Research: Rating Action: Moody’s Affirms Trader Corporation’s B2 Ratings, Changes Outlook to Negative

Approximately C$697 million of rated debt affected, including the C$50 million unfired revolver

Toronto, August 05, 2022 — Moody’s Investors Service (“Moody’s”) has affirmed Trader Corporation’s (Trader) B2 Corporate Family (CFR) rating and B2-PD probability of default (PDR) rating. In addition, Moody’s affirmed the B2 senior secured term loan rating and the B2 senior secured revolving credit facility rating. The outlook changed from stable to negative.

“While the ratings affirmation reflects Moody’s expectation that Trader’s stable operating performance will support stable credit metrics over the next 12 to 18 months, the change in outlook to negative reflects growing rollover risk before the first lien term loan due September 28, 2023,” said Dion Bate, vice president and principal analyst at Moody’s.

Statement:

..Issuer: Trader Corporation

…. Classification of the family of companies, confirmed B2

…. Probability of default rating, confirmed B2-PD

….Senior Secured 1st Privilege Term Loan, Affirmed B2 (LGD3)

….Senior Secured Revolving Credit Facility, Committed B2 (LGD3)

Outlook Actions:

..Issuer: Trader Corporation

….Outlook, changed to negative from stable

RATINGS RATIONALE

The negative outlook reflects Trader’s weak liquidity, as there is C$647 million (US$362 million and C$193 million outstanding in the first quarter of 2022 ending March 31) of term debt maturing in September 2023 as well as the C$50 million (undrawn) revolving credit facility which expires in March 2023. While Moody’s expects Trader to generate approximately C$60 million of free cash flow through September 2023 and has a large cash balance of approximately C$130 million in the first quarter of 2022, it will not have sufficient sources of cash to repay the term loan and will need to access the debt capital market to refinance the term loan. term. The outlook may stabilize once Trader approaches the term loan maturity.

Moody’s estimates that Trader should be able to refinance the term loan, given its strong performance to date with revenue growing by approximately one-third over the past 12 months to March 31, 2022, margins of EBITDA of over 40% and moderate leverage with adjusted debt / EBITDA of 4.8x dropping to around 4.5x. However, market conditions have delayed refinancing and rising interest rates will likely increase the company’s cost of borrowing. The trader’s good free cash flow generation and good interest coverage (EBITA/interest expense) of 3.9x provides a good buffer to absorb a higher cost of borrowing.

Governance is a key consideration given Trader’s significant debt maturities that will become common at the end of September 2022 and have yet to be addressed.

Trader’s B2 CFR benefits from (1) its strong digital market position in the Canadian used car advertising market with a well-known brand in Canada (autotrader); (2) good recurring revenue per subscription from auto dealers and manufacturers; and (3) a track record of positive free cash flow generation given its asset-light business model and strong EBITDA margins of over 40%.

The company is constrained by (1) a narrowly focused business serving the cyclical automotive industry; (2) its small scale relative to rated peers; (3) the potential for increased competition from existing and new competitors in the online automotive market; and (4) private equity ownership, which could lead to a highly leveraged capital structure.

The trader’s liquidity is low. The Company’s sources of liquidity are approximately C$190 million and uses include the C$647 million (equivalent) senior term loan maturing September 28, 2023. The sources of liquidity consist of approximately C$130 million of cash in the first quarter of 2022 and Moody’s expects approximately C$60 million of free cash flow through September 2023. Although the C$50 million revolving credit facility will not not drawn, Moody’s offers no benefit because it expires in less than 12 months. The company has a limited ability to generate cash from the sale of assets as its assets are encumbered.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Moody’s could downgrade the ratings by more than one notch if term lending becomes mainstream and Trader has not made enough progress to mitigate the impending rollover risk. In addition, downgrade could occur if Trader’s performance weakens, or if it engages in debt-financed distributions to its financial sponsor or by taking advantage of acquisitions, such that Adjusted Debt/EBITDA is maintained above 6.5x or that EBITA/interest falls permanently below 1.5x.

Moody’s is reportedly considering an upgrade following a hardware upgrade to its scale; there is a clearly defined financial policy on the part of the financial sponsor; and adjusted debt/EBITDA is maintained below 4.5x and EBITA/interest is permanently above 4x.

The main methodology used in these ratings is that of business and consumer services published in November 2021 and available on https://ratings.moodys.com/api/rmc-documents/356424. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Trader Corporation, headquartered in Toronto, Canada, primarily operates the autoTrader.ca website for the buying and selling of automobiles/trucks, primarily through dealerships, but also individuals, and supplemented by advertising car manufacturers. Trader provides a marketplace platform for auto listings, web traffic and solution services as well as inventory management services. The company is owned by Thoma Bravo, a private equity firm.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These ratings are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the announced credit rating metric(s) described above.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Dion Bate
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Canada Inc.
70 York Street
Office 1400
Toronto, Ontario M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Peter H. Abdill, CFA
MD – Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Canada Inc.
70 York Street
Office 1400
Toronto, Ontario M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653