Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of Astra Acquisition Corp. and its subsidiary, Astra Intermediate Holding Corp. (collectively referred to as Astra and dba Anthology), to 'RD' (Restricted Default) from 'CCC'.

This action follows the company's execution of a series of transactions including the replacement of its $140 million secured revolver due 2026 with a new superpriority first out revolver due 2028. In addition, the company has a $270 million superpriority first out new money term loan, and nearly 100% of the previously existing first lien term loan was exchanged for Tranche A and Tranche B term loans.

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 $300 million of that can be uptiered to Tranche C, which is also not rated.

Fitch has withdrawn the 'CCC+'/'RR3' rating for the previously existing first-lien revolver since it has been extinguished. Fitch has also withdrawn the 'CCC+'/'RR3 rating for the previously existing first-lien term loan since a de minimis amount remains outstanding.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 $300 million of the $500 million of the second lien term loan, which can be uptiered to Tranche C. The timing for this to be completed is yet to be determined.

New Debt: The new superpriority revolver matures in February 2028 whereas the prior revolver commitment extended until October 2026. The new money term loan and Tranche A term loan are superpriority first out instruments that mature in February 2028, and Tranche B matures in October 2028. The previously existing term loan also matured in October 2028. Up to $300 million of the 2L term loan can be uptiered to Tranche C first lien debt, and the maturity date for those instruments remains October 2029.

Improved Liquidity: With the $270 million new money term loan and the new $140 million revolver, the company's liquidity has improved. Astra's ability to draw on the prior revolver was restricted due to the previous financial covenant. The new credit agreement has one financial covenant, which does not permit Consolidated First-Out First Lien Net Leverage (as defined by the credit agreement) to exceed 8.0x. However, the lenders have the ability to amend, waive or change this and they can waive any default or event of default. As such, Fitch does not view this covenant as restrictive.

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 $151, which was much greater than Fitch's previous forecast for negative FCF. In the first half of FY24, FCF was negative $69 million and over the forecast horizon, Fitch continues to project negative FCF. The company's improved liquidity position should help to offset this in the near term.

Unsustainable Leverage: With proceeds from asset sales in 4QFY23 and 1QFY23, the company reduced its total debt by about $400 million. However, with weak EBITDA, Fitch calculates that leverage was 16x at the end of FY23 and prospects for significant leverage reduction appear limited. Interest coverage is forecasted by Fitch to remain under 1.0x over the rating horizon. If management can successfully enhance EBITDA margins as it plans, Astra's credit metrics could be better than Fitch's projections.

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 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, whereas Astra showed a decline (on a pro forma basis adjusted for the sale of assets).

Ownership Expected to Limit Deleveraging: Astra is majority owned by private equity firm Veritas Capital. Fitch believes private equity ownership has kept the company focused on optimizing ROE versus leverage reduction.

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 Instructure Holdings, Inc. (INST; BB-/Stable), a direct competitor that has been gaining market share in the LMS space. Astra's 'CCC-' rating is one notch below GoTo Group Inc. (GoTo; 'CCC+'), which recently went through a DDE, and Astra is also one notch below QBS Parent (QBS; 'CCC+'). QBS's rating reflects its potential liquidity issues and near-term debt maturities. Like other private equity owned entities, Astra's ownership structure is designed to optimize ROE, limiting the prospect for accelerated deleveraging.

Fitch rates the IDRs of Astra Intermediate Holding Corp. and its wholly-owned subsidiary, Astra Acquisition Corp., on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties.

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 $116 million of cash on the balance sheet and full access to its $140 million revolver. Fitch expects Astra to continue to generate negative FCF, but the improved liquidity should help offset this over the next several quarters.

Issuer Profile

Astra Acquisition Corp. (dba Anthology) is a provider of cloud-based software solutions for higher educational institutions. Its primary software solutions are 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

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.

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