ThoughtWorks Holding, Inc. — Moody’s assigns B1 CFR to Thoughtworks; outlook is stable

Rating Action: Moody’s assigns B1 CFR to Thoughtworks; outlook is stableGlobal Credit Research – 07 Jan 2022New York, January 07, 2022 — Moody’s Investors Service, (“Moody’s”) assigned a B1 corporate family rating (“CFR”) rating, B1-PD probability of default rating (“PDR”) rating, and SGL-1 speculative grade liquidity (“SGL”) rating to Thoughtworks Holding, Inc. (“Thoughtworks”). Moody’s also upgraded the senior secured first lien instrument credit rating at Thoughtworks, Inc. (a wholly-owned subsidiary of Thoughtworks Holding, Inc.) to B1. Moody’s withdrew Thoughtworks, Inc.’s existing B2 CFR and B2-PD PDR ratings. The outlook remains stable.The ratings actions are based on the continued strong performance of the company and deleveraging as a result of voluntary debt repayment following the initial public offering, which improved credit metrics to levels that are in line with a B1 CFR. Moody’s believes that the company is poised to benefit from very strong industry dynamics where the demand for IT services is accelerating and will lead to earnings growth for the company. The company has diversified its customer base and has been able to grow revenue that is now approaching $1 billion annually with leverage expected to decline to below 3.0x by the end of 2022. Social factors are a driver of this rating action since the trend of increasing digitization of services will support growth in new clients and expansion of the revenue base while considering competition for talent that could pressure the company. Governance is also a factor that was taken into consideration. Moody’s believes that with the IPO, the company will adopt a less aggressive financial policy via lower leverage and lower risk of debt funded distributions to equity holders.Assignments:..Issuer: ThoughtWorks Holding, Inc….. Corporate Family Rating, Assigned B1…. Probability of Default Rating, Assigned B1-PD…. Speculative Grade Liquidity Rating, Assigned SGL-1Upgrades:..Issuer: ThoughtWorks, Inc…..Senior Secured 1st Lien Bank Credit Facility, Upgraded to B1 (LGD3) from B2 (LGD3)Withdrawals:..Issuer: ThoughtWorks, Inc….. Corporate Family Rating, Withdrawn, previously rated B2…. Probability of Default Rating, Withdrawn, previously rated B2-PDOutlook Actions:..Issuer: ThoughtWorks Holding, Inc. ….Outlook, Assigned Stable ..Issuer: ThoughtWorks, Inc. ….Outlook, Remains Stable RATINGS RATIONALE The B1 corporate family rating reflects Thoughtworks’ small scale relative to larger information technology (“IT”) services providers, relatively thin EBITDA margins and exposure to cyclical spend on IT projects by corporations. Thoughtworks’ employs around 10,000 people and operates in 17 countries around the world. Revenue for the LTM September 2021 period was $989 million, which is small for the global information technology services industry. Thoughtworks competes against both larger, established global information services providers with significant resources, as well as smaller, niche-focused companies vying for market share in the outsourced software development market. Thoughtworks’ long-standing relationship with a diversified customer base and history of strong revenue growth provide support despite the limited barriers to entry in the narrow market segment in which it competes. A thin margin profile with EBITDA margins in the mid-teens and expectations for cyclicality of demand from many of Thoughtworks’ customers are additional negative credit factors. Thoughtworks’ has sufficient utilization rates and given that the company needs to operate with some cushion there is limited scope to reduce costs without impairing earnings. Free cash flow is expected to be positive over the next twelve months with free cash flow to debt of around 16% for 2022 and, due to the growth expected, there will be some working capital expansion. Expectations for solid financial metrics, good liquidity and a positive demand environment are important factors supporting the B1 CFR given the company’s limited scale and scope, competitive pressures and potential revenue growth investments.The company operates in a competitive sector where the ability to hire and retain high quality talent is essential to drive revenue growth. Driven by the strong demand for digitalization the IT services sector overall is experiencing competition for talent. In addition, the ratings also reflect the exposure to cyclicality where clients may stall or cancel IT projects in times of economic uncertainty or decline. Mitigating this exposure is Thoughtworks’ customer, geographic and sector diversity that includes the public sector. Further constraints to the ratings include the frequent acquisitions that are likely to be undertaken by the company as it seeks to grow and expand service offerings, which exposes the company to integration risk.From a social risk perspective, Thoughtworks will benefit from demographic and societal trends that have led people to embrace technology and drive demand for tech-enabled services. Moody’s believes this secular trend will continue for some time. IT providers will continue to support increased productivity through technology. Demand for technology services will continue to increase as clients across all sectors of the economy increasingly demand new digital ways to conduct business. Failure to adopt technological