TMF Group Holding B.V. -- Moody's assigns B2 rating to TMF Group Holding B.V.; outlook stable

Moody's issues provisional ratings in advance of the final sale of securities and these reflect Moody's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation Moody's will endeavour to assign definitive ratings. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The different ratings for the notes reflect the relative ranking within the capital structure. The senior secured floating rate notes together with the revolving credit facility benefit from a guarantor and security package that is ultimately expected to comprise 84% of total group EBITDA, excluding those entities with negative EBITDA. However, the revolver benefits from priority of payment according to the intercreditor agreement. The senior unsecured notes rank behind these instruments and benefit from a senior subordinated guarantee from the same guarantor group.

The B2 rating reflects the company's limited size and reliance on Europe, in particular the Benelux region, for a large part of revenues and EBITDA. It further considers the need for strong compliance and know-your-customer (KYC) procedures given the complexity of regulation, tax and reporting requirements across the world and elevated legal risks inherent in the industry, particularly related to situations where TMF provides trustee, (independent) director, or proxy management representative services for clients. Importantly, it also incorporates the significantly leveraged capital structure that together with some remaining restructuring and integration cost following the Equity Trust merger pressure operating cash flow generation. In addition, the rating does not factor in any material further acquisition activity and corresponding potential restructuring or acquisition charges.

However, the rating also reflects TMF's strong position as a corporate services provider in the Benelux region, complemented by a global network of offices in 80 jurisdictions that enables growth for clients into new regions and offers cost-efficient outsourcing of corporate functions. The business benefits from clients' needs for quality, expertise and responsiveness over cost, and TMF's services are sometimes deeply embedded in the clients' processes. This results in significant switching cost allowing for stable performance throughout the cycle and solid cash flow generation.

Following the envisioned refinancing transaction, TMF remains significantly leveraged with an estimated and pro-forma Debt/EBITDA around 5.7x (Moody's adjusted) for the last twelve months to September 2012. While the company is cash generative, the capital structure provides for limited debt repayment options in the absence of amortizing debt instrument. Hence TMF will need to remain on a visible positive operating trajectory to achieve leverage reductions.

Moody's also notes that the company experiences a degree of geographic concentration with its core Benelux and broader EMEA regions accounting for 51% and 77% of last twelve months to September 2012 EBITDA generation before corporate overhead cost. The two largest contributors are the Netherlands and Luxembourg, both known for their low corporate tax environment and extensive global double taxation treaty network that appeals to corporate clients for setting up holding or finance entities. The company remains exposed to any changes to the appeal of these countries although the rating currently assumes no near-term pressure on TMF.

The industry is exposed to significant legal risks in situations where parties involved may have taken differing views with regard to the provision of services in compliance with contracts or complex regulation, reporting and tax requirements. The company is regulated by 18 regulators and Moody's notes the importance of maintaining the necessary (IT) infrastructure and retain qualified and experienced personnel to ensure compliance across the world. Additionally, Moody's identifies elevated legal risks in the company's structured finance business, which also includes the provision of (independent) directors and officers, and the domiciliary and management services which include proxy management representatives. However, Moody's takes a degree of comfort from the fact that these businesses represent a smaller part of TMF's operations as these services are only provided in countries where the company is confident that it can manage the risk. TMF also has a comprehensive compliance structure in place and carries customary litigation and D/O liability insurance cover.

The business process outsourcing market in which TMF operates is fairly fragmented and the company sometimes competes against much larger or more specialised companies. The company benefits from the client's need for consistent, quick and high quality execution, and the fact that it is sometimes deeply embedded in a client's processes. Tax, regulatory and reputational implications from non-compliant procedures can be severe for clients which results in reduced switching incentives purely on price considerations. As a result client relationships last on average more than 7 years and client retention rates reach 90% notwithstanding typically short contract maturities that are rolled over regularly. Moody's also positively notes TMF's high client diversity across industries with the top 20 clients accounting for less than 5% of total revenues. As a result, TMF's resilient business model has resulted in solid margins, cash flow generation and stable performance throughout the business cycle.

The company achieves organic revenue growth mainly through a referral system from a network of relationships across law or accounting firms and cross-selling to existing clients for example as they expand into new countries. In this context, Moody's views the company's investment over the last year in improving its sales force and commercial abilities as a positive that should support organic revenue growth. However, growth in some regions such as the Americas and APAC may pressure margins due to a different mix of services provided and reduced scale.

Limited capital expenditure needs and modest working capital seasonality in combination with good EBITDA to cash flow conversion results in generally solid cash flow generation. However, the business also incurred substantial cash restructuring and acquisition cost over 2011 and 2012 from the merger with Equity Trust weighing significantly on cash flow generation. Moody's would expect these charges to reduce from 2013 onwards in the absence of new acquisitions.

The stable outlook reflects Moody's expectation that the company will continue to deliver resilient operating performance through the cycle.

Negative pressure on the rating could arise if any concerns around the resilience of the business materialises, for example from changes in the Netherlands' or Luxembourg's appeal as tax-efficient regions. Negative pressure could also arise if any legal dispute becomes more substantiated. In any case, the rating would come under pressure if the ratio of adjusted Debt/EBITDA moves towards 6x or free cash flow generation turns negative.

Conversely, positive pressure could arise if the company successfully executes on its growth plans diversifying the business into APAC and Americas regions so that adjusted Debt/EBITDA falls sustainably below 5x and FCF/Debt exceeds 5%.

Moody's views the company's liquidity profile as good. Following the transaction the company will have no material debt maturities until 2018 when the secured notes and revolving credit facility fall due. While Moody's expects generated cash flows to cover working capital and capital expenditures needs for the year, existing cash and the undrawn EUR70 million revolving credit facility provide for additional flexibility to weather any working capital swings and temporary capital expenditure peaks. The revolver carries one financial maintenance covenant with sufficient headroom.

The principal methodology used in rating TMF Group Holding B.V. was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

TMF Group Holding B.V. ("TMF") is a provider of business process services mainly for companies but also for individuals, funds and structured finance with 64% of revenues generated in EMEA including 34% in the Benelux region in 2011, not counting the fund services business. Services include the establishment and maintenance of operating or holding entities and the provision of accounting and reporting, legal administrative and HR services (eg payroll) on an ongoing basis. The group operates over 35,500 client entities in 80 jurisdictions. The business is owned by Doughty Hanson (65.2%) and management (34.8%).

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Tobias Wagner Analyst Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Chetan Modi MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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