma for the Creative Circle acquisition) over the next 12 to 24 months, with Creative Circle adding about a percentage point to the overall growth rates. The acquisition will enhance On Assignment's operating scale and broaden its services into the niche and growing creative staffing segment. The acquisition will be accretive to On Assignment's EBITDA margins and cash flow from operations as Creative Circle had approximately 10% higher adjusted EBITDA margins despite its significantly smaller scale.

The Ba2 CFR is supported by On Assignment's solid prospective free cash flow relative to debt (17% to 18% in FY 2016). The company is one of the leading providers of temporary IT staffing services. The IT staffing segment benefits from secular demand driven by ongoing technology change and a supply/demand imbalance for professionals possessing particular skill sets. Because of its focus on professional staffing niches with high bill rates, On Assignment has higher EBITDA margins than certain rated peers within the staffing industry.

However, like its competitors, On Assignment is vulnerable to cyclical macroeconomic changes, such as rising unemployment levels, and volatility in capital spending. The company operates in a highly competitive and fragmented temporary staffing industry. In addition, as unemployment levels continue to decline, the company's challenges include maintaining a large pool of candidates with the skills that are in demand by its customers and managing the bill/pay rate spread that drives its gross margins.

The stable outlook reflects Moody's expectations for a 6% to 8% revenue growth over the next 12 to 18 months and total debt to EBITDA to progressively decline toward 3x.

The SGL-2 liquidity rating reflects On Assignment's good liquidity comprising cash balances, projected free cash flow and availability of funds under the new $100 million revolving credit facility.

Moody's could downgrade On Assignment's ratings if revenue growth decelerates, or if its financial policy deviates from the commitment to reduce leverage. The rating could also be downgraded if Moody's believes that On Assignment is unlikely to reduce and maintain total debt / EBITDA (Moody's adjusted) below 3.5x or free cash flow to total debt ratio declines to below 8%. Moody's could raise On Assignment's ratings if it generates strong revenues and earnings growth, and Moody's believes that total debt to EBITDA and free cash flow to total debt could be sustained below 2.5x and above 15%, respectively, including through a downturn and while maintaining capacity for acquisitions consistent with its track record.

Moody's has taken the following rating actions:

Assignments:

..Issuer: On Assignment, Inc.

....Senior Secured Bank Credit Facilities, Assigned Ba2 (LGD3)

Affirmations:

..Issuer: On Assignment, Inc.

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba3-PD

.....Speculative Grade Liquidity Rating, Affirmed SGL-2

Outlook Actions:

..Issuer: On Assignment, Inc.

....Outlook, Remains Stable

On Assignment, Inc. is a leading professional staffing firm specializing in the technology and life sciences sectors. The company generated $1.75 billion in revenues in the twelve months ended March 31, 2015, on a continuing operations basis.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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