Fitch Ratings has downgraded
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
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
Recent Divestitures: Astra acquired Blackboard in
Impact of from Divestitures: The company used
Ownership Could Limit Deleveraging: Anthology is majority owned by private equity firm
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
Astra's 'B-' rating is three notches below publicly traded
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
Going-Concern (GC) Approach: Astra's GC EBITDA is assumed to be
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:
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 '
Liquidity and Debt Structure
Sufficient Liquidity: Fitch views Astra's liquidity as sufficient. As of
Debt Structure: Astra has a 1st lien senior secured facility, including the undrawn
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
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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