TEXT-S&P cuts Airvana Network Solutions to 'CCC-'
Overview -- U.S. network infrastructure software provider Airvana reported steep year-to-date declines in revenue and EBITDA. -- The company's lawsuit, seeking a preliminary injunction against its sole customer, Ericsson AB, remains unresolved. -- We are lowering all our ratings on Airvana to 'CCC-' from 'CCC', reflecting Airvana's revenue and earnings vulnerability and weak liquidity. -- At the same time, we removed the ratings from CreditWatch, where we placed them with developing implications on Feb. 9, 2012. -- The outlook is negative, reflecting the lack of resolution of the lawsuit, and our concern that Airvana may be unable to meet its obligations as they come due. Rating Action On Nov. 20, 2012, Standard & Poor's Ratings Services lowered its corporate credit and issue ratings on Chelmsford, Mass.-based Airvana Network Solutions Inc. to 'CCC-' from 'CCC'. The recovery rating on the company's senior secured debt remains '4', indicating our expectation of average (30%-50%) recovery in the event of a payment default. In addition, we removed the ratings from CreditWatch, where we placed them with developing implications on Feb. 9, 2012. The outlook is negative. Rationale The downgrade reflects rapid declines in revenue and cash flow year to date, and lack of resolution of the legal proceedings against Ericsson, including ongoing uncertainty about potential proceeds from a settlement or judgment. Airvana is dependent on Ericsson for essentially 100% of its revenues. Our ratings on the company reflect the ongoing lawsuit against its sole customer, and the related vulnerability of its future revenues and cash flows. Airvana filed suit against Ericsson in the Supreme Court of the State of New York on Feb. 8, 2012. The suit alleges that Ericsson violated key terms of its contract with Airvana and misappropriated Airvana's critical intellectual property, among other items. As a result, Airvana seeks from Ericsson damages of not less than $330 million and an injunction barring certain conduct by Ericsson. Airvana's "vulnerable" business risk profile reflects its declining revenue base and ongoing litigation against its sole customer. Airvana, founded in 2000, provides mission-critical network infrastructure software products used by wireless operators to provide third-generation (3G) mobile broadband services. After a 2007 IPO, Airvana was taken private in April 2010 by a consortium of private-equity investors led by S.A.C. Private Capital. Airvana's sole customer, formerly known as Nortel Networks Corp., was acquired out of bankruptcy by Ericsson AB in November 2009. Under generally accepted accounting principles (GAAP) requirements, Airvana defers all revenue from sales until all elements (product, software, and services) have been delivered, although customer billing and collections occur monthly. As a result, GAAP accounting is not representative of Airvana's operating performance; our analysis--and all further references to revenue--incorporates customer billings as a proxy for revenue. We view Airvana's financial risk profile as "highly leveraged," and we assess Airvana's management and governance as "weak," based on our uncertainty regarding the sustainability of the revenues and cash flows. Billings and EBITDA in the September 2012 quarter were $46.8 million and $36.3 million, respectively, which were down 48% and 53%, respectively, over the same period in the prior year. Revenue declines during 2012 reflected rapidly declining investments and upgrades to 3G data equipment, as larger carriers divert capital expenditures toward next-generation 4G equipment and software. Last-12-month leverage as of September 2012 was 0.2x and the company's debt balance was $43 million, down from $184 million as of Dec. 31, 2011. However, given the lack of resolution of the lawsuit, Airvana may be unable to meet its obligations as they come due. Liquidity We view Airvana's liquidity as "weak" because of diminished operating performance and uncertainty related to future cash flows. Cash balances were $15.6 million as of Sept. 30, 2012. We see coverage of uses to be below 1x for the next 12 months. Our assessment of Airvana's liquidity profile incorporates the following factors: -- The company has satisfied annual term loan amortization requirements for fiscal year 2012, and substantially reduced the term loan balance. -- However, the company does not have a revolving credit facility. -- In addition, the company faces material tax liabilities in 2013, which it could not pay when due from current cash flow levels. Recovery analysis The rating on Airvana's senior secured debt is 'CCC-' (the same as the corporate credit rating), and the recovery rating is '4', indicating our expectation that lenders would receive average (30% to 50%) recovery if a payment default occurs. The issue-level rating recovery analysis on Airvana will be published separately on RatingsDirect. Outlook The negative outlook reflects the uncertain status of the litigation against Ericsson. The absence of a timely (before March 1, 2013) and favorable resolution could lead to lower a lower rating in the near term. We could also lower ratings in the near term if negative operating trends put Airvana's revenues, cash flow, and liquidity more at risk. Related Criteria And Research -- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Downgraded; Off Watch To From Airvana Network Solutions Inc. Corporate credit rating CCC-/Negative/-- CCC/Watch Dev/-- Senior secured CCC- CCC/Watch Dev Recovery rating 4 4 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. 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