Fitch Ratings has downgraded Astra Acquisition Corp.'s (d.b.a. Anthology) Long-term Issuer Default Rating (IDR) to 'B-' from 'B'.

In addition, Fitch has affirmed the company's senior secured credit facility and first lien term loan at 'BB-' and updated the recovery rating to 'RR1' from 'RR2' due to the repayment of $525 million of first lien debt. Fitch has also downgraded Astra Intermediate Holding Corp.'s IDR to 'B-' from 'B'. The Rating Outlook for both entities is Negative. Astra Intermediate Holding Corp. is the parent and Astra Acquisition Corp. is the wholly-owned subsidiary, collectively they are referred to as 'Astra'.

The downgrade of the IDRs reflects Fitch's concerns about significant leverage and weak interest coverage. The rating also reflects Astra's modestly declining retention rates as it operates in a highly competitive environment. The company's credit profile benefits from significant recurring revenues, adequate liquidity over the rating horizon and from having no near-term maturities.

Key Rating Drivers

Significant Leverage and Weak Coverage: While debt has been reduced with some of the proceeds from asset sales, leverage is still projected to be well over 8.0x. With higher interest rates, Fitch sees interest coverage below 1.0x over the next several quarters before improving. Astra's significant interest burden is projected to result in negative free cash flow for the company. Fitch believes Astra has sufficient liquidity over the forecast horizon and no near-term maturities, which benefit the credit profile. If management can successfully enhance EBITDA margins as planned, Astra's credit metrics could be better than Fitch's projections.

Retention Rates Modestly Declining: For fiscal 2023, the company projects improvements in gross and net retention rates. The company expects a 92 % gross retention rate and 99% net retention rate versus 90% and 95%, respectively for fiscal 2022. Overall renewal rates were modestly down in fiscal 2022. Astra's gross renewal rate was 94% and net retention was 97% in fiscal 2021, while Blackboard's gross retention rate was 95%, and its net retention rate 104% during the same period. In the first quarter of fiscal 2023, recurring revenues accounted for 88% of revenues, which is fairly in line with historical revenues (pro forma for the Blackboard acquisition).

Competitive LMS Environment: Astra's largest segment is its Learning Management Systems (LMS) where there is strong competition, including Canvas, which is owned by Instructure (NYSE: INST; BB-/Stable) and Brightspace, owned by D2L Inc. (TSE: DTOL; not rated). The most recent quarterly results from INST and DTOL show strong revenue growth yoy, whereas Astra showed a very modest decline (on a pro forma basis adjusted for the sale of assets). Astra intends to invest in legacy Blackboard LMS solutions as well as sales and marketing to increase revenues for the long term.

Recent Divestitures: Astra acquired Blackboard in October 2021 and has since evaluated its portfolio of offerings, making some strategic decisions. Astra sold Blackboard Collaboration in June 2022 and Blackboard Community Engagement in September 2022. Astra believes these divestitures will allow the company to focus more on its higher education software offerings, which should translate into revenue growth and increased EBITDA longer term. However, the divested businesses had higher EBITDA margins than the remaining business. Fitch believes that Astra will have to successfully execute on its strategic plans to gain market share and grow its remaining offerings.

Impact of from Divestitures: The company used $525 million of the proceeds from the September 2022 and June 2022 divestitures of Blackboard Collaborate and Blackboard Community Engagement to repay debt. This will help to reduce the company's interest expense burden, but with higher floating rates, Fitch remains concerned about the company's interest coverage, while margins from the remaining businesses are slightly below the recent divestures.

Ownership Could Limit Deleveraging: Anthology is majority owned by private equity firm Veritas Capital. Fitch believes private equity ownership is likely to result in the company focusing on growth to optimize ROE versus focusing on leverage reduction. Recent asset sale proceeds used to repay debt were in accordance with the credit agreement. Fitch expects the company to gradually delever through modest EBITDA growth.

Derivation Summary

Astra's ratings are supported by the company's highly recurring revenues, strong product portfolio and technology platform, as well as its strong market position in the LMS space. The rating is constrained by its smaller scale relative to the larger and more diversified education software peers, such as Ellucian (not rated), Oracle (ORCL; BBB/Neg), and Workday (not rated). The ratings are also constrained by the company's significant leverage when compared to similarly sized Instructure Holdings, Inc. (INST; BB-/Stable), a direct competitor in the LMS space.