advancement will result in competitive risks and disruption. Thoughtworks is well positioned to benefit from these social tailwinds. Thoughtworks is exposed to other social risks however, such as the availability of skilled human capital, which could result in higher employee and administrative costs, leading to margin erosion. A large part of the company’s software development employees is based in India and China and as those countries develop there could be higher than expected wage pressure. Thoughtworks’ governance risk is moderate. Apax Partners, the private equity sponsor, is the controlling equity owner of the company with 65% of the equity. With the IPO, disclosure of information has improved from when the company was private. In addition, the company counts a few sovereign and large non-sovereign funds such as GIC, Siemens AG, Fidelity Management and Research LLC, and Mubadala Investment Company as investors and these funds typically are less aggressive in financial policies.The SGL-1 Speculative Grade Liquidity Rating reflects Moody’s expectation that Thoughtworks will have very good liquidity over the next twelve months. Internal sources of liquidity consist of a cash balance of approximately $452.8 million as of September 30, 2021 and positive free cash flow generation of around $100 million over the next twelve months. The large cash balance consists of the proceeds from the IPO and will be used over the next 12 to 18 months for general administrative expenses. These internal sources of cash provide sufficient coverage of the company’s approximately $5 million of annual term loan amortization and capital expenditures, which historically was 2%-3% of revenue (Moody’s adjusted capital expenditure). The company’s revolver size is $165 million and is expected to remain undrawn. The revolver is subject to a springing leverage covenant that is applicable when utilization of the revolver is 35% or more. The term loan is not subject to any financial covenants.The company’s first lien credit facilities instrument ratings were determined using Moody’s Loss Given Default for Speculative-Grade Companies methodology and reflect an average family recovery rate assumption of 50%. The first lien debt represents the preponderance of the capital structure and is thus rated B1 (LGD3), the same as the corporate family rating. The rated debt is guaranteed by all U.S. subsidiaries and secured by a first priority perfected lien on all property and assets of the issuer and the guarantors, although the liens are limited to two-thirds of the capital stock of first tier foreign subsidiaries and ranked behind a small amount of priority trade claims and ahead of other unsecured claims.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RAT
INGSThe stable outlook reflects the view that Thoughtworks will be able to grow revenue in the low-teens area and EBITDA margin remains stable. Moody’s expects revenue growth to be driven by continued demand from customers as they digitize their platforms and as technology plays an increasing role in overall business strategy for corporations across sectors. The outlook incorporates the view that technology budgets for corporations will grow over the next few years. Margins will remain solid in the mid-teens area. Free cash flow to debt is expected to be approximately 16%. The outlook assumes that there are no debt funded distributions over the next two years. The outlook also assumes that any acquisitions undertaken will be small and tuck-ins that will be funded by internal cash.The ratings could be upgraded if Moody’s expects 1) sustained, strong revenue growth that leads to increased scale, closer to higher-rated peers, while diversifying revenue sources and maintaining strong profitability with EBITDA margins in the high-teens percent range or above; 2) sponsor equity ownership falls below 50% and the company is expected to employ more conservative financial policies, with debt to EBITDA to remain below 3.0x (all metrics Moody’s adjusted); and 3) the company is able to maintain strong liquidity.The ratings could be downgraded if Moody’s expects 1) the loss of a major customer, decline in customer retention rates or other development indicating there is a weakening of competitive position that could result in lower-than-expected revenue or profitability; 2) debt/EBITDA (Moody’s adjusted) to be sustained above 4.5x; 3) free cash flow to debt is sustained below 5%; or 4) aggressive financial policies as evidenced by debt funded distributions to shareholders.Headquartered in Chicago, Illinois, Thoughtworks Holding, Inc. provides information technology services to enterprises worldwide and is focused on agile software development, consulting and related tools and information. The company has over 10,000 employees and operates in 17 countries around the world, with approximately 36% of revenue generated in North America, which is its largest region, followed closely by APAC (35% of revenue). Thoughtworks generated total revenues of almost $1 billion for the LTM September 2021 period. The company is controlled by affiliates of private equity sponsor Apax Partners. Apax acquired the company for approximately $785 million in October 2017.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Farah Zakir Vice President – Senior Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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