Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of
This action follows the company's execution of a series of transactions including the replacement of its
Fitch views the executed exchange of the first lien term loan as a distressed debt exchange (DDE) because it weakened the lien priority to become junior to superpriority first out debt and the exchange required participating lenders to consent to amendments that materially impair the position of nonparticipating lenders. Fitch believes Astra has taken these actions to avoid an eventual probable default.
Subsequently, Fitch has upgraded the IDRs to 'CCC-' and placed the ratings on Rating Watch Negative (RWN), reflecting the outstanding offer to exchange the second lien term loan. Fitch expects to resolve the RWN on the IDRs when the second lien debt exchange has been completed. If Fitch determines that the second lien debt exchange meets its definition of a DDE, Fitch would expect to downgrade the IDR to 'RD' and then rate the company based on the new capital structure.
Fitch does not rate the new first-lien first out revolver, the first lien first out new money term loan, Tranche A term loan (all superpriority first out debt), the Tranche B term loan or the second lien term loan. Up to
Fitch has withdrawn the 'CCC+'/'RR3' rating for the previously existing first-lien revolver since it has been extinguished. Fitch has also withdrawn the 'CCC+'/'RR3 rating for the previously existing first-lien term loan since a de minimis amount remains outstanding.
Key Rating Drivers
DDE Executed: Fitch regards Astra's first lien term loan exchange as a DDE as these were steps the company has taken to address its financial liabilities. The current debt is structured with superpriority first out debt, superpriority debt, and below that is the Tranche C term loan followed by the second lien term loan. A de minimis amount of previously existing first lien term loan remains outstanding.
Additional Debt Exchange Offered: Astra's next step to reduce its financial liabilities is the pending tender offer to exchange up to
New Debt: The new superpriority revolver matures in
Improved Liquidity: With the
Weak Performance: Astra's FY23 pro forma revenues (after adjusting for the divestitures in 4QFY22 and 1QFY23) were flat to slightly down, which was lower than Fitch's expectations of very low single-digit growth. Total revenues fell just over 10% in 1HFY24 versus 1HFY23 and when accounting for 1HFY23 divestures, they were down 7%. EBITDA margins were in the mid-teens versus Fitch's expectation of results in the upper-teens. The competitive intensity for the industry has been increasing as other players with stronger financial flexibility have increased their customer base and grown revenues.
Negative FCF: Astra's FY23 actual results for FCF were negative
Unsustainable Leverage: With proceeds from asset sales in 4QFY23 and 1QFY23, the company reduced its total debt by about
Retention Rates Below Historical Levels: For fiscal 2023, Astra's net retention rate improved to 86% versus 83% in the prior year. Management indicated that on a pro forma basis, it is expected to be 90% once delayed contracts were signed for renewal and when 1QFY24 results were released, gross retention was 87% for the TTM. These rates are lower than historical levels. Astra's gross retention rate was 94% and net retention was 97% in FY21, while Blackboard's gross retention rate was 95%, and its net retention rate was 104% during the same period.
Competitive LMS Environment: Astra's largest segment is its Learning Management Systems (LMS) where there is strong competition, including Canvas, which is owned by
Ownership Expected to Limit Deleveraging: Astra is majority owned by private equity firm
Derivation Summary
Astra's rating of 'CCC-' reflects the heightened probability of a downgrade to 'RD' given the pending DDE. Assuming the final DDE is executed, the company would still have high leverage and negative FCF. Astra's ratings are supported by high, albeit declining, recurring revenues, a strong product portfolio and technology platform, as well as its market position in the LMS space. The rating also reflects its smaller scale relative to the larger and more diversified education software peers, such as Ellucian (not rated), Oracle (ORCL; BBB/Stable), and Workday (not rated).
The ratings are also constrained by the company's significant leverage when compared to similarly sized
Fitch rates the IDRs of
Key Assumptions
In fiscal 2024, Fitch assumes modest revenue declines followed by more revenue stability in the years that follow;
EBITDA margins expand in the forecast years as a result of significant cost optimization;
FCF remains negative over the forecast horizon;
No assumptions are made for acquisitions or dividends.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating action is unlikely until after the successful execution of the second lien debt exchange.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Fitch would lower the IDR to 'RD' after the second lien debt is exchanged if Fitch determines that it meets the definition of a DDE under its Corporate Rating Criteria.
Liquidity and Debt Structure
Improved Liquidity: Fitch views Astra's liquidity as improved with the new revolver. With the debt exchange and new money term loan, the company projected it would have
Issuer Profile
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
Astra has an ESG Relevance Score of '4' for Management Strategy due to the company's revenues declines on a pro forma basis and ongoing negative FCF, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
(C) 2024 Electronic News Publishing, source