TEXT-S&P cuts Aspect Software to 'B-'

Tue Aug 28, 2012 12:02pm EDT

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
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