Moody's Upgrades Expert Global Solutions (formerly NCO Group)

Moody’s Investors Service said Monday that it has upgraded the Corporate Family Rating of Expert Global Solutions, Inc. (formerly NCO Group, Inc.) to B2 from Caa1. Concurrently, Moody’s affirmed the Ba3 rating on the $795 million first lien credit facility and the B3 rating on the $200 million second lien term loan. The ratings outlook is stable. This rating action concludes Moody’s review for upgrade initiated on March 15, 2012.

On April 3, 2012, APAC Customer Services, Inc. was merged with Expert Global Solutions. Proceeds from new term loans, along with cash on the balance sheet and $20 million drawn on the new revolver, were used to refinance existing debt in the capital structure. At the same time, NCO Group, Inc. was renamed Expert Global Solutions, Inc.

Moody’s upgraded the following ratings:

• Corporate Family Rating (CFR), to B2 from Caa1
• Probability of Default Rating, to B2 from Caa

Moody’s said that the CFR upgrade to B2 from Caa1 reflects the combined company’s improved debt maturity profile, greater scale in the more stable Customer Relationship Management (CRM) segment, and lower financial leverage resulting from the contribution of APAC’s estimated $52 million in EBITDA (pre-synergies) with relatively modest incremental debt of $158 million (at the holding company).

The B2 CFR reflects integration risks associated with the merger, highly competitive industry conditions, and pro forma financial leverage of about 5.6 times (including a $158 million holding company note) before consideration of merger-related cost synergies. The inclusion of management’s targeted $30 million in annualized cost synergies would reduce pro forma financial leverage to about 5.0 times. The ratings are further constrained by Moody’s expectation that the environment for the collection of delinquent accounts receivable will remain difficult, as many consumers struggle with high unemployment, lack of wage growth and constrained access to credit.

The stable outlook anticipates that Expert Global Solutions will successfully integrate the APAC business into its CRM segment and realize planned merger-related synergies. We expect stabilization in the accounts receivable management revenue base, along with debt reduction, to bring financial leverage below 5 times by the end of 2012. The ratings could eventually be raised if Expert Global Solutions demonstrates solid organic revenue and profitability growth and materially reduces debt such that financial leverage and free cash flow to debt are sustained below 4 times and above 8%, respectively. Conversely, the ratings could be downgraded if consolidated revenues (excluding reimbursable costs and fees) continue to decline on a pro forma basis, synergies are not realized, liquidity or margins deteriorate, or debt-financed acquisitions are made that result in financial leverage and free cash flow to debt being sustained above 5 times and below 3%, respectively.