Astra's 'B-' rating is three notches below publicly traded Instructure. Both have somewhat similar revenues, although Instructure serves both K-12 and higher ed. With Astra's recent divestitures, it is largely focused on the higher ed market. Instructure's credit profile is stronger given its low leverage (as defined by Fitch), which was 2.8x for the LTM ending 3Q22, whereas Astra's leverage is expected to be over 10x at the end of fiscal 2023 (fiscal year ends June 30).

Like other Fitch-rated software issuers owned by private equity, Astra is in the single 'B' rating category reflecting its high leverage. The ownership structure could optimize ROE, limiting the prospect for accelerated deleveraging.

Key Assumptions

In fiscal 2023, revenues increase in the low single digits (on a pro forma basis) reflecting new bookings at the end of fiscal 2022;

Revenues grow in the very low single digits beyond fiscal 2023;

Investment in sales and marketing in fiscal 2023 pressure EBITDA margins; however, in fiscal 2024 and beyond operating expenses decline and EBITDA margins increase to the low 20's;

No assumptions are made for acquisitions or dividends.

Recovery Rating Assumptions

The recovery assumes that Astra would be reorganized as a going-concern entity in bankruptcy rather than liquidated.

A 10% administrative claim and that the $140 million revolver is fully drawn.

Going-Concern (GC) Approach: Astra's GC EBITDA is assumed to be $133 million, which is lower than the prior GC EBITDA of $193 million. The lower GC EBITDA considers Astra's divestitures of Community Engagement and Collaborate. The remaining company has GC EBITDA that reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which Fitch bases the enterprise value. This considers that as contracts come up for renewal, Astra loses market share to other large players in the LMS space including Canvas LMS, Moodle and Google Classroom. Fitch assumes that the company generates $500 million in revenues and that the company can cut operating expenses during its rehabilitation period. As a result, Fitch assumes Astra operates with 26.7% EBITDA margins and the GC EBITDA is $133 million.

GC EV Multiple Rationale: Comparable Reorganizations - Per the 2021 TMT Bankruptcy Study, Fitch notes 10 past reorganizations in the Technology sector, where the median recovery multiple was 5.1x. Of these companies, only three were in the Software subsector: Allen Systems Group, Inc., Avaya, Inc., and Sungard Availability Services Capital, Inc., which received recovery multiples of 8.4x, 8.1, and 4.6x, respectively. Given Astra's market position but weak financial metrics, Fitch believes that the GC EV Multiple for the company would fall somewhere near the center of this range, at 7.0x.

As a result of these considerations, Fitch rates the first lien credit facility with a recovery rating of 'RR1', up from 'RR2' as a result of the reduction of first lien debt in Astra's capital structure. Its instrument rating remains unchanged at 'BB-', up three notches from above Astra's 'B-' IDR. The second lien debt remains unrated.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to a Stable Outlook:

Operating EBITDA interest coverage above 1.2x on a sustained basis;

Breakeven or positive free cash flow.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Operating leverage Debt with Equity Credit / EBITDA sustained below 6.5x;

Sustained revenue growth of mid-single digits implying an overall stable market position:

--(CFO-Capex)/Debt with Equity Credit above 5%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Sustained negative revenue growth, signaling material customer churn amidst competitive pressures;

--(CFO-Capex)/Debt with Equity Credit below 0%;

Operating EBITDA interest coverage below 1.2x on a sustained basis;

Liquidity concerns.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: Fitch views Astra's liquidity as sufficient. As of Sept. 30, 2022, it had $177 million of cash on the balance sheet and full availability on its $140 million revolver which extends until 2026.

Debt Structure: Astra has a 1st lien senior secured facility, including the undrawn $140 million revolver due 2026, and a $772 million term loan due in 2027. In addition, it has $500 million of 2nd lien debt due in 2028.

Issuer Profile

Astra Acquisition Corp. (d.b.a. Anthology) is a provider of cloud-based software solutions for higher educational institutions. Its primary software solutions are learning management systems (LMS) and it offers other products such as student information systems (SIS) and customer relationship management (CRM) software.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch ESG Relevance Scores, visit www.fitchratings.com/esg.

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