S&P: Pre-Paid Legal Services Rating Affirmed; Trident LS Parent Corp. And Acquisition Financing Assigned Ratings

S&P Global Ratings today affirmed its 'B' corporate credit rating on U. S.-based Pre-Paid Legal Services Inc. (LegalShield). The outlook is stable.

At the same time, we assigned our 'B' corporate credit rating to the U. S.-based Trident LS Parent Corporation (Trident), the parent company of LegalShield. The outlook is stable.

Concurrently, we assigned a 'B' issue-level rating and '3' recovery rating to the company's proposed senior secured first-lien credit facilities, including a $50 million revolving credit facility maturing in 2023 and a $550 million term loan facility maturing in 2025. The '3' recovery rating indicates our expectation for meaningful (50%-70%, rounded estimate 60%) recovery in the event of a payment default.

We also assigned a 'B-' issue-level rating and '5' recovery rating to the company's proposed $150 million senior secured second-lien term loan facility maturing in 2026. The '5' recovery rating indicates our expectation for modest (10%-30%, rounded estimate 10%) recovery in the event of payment default.

All ratings are based on preliminary terms and are subject to review of final documents.

We expect the company to use proceeds from the proposed senior secured credit facilities to partially fund the buyout transaction and repay existing debt facilities. We will withdraw the existing issue-level ratings once these debt instruments are repaid in conjunction with the acquisition.

Pro forma for the transaction, the company will have about $702 million of adjusted debt outstanding.

Our ratings on LegalShield and its parent reflect our belief that the leveraged buyout transaction will increase its debt burden resulting in pro forma leverage of above 6x. But we expect the company will gradually delever to mid - to high-5x by fiscal year-end 2019. We expect the transaction will close in the second quarter of 2018.

The stable outlook reflects our belief that the company will actively grow in the digital and business solutions segment, gradually improve margins by reducing customer acquisition costs, and continue to manage SG&A expense, such that EBITDA margin is sustained above 20%. We expect the company to generate free operating cash flow in the range of $35 million to $45 million and maintain debt leverage in the range of mid-5x to low-6x over the next two years.

We could lower our ratings if debt leverage increases above 7x on a sustained basis and free operating cash flow deteriorates significantly. We believe debt leverage would reach this level if the company pursues a $100 million dividend or acquisition funded by debt while EBITDA level remains constant, or EBITDA drops by about 13% from our projected level for 2018 due to declining memberships or higher customer acquisition costs while the debt level remains constant.

Although unlikely given the private equity ownership of the company, we could raise the ratings if the company demonstrates better cash flow generation by increasing and diversifying its earnings base while sustaining debt leverage below 5x, and the sponsors demonstrate a commitment to a financial policy consistent with maintaining leverage at these levels.
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