April 18 - Overview -- U.S. educational technology company Blackboard plans to raise $60 million in an incremental first-lien term loan to help finance its acquisitions of Moodlerooms and netSpot. -- We are assigning issue-level ratings to the existing first- and second-lien facilities. -- We also are assigning a 'B+' issue-level rating to the additional financing, with a recovery rating of '2'. -- The stable outlook reflects our expectations that leverage will decline over the near term due to growth in EBITDA, as well as cash generation for debt reduction. Rating Action On April 18, 2012, Standard & Poor's Ratings Services assigned its 'B+' issue level rating (one notch higher than the corporate credit rating) to Washington, D.C.-based Blackboard Inc.'s proposed $60 million incremental term loan with a recovery rating of '2',indicating substantial (70%-90%) recovery of principal in the event of a payment default. At the same time, we also assigned 'B+' issue-level ratings to the company's $100 million revolver due 2016 and $780 million first-lien term loan due 2018. Both have recovery ratings of '2', indicating substantial (70%-90%) recovery in the event of a payment default. In addition, we assigned our 'CCC+' rating to Blackboard's $350 million second-lien term loan due 2019. The recovery rating is '6', indicating negligible (0%-10%) recovery in the event of a payment default. We also affirmed our 'B' corporate credit rating on Blackboard. The outlook is stable. Rationale Standard & Poor's believes Blackboard's "highly leveraged" financial risk profile more than offsets the company's "fair" business risk profile. We estimate pro forma adjusted debt leverage over 9x following its recently announced acquisitions of Moodlerooms and NetSpot and that it will decline over the coming year, given our expectation for continued revenue and EBITDA growth and the benefit from cost savings already implemented. The company has a leading position in the educational technology market, with its products allowing users to deliver Web-based teaching, course and content management, community collaboration, rapid communication, and on- and off-campus e-commerce facilitation. The company derives more than half of its revenues from the higher education market, and the recent combination with Edline will enable it to solidify its position and cross-sell its products in the K-12 market as well. In addition, the purchase of Moodlerooms and netSpot will enable the company to further its offerings in the open source market. Standard & Poor's views Blackboard's business risk profile as fair. Although the company benefits from high renewal rates and a broad suite of product offerings, the market is highly competitive and we view barriers to entry as moderate. In addition, we view the company's product market focus as somewhat narrow, with Blackboard deriving more than 60% of revenues from its Blackboard Learn product. The company's leading position in the rapidly growing educational software technology market, a significant base of recurring revenues, and high client retention rates partly offset these factors. Additional opportunities for growth are present in the K-12, international, and open source markets, which also present cross-selling opportunities. Eighty-five percent of revenues are from recurring software licensing renewals, and hosting and support contracts; the company enjoys renewal rates of more than 90%, which enabled it to maintain relatively stable performance through the recent downturn. Revenues for the 12 months ended Dec. 31, 2011 grew 21% to $568 million, reflecting a combination of acquisitions, organic growth, and a revenue recognition policy change for its Blackboard Transact product. EBITDA margins of 24% were affected by increased costs from acquisitions. As the company absorbs these costs and realizes efficiencies, we expect margins to return to higher historical levels. We view Blackboard's financial risk profile as highly leveraged. Our assessment primarily reflects the high debt associated with the 2011 $1.64 billion all-cash going-private transaction between Blackboard and the affiliates of Providence Equity Partners, as well as the debt associated with the Moodlerooms and netSpot acquisitions. Pro forma for these two acquisitions, estimated adjusted pro forma year-end leverage was over 9.0x, which we expect to improve to about 7.5x by 2012. This anticipated improvement reflects our expectation of revenue growth in the upper-single-digit range and improvement in current margins, reflecting recently implemented cost savings as well as operating leverage. Liquidity We view Blackboard's liquidity as "adequate." We expect the company to retain a minimum of $50 million of cash and short-term investments and to have access to a $100 million revolver. Because of its seasonal cash generation cycle--with renewals occurring in the third and fourth quarters, when Blackboard receives the cash--the company typically has negative free operating cash flow (FOCF) in the first half of the year and positive cash flow in the second half, when it typically would pay down the revolver. The company will not have any significant debt maturities until 2018. Additional relevant aspects of Blackboard's liquidity are: -- We expect coverage of uses to be more than 1.2x in the near-to-intermediate term. -- Net sources are likely to be positive, even if EBITDA were to drop 20% from current levels. -- No additional material acquisitions are likely in the near term and Blackboard could use excess cash flow to further reduce debt. -- The bank agreement covenant calculation adds back to EBITDA the change in deferred revenue. Using this calculation, initial pro forma adjusted leverage would be a lower 6.6x and compares with an actual year-end 2011 figure of 6.3x. -- A significant covenant cushion has been set for both loan tranches. Recovery analysis For the complete recovery analysis, see Standard & Poor's recovery report on Blackboard, to be published separately on RatingsDirect. Outlook The outlook is stable. While leverage is high at the outset, we expect it to decline somewhat over the coming year due to growth in both EBITDA and revenues. This would reflect the growing product offering, and cash generation for debt reduction. An upgrade over the near term is unlikely, as the company's highly leveraged debt structure is a limiting factor. We could lower the rating if increased competitive factors lead to a deteriorating business profile or further debt-financed acquisitions prevent leverage from dropping to the high-7x level over the next year. Related Criteria And Research -- Global Technology Ratings Trend Shifts To Negative In The First Quarter, April 11, 2012 -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 29, 2012 -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012 -- Reshuffling The Debt: Global High-Tech M&A Activity Accelerates, Oct. 13, 2011 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Blackboard Inc. Corporate Credit Rating B/Stable/-- New Ratings Blackboard Inc. Senior Secured US$60 mil 1st-lien incremental term B+ bank ln due 2018 Recovery Rating 2 US$100 mil revolver due 2016 B+ Recovery Rating 2 US$780 mil 1st-lien term ln due 2018 B+ Recovery Rating 2 US$350 mil 2nd-lien term ln due 2019 CCC+ Recovery Rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.