TEXT-S&P cuts Aspect Software to 'B-'
Overview -- U.S. contact-center software provider Aspect Software's revenues and profits experienced a greater-than-expected decline during the June 2012 quarter, resulting in higher-than-expected leverage and limited covenant headroom. -- We are lowering our corporate credit rating to 'B-' from 'B'. The outlook is negative. -- The negative outlook reflects our concern that sustained operating performance weakness will further pressure credit metrics and the company's ability to comply with its leverage covenant. Rating Action On Aug. 28, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Chelmsford, Mass.-based Aspect Software Inc. to 'B-' from 'B'. The outlook is negative, reflecting weak near-term earning prospects and limited covenant headroom at current debt levels. At the same time, we lowered our issue-level rating on Aspect's first-lien credit facility to 'B' from 'B+' and our issue-level rating on its senior second-lien notes to 'CCC+' from 'B-'. The recovery ratings on the debt remain unchanged. Rationale The ratings reflect the company's recent revenue decline and diminished profitability, as well as tightening covenant cushion. We view Aspect's business risk profile as "weak," reflecting the company's modest overall market position and vulnerability to competition from larger and more diversified companies. Aspect's "highly leveraged" financial risk profile incorporates our expectation that declines in revenue and EBITDA will lead to leverage of approximately 7x at fiscal year-end. These factors are partially offset by the company's recurring revenue base, ample cash balances and positive year-to-date free operating cash flow (FOCF). With annual revenues of about $480 million, Aspect's revenues in the June 2012 quarter declined by approximately 24.5% from the year-ago period, which was below our expectations. The decline reflects soft corporate spending, which slowed the adoption of Unified IP and Workforce Optimization products and contributed to a decline in maintenance revenue. Standard & Poor's expects revenue levels will continue to be challenged by weak corporate spending, economic headwinds in Europe, and increased competition. We also expect that EBITDA margins will be compressed by increased spending on development and sales and marketing efforts related to a new release of Aspect's Unified IP platform. As a result, we anticipate that leverage will rise to approximately 7.0x by fiscal year-end from 5.7x as of the second quarter ended June 30, 2012. We believe that an improvement in credit metrics would have to incorporate debt repayment. With low capital expenditures and working capital requirements, we expect the company to generate positive levels of FOCF in the near term. Liquidity We revised Aspect's liquidity to "less than adequate" from "adequate," reflecting a diminished cushion under the company's total and first-lien leverage covenants. The company had less than 10% headroom under its total leverage and first-lien leverage covenants as of June 2012. In addition, covenant step-downs in 2013 and our anticipated EBITDA decline could lead to further deterioration in headroom. However, the company currently has the ability to use its ample cash balances and cash flow to repay debt and improve its covenant cushion. Other relevant aspects of the company's liquidity are as follows: -- Covenant coverage tests could be breached if our forecasted EBITDA were to decline by just 10%. -- As of the quarter ended June 30, 2012, Aspect had a cash balance of about $146 million and positive FOCF on a 12-month basis. An undrawn $30 million revolving credit facility is unlikely to provide significant liquidity given covenant requirements. -- Uses of cash are modest, comprising low capital expenditures and no significant debt maturities until 2016. -- We expect potential acquisitions to be moderate in size and not materially impact Aspect's liquidity profile. Outlook The negative outlook reflects our expectation of a decline in revenues and EBITDA over the near term and limited covenant headroom. We could lower the rating if a continuing decline in Aspect's revenues and EBITDA result in materially diminished liquidity or failure to comply with covenants. We could revise the outlook to stable if the company demonstrates revenue stabilization, and restores adequate covenant headroom. Related Criteria And Research -- Industry Economic Outlook: Despite Economic Headwinds, Global Technology Shows Balanced Ratings Trend, July 9, 2012 -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, June 29, 2012 -- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile, But Ratings Remain Stable, June 11, 2012 -- Top 10 Investor Questions: How Will The Global Technology Industry Fare Amid An Economy In Flux?, April 26, 2012 -- 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; Outlook Action To From Aspect Software Inc. Corporate Credit Rating B-/Negative/-- B/Stable/-- Downgraded; Recovery Ratings Unchanged To From Aspect Software Inc. Senior Secured B B+ Recovery Rating 2 2 Senior Secured CCC+ B- Recovery Rating 5 5