Rating Action: Moody's downgrades IRIS to B3; stable outlookGlobal Credit Research - 11 Jan 2022London, 11 January 2022 -- Moody's Investors Service (Moody's) has today downgraded IRIS Debtco Limited's (IRIS or the company) corporate family rating (CFR) to B3 from B2 and its probability of default rating (PDR) to B3-PD from B2-PD. Concurrently, Moody's has downgraded to B3 from B2 the instrument rating on the backed senior secured term loan B, backed senior secured acquisition capex facility (ACF) and backed senior secured revolving credit facility (RCF) held by IRIS Bidco Limited. The outlook on all ratings remain stable.IRIS intends to secure a GBP75 million add-on term loan, fungible into the existing GBP670 million backed senior secured term loan B. The proceeds will be used to fully repay GBP40 million under the company's RCF, add cash on balance sheet and pay associated fees and expenses. Recent acquisitions of Every and AccountantsWorld were funded through the drawdown of additional debt, including the RCF."Today's rating action reflects the significant increase in IRIS' leverage on the back of the recently completed debt-funded acquisitions, leading to a pro forma Moody's-adjusted leverage of around 8x" says Luigi Bucci, Moody's lead analyst for IRIS."Current leverage levels are now higher than at the time of the initial LBO in 2018, flagging a consistently aggressive financial policy for the company" adds Mr Bucci.A full list of affected ratings can be found at the end of this press release.RATINGS RATIONALEIRIS' B3 CFR mainly reflects the company's strong position in certain niches of the UK software market, such as accountancy and the education sector. IRIS' rating also benefits from the company's (1) good product offering, which requires a deep understanding of UK-specific laws and regulations; (2) high degree of recurring revenue, with around 90% of its base coming from subscriptions; (3) low customer attrition and diversified customer base; and (4) good liquidity, underpinned by positive free cash flow (FCF).Counterbalancing these strengths are the company's (1) high Moody's-adjusted leverage after recent round of debt-funded acquisitions; (2) still high exposure to the UK market, although meaningfully reduced on the back of the company's strategy to expand in North America; (3) persistent risk of debt-funded acquisitions with high valuations, given IRIS' acquisitive nature; and (4) material slowdown in pro forma EBITDA expansion because of the coronavirus pandemic but also increased investments in acquired businesses.The downgrade of IRIS' ratings to B3 from B2 reflects Moody's anticipation that IRIS' leverage levels will be higher than previously expected over fiscals 2022-23, ending April, with Moody's-adjusted leverage remaining well outside the levels required for a B2 rating at around 7x-8x. Moody's notes that IRIS' rating positioning in the B2 category had been weak since 2019 largely because of an aggressive debt-funded acquisition strategy but also because of the effects of the coronavirus pandemic on the company's financial performance. This has resulted in the company's Moody's-adjusted leverage remaining consistently above 6.5x.Moody's anticipates a continued operating performance recovery in the remainder of fiscal 2022, leading to an organic revenue growth of around 6%-7% over the year. Weak comparatives in fiscal 2021 for Education and HCM together with pricing increases and growth of cloud in the Accountancy segment will be the main growth drivers. The rating agency expects IRIS to have a modestly lower growth rate of around 5%-6% in fiscal 2023 as growth for Education and HCM is likely to decelerate. Upside potential to the rating agency's estimates persists because of the recent acquisitions in the North American market presenting strong growth potential.In terms of company-adjusted EBITDA, Moody's expects IRIS to post growth rates moderately lower than those of its revenue in fiscals 2022-23, largely as a result of an acceleration in investments for cloud and hosted product offerings, particularly, in the newly acquired businesses.Moody's forecasts that IRIS' FCF will be around GBP25 million-GBP30 million in fiscal 2022 before a broad recovery towards GBP40 million-GBP50 million in fiscal 2023 (fiscal 2021: GBP38 million). This should translate into Moody's-adjusted FCF/debt of 4% and 5% in fiscal 2022 and fiscal 