Moody’s Analytics said in a recent note that Black Knight’s acquisition of Optimal Blue could be a credit negative for the company.
Moody’s cited a rising debt burden risk as a potential concern in the acquisition.
“The planned acquisition, which Black Knight expects to complete by the end of September, is credit negative because it will likely result in a more than 50 percent increase to its debt burden,” Moody’s stated.
Black Knight Inc. announced that it had agreed with its partners Cannae Holdings Inc. and Thomas H. Lee Partners L.P. to purchase Optimal Blue, a provider of mortgage data, analytics and a marketplace for secondary trading of mortgage debt, for $1.8 billion. The three partners will form a joint venture to purchase and own Optimal Blue. The latter two parties will each pay $290 million cash and each receive a 20 percent share in the joint venture. Black Knight will contribute its Compass Analytics business line, valued at $100 million, plus about $1 billion of cash for a 60 percent joint venture interest.
The Optimal Blue joint venture will be consolidated by Black Knight, the report stated.
“If Black Knight borrows the approximately $1 billion it needs to fund its share of the cash component of the acquisition, debt/ EBITDA would expand from around 3.0x as of 31 March to almost 5.0x pro forma for the incremental debt and assuming no EBITDA contribution from Optimal Blue,” Moody’s stated. “However, we believe Optimal Blue will contribute some positive EBITDA in the 12 months after the acquisition closes.”
Because Black Knight has not announced how it would fund the $1 billion, Moody’s said its ownership in The Dun & Bradstreet Corp., worth more than $1 billion, could provide it an asset to monetize for cash that would lower its debt burden.
“As a result, we believe Black Knight could quickly bring financial leverage back below 4.0x in the 12 to 18 months following the acquisition’s closing through the application of its free cash flow or by monetizing all or a portion of its Dun & Bradstreet stock,” Moody’s stated.
Moody’s said Black Knight’s ratings were unchanged by the announcement, but if the company did incur debt that was not easily prepayable, its ratings and outlook could be pressured.
“Black Knight has an unused $750 million senior secured revolving credit facility it could access for cash to close the transaction and easily repay with free cash flow over time,” Moody’s stated. “We anticipate Black Knight will generate free cash flow of about $300 million a year, enabling debt repayment if it borrows to fund the purchase.”