TEXT-S&P downgrades SS&C Technologies to 'BB-'
April 24 - Overview -- U.S. financial software provider SS&C has announced an all-cash offer for U.K.-based hedge fund administrator GlobeOp Financial Services S.A. for $949 million and it also agreed to acquire PORTIA, a financial software provider, from Thompson Reuters for $170 million. -- SS&C is issuing $1.367 billion of senior secured credit facilities in conjunction with the acquisitions, including a $100 million revolving credit facility and a $142 million bridge loan (not rated). -- We are lowering our corporate credit rating to 'BB-' from 'BB' and assigning a 'BB-' issue rating to the company's new senior secured credit facilities with a '3' recovery rating. -- The stable outlook reflects our expectation that SS&C will continue to generate consistent growth and free operating cash flow, and that the company will de-lever modestly over the coming year, largely through EBITDA expansion. Rating Action On April 24, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Windsor, Conn.-based financial software provider SS&C Technologies Inc. to 'BB-' from 'BB'. The outlook is stable. At the same time, we assigned an issue rating of 'BB-' to the company's proposed senior secured credit facilities, which include a term loan A of $300 million, a term loan B-1 of $725 million, a term loan B-2 of $100 million, and a $100 million revolving credit facility. We assigned a recovery rating of '3' to the debt, indicating our expectation of meaningful (50%-70%) recovery in the event of default. The downgrade reflects increased leverage--partially offset by an improved business profile--associated with SS&C's announced all-cash offer for U.K.-based hedge fund administrator GlobeOp Financial Services S.A. for $949 million, along with its agreement to acquire PORTIA, a financial software provider, from Thompson Reuters for $170 million. Rationale The ratings on SS&C reflect our expectation that after the completion of the recently announced GlobeOp and PORTIA acquisitions, the company will have a "fair" business risk profile, resulting from a good position in the hedge fund administration (HFA) industry, high recurring revenue, and EBITDA margin in the high-30% area. We viewed the company as having a "weak" business risk profile on a stand-alone basis. Offsets to these strengths are its narrow market focus, exposure to the cyclical financial services industry, and an "aggressive" financial profile. Prior to the acquisitions, we viewed its less levered financial profile as "significant." SS&C is a software and services company catering to alternative asset managers, insurance and pension funds, and institutional asset managers. It provides systems with trading, modeling, portfolio management, reporting, and accounting functionality and fund administration services, which include portfolio valuation, accounting, statement generation, and redemption and subscription processing. The company competes with larger custodian banks, smaller software providers targeting specific markets, and internal IT departments. The business focused on alterative asset managers grew organically in the high-teens in 2010 and 2011 as a result of a cyclical rebound in assets under administration (AUA) from the lows in 2009. The business focused on traditional buy-side managers and other financial service providers grew organically in the low-single digits in 2011. Pricing for fund administration services is based on assets under management, complexity of the portfolio, and number of transactions. Growth in this segment depends on SS&C's existing clients' performance and their ability to raise new funds, and its ability to capture new start-up clients or clients from other administrators. GlobeOp is a U.K.-based hedge fund administrator with about 200 clients in the U.S., Europe, and the Cayman Islands. The combination with its existing unit will give SS&C the No. 3 position in the HFA industry, with about $300 billion in AUA, resulting in approximately a 10% share behind Citco and State Street. SS&C will also gain GlobeOp's operations in India which it plans to leverage to support future growth of the combined HFA platform. PORTIA, an operating unit of Thompson Reuters, will add portfolio management software and about 200 institutional investment manager clients. We believe that SS&C will have a fair business profile, reflecting its enhanced market position within the HFA industry, high recurring revenue, and stable EBITDA margin. The company's client base is diverse, with its top-10 clients representing 15% of revenues. Good revenue visibility is provided by a client retention rate in excess of 90% and recurring revenues from software-enabled services and maintenance of near 88%. However, the company has a narrow target market of financial services providers, whose businesses are cyclical. Pro forma for GlobeOp and PORTIA, 2011 revenues totaled $635 million, representing organic growth of about 9% over 2010, reflecting strength in the HFA business, with an adjusted EBITDA margin of 38%. We expect that the combined company will maintain profitability and generate organic growth in the mid-single digits, as strength in the HFA business moderates and the institutional asset manager business continues to grow in the low-single digits. SS&C will have an aggressive financial profile, with pro forma adjusted leverage at 4.9x and pro forma funds from operation (FFO) to debt near 15% as of December 2011. However, we do expect the company to de-lever modestly over the next year, largely as a result of EBITDA expansion. Leverage in December, before the acquisitions, was about 1x and FFO to debt was 75%. The current rating does not incorporate material debt-financed acquisitions, although tuck-in acquisitions are likely to continue. Liquidity SS&C will have "adequate" liquidity with sources of cash likely to exceed uses by 20% over the next 12 to 24 months. Cash sources include about $40 million of cash, $100 million of capacity under its new revolving credit facility, and positive free operating cash flow (FOCF). We expect annual uses over the next 24 months to include working capital investment and capital expenditures near $21 million and debt amortization of about $23 million. Our assessment of the company's liquidity profile includes the following expectations and assumptions: -- Net sources will be positive, even with a 15% decline in EBITDA. -- We expect financial covenants to have adequate headroom. -- The company has satisfactory standing in capital markets. -- The company will continue to pursue tuck-in acquisitions. Recovery analysis For the complete recovery analysis, please see the recovery report on SS&C, to be published separately on RatingsDirect. Outlook The stable outlook reflects our expectation that SS&C will continue to generate consistent growth and FOCF, and that the company will de-lever modestly over the coming year, largely through EBITDA expansion. An upgrade is unlikely in the near term given SS&C's current pro forma financial profile and its acquisitive growth strategy. We could lower the rating if the company does not reduce leverage to the mid-4x area over the next 12 months, either due to integration challenges or additional acquisitions. 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 Downgraded To From SS&C Technologies Inc. Corporate Credit Rating BB-/Stable/-- BB/Watch Neg/-- New Ratings SS&C Technologies Inc. Senior Secured US$100 mil revolving bank ln due 2017 BB- Recovery Rating 3 US$725 mil term B-1 bank ln due 2019 BB- Recovery Rating 3 SS&C Technologies Holdings Europe S.A.R.L. Senior Secured US$100 mil fltg-rate term B-2 bank BB- ln due 2019 Recovery Rating 3 SS&C Technologies Inc. SS&C Technologies Holdings Europe S.A.R.L. Senior Secured US$300 mil term A-2 bank ln due 2019 BB- Recovery Rating 3 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.
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