2023, respectively (fiscal 2021: 6%). IRIS' FCF in fiscal 2022 will be negatively affected by the one-month extra interest rollover from fiscal 2021 and the step-up in the payment of corporate tax liabilities.Moody's expects a reduction in IRIS' Moody's-adjusted leverage towards 7x by fiscal 2023, largely driven by a recovery in its company-adjusted EBITDA (LTM October 2021 pro forma for the new acquisitions: 8.1x). The company's Moody's-adjusted leverage in fiscal 2023 will also benefit from the phasing out of a good portion of the current contingent considerations. While the rating agency expects IRIS to focus on the integration of recently acquired companies over the next 12-18 months, downside risk to these estimates still persists because of potential debt-funded M&A with high valuations involved.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSIn terms of governance, following the LBO in 2018, HgCapital Trust plc and Intermediate Capital Group PLC are the main shareholders in the business. Under the current structure, IRIS' financial policy has been aggressive, with a strong focus on acquisitions. This is evidenced by the takeover of FMP in 2019 together with the subsequent ACF drawdown and the recent debt-funded acquisitions of Every and AccountantsWorld which have brought IRIS' Moody's-adjusted leverage substantially higher than the initial LBO level.LIQUIDITYMoody's perceives IRIS' liquidity profile as good. As of the end of October 2021, the company had available cash resources of GBP35 million (pro forma for the proposed transaction: GBP67 million) after having fully drawn its GBP75 million ACF due September 2025. IRIS retains access to a GBP40 million RCF (undrawn pro forma for the proposed transaction) due in March 2025.The company's RCF has a springing senior secured net leverage covenant (10x) that will be tested only when the facility is drawn by more than 40%. Moody's anticipates the headroom under the covenant test to remain ample.STRUCTURAL CONSIDERATIONSThe B3 instrument ratings of the backed senior secured term loan B, the ACF and the RCF are in line with the CFR, reflecting the pari passu capital structure of the company. While not included in Moody's-adjusted metrics, the rating agency notes the presence of PIK debt outside of the restricted group.RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects Moody's expectation of a step-up in IRIS' operating performance over fiscals 2022-23 leading to a gradual reduction in the company's Moody's-adjusted gross debt/EBITDA within the next 12-18 months. The stable outlook is also reliant on IRIS continuing to generate positive FCF and maintaining adequate liquidity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWhilst unlikely in light of the recent downgrade, upward pressure on IRIS' rating could arise if: (1) its Moody's-adjusted leverage reduces towards 6x; and (2) its Moody's-adjusted FCF/debt remains in the solid mid-single digits in percentage terms on a sustained basis.Downward rating pressure could arise if IRIS': (1) operating performance deteriorates, leading to a decline in EBITDA or negative FCF; or (2) Moody's-adjusted leverage remains at around 8x; or (3) liquidity weakens.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. LIST OF AFFECTED RATINGS Downgrades: ..Issuer: IRIS Bidco Limited ....BACKED Senior Secured Bank Credit Facility, Downgraded to B3 from B2..Issuer: IRIS Debtco Limited....Probability of Default Rating, Downgraded to B3-PD from B2-PD....LT Corporate Family Rating, Downgraded to B3 from B2 Outlook Actions: ..Issuer: IRIS Bidco Limited ....Outlook, Remains Stable ..Issuer: IRIS Debtco Limited ....Outlook, Remains Stable COMPANY PROFILE Based in Langley (UK), IRIS provides business-critical software solutions, such as those pertaining to accounting and tax, and payroll and human resources, together with back-office applications in the UK education sector. The group primarily provides solutions to accountancy practices, payroll bureaus and SMBs in the UK, and has more than 1,500 employees. In fiscal 2021, IRIS reported pro forma revenue of GBP229 million and pro forma company-adjusted EBITDA of GBP103 million.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Luigi Bucci Analyst Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Richard Etheridge Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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