TEXT - S&P revises SafeNet Inc outlook to positive

Wed Nov 21, 2012 3:41pm EST

Overview
     -- Global data protection solutions provider SafeNet Inc. has entered 
into a definitive agreement to sell its government solutions (GS) business.
     -- We are affirming our 'B' corporate credit on SafeNet. We are raising 
our rating on the company's first-lien term loan to 'BB-' from 'B+' and 
raising the rating on the second-lien notes to 'B' from 'B-'.
     -- We are revising the outlook to positive from stable.
     -- The positive outlook reflects our expectation of debt repayment 
following the sale, and a subsequent reduction in leverage. 

Rating Action
On Nov. 21, 2012, Standard & Poor's Ratings Services revised its outlook on 
Belcamp, Md.-based SafeNet Inc. to positive from stable. At the same time, we 
affirmed our 'B' corporate credit rating on the company. We also raised our 
issue rating on the company's existing first-lien term loan to 'BB-' from 'B+' 
and revised our recovery rating on the debt to '1' from '2', indicating our 
expectation for very high (90% to 100%) recovery of principal in the event of 
payment default. In addition, we are raising our rating on the company's 
existing second-lien term loan to 'B' from 'B-'. We revised our recovery 
rating on the debt to '3' from '5', indicating our expectation for meaningful 
(50% to 70%) recovery of principal in the event of payment default.

Rationale
The outlook revision reflects our expectation of an improved financial risk 
profile following the sale of the GS business.

The company plans to use the sale proceeds to repay approximately 80% of its 
outstanding first-lien debt, for taxes, fees, and expenses, and to add $5 
million of cash to the balance sheet.

The rating on SafeNet reflects its "weak" business risk profile, which 
encompasses the company's modest scale, as well as vulnerability to 
competition from large vendors with stronger financial profiles and its  
"aggressive" financial risk profile. These factors are partly offset by a 
diverse customer base and growing addressable markets.  

Our base-case rating assumptions include mid-single-digit revenue growth, 
reflecting new products in the data protection business and revenue 
stabilization in the software rights management (SRM) business. We also assume 
EBITDA margins will improve to the mid-double-digits by the end of 2013, 
reflecting growth in higher-margin products and maintenance revenue.
SafeNet provides data protection and software monetization solutions to 
commercial and government customers. The company specializes in 
certificate-based token authentication products, hardware security modules, 
data encryption and control solutions, and SRM. 

We are maintaining our "weak" business risk profile evaluation for SafeNet.  
Although the company's revenue base will be substantially smaller (GS 
accounted for approximately 30% of year-to-date Sept. 30, 2012, revenues) and 
we expect its EBITDA margins to decline following the sale, our business risk 
evaluation incorporates substantially better growth prospects for the 
remaining company. The company's GS business, which includes Type 1 solutions 
used by the  U.S. government agencies,  has been rapidly declining  due to its 
vulnerability to budgetary pressures. Revenues from GS products decreased by 
approximately 32% year-over-year for the nine months ended Sept. 30, 2011. We 
expect the company's pro forma revenues to grow in the mid-single-digits in 
the next year due to growing demand for data protection solutions for the 
cloud, storage, and virtual environments, as well as new product 
introductions. We also believe that the SRM business will grow in low- 
single-digits compared with SRM's depressed revenue base in 2012.
Excluding the higher-margin government business, we expect pro forma EBITDA 
margins to be about 12% for fiscal 2012, compared with combined margins of 
around 20%. However, we expect the margins to improve in 2013 to the 
mid-double- digits, due to growth in higher-margin products and maintenance 
revenue and modest operating scale improvements. 

In our assessment, the company's management and governance is "fair". We 
revised our view of SafeNet's financial risk profile to "aggressive" from 
"highly leveraged," incorporating the expected debt repayment. We expect lease 
adjusted debt  to EBITDA to be in the mid-4x area in 2012 and then decline to 
below 4x in 2013. Pro  forma funds from operations (FFO) to debt is expected 
to be around 20% exiting 2013. Although the company's financial metrics are 
moderate for the "aggressive" financial risk score, the rating incorporates 
the company's relatively modest scale following the sale, and potential 
revenue and earnings pressure due to economic weakness in Europe. 

Liquidity
We expect SafeNet to maintain "adequate" liquidity, consisting of cash on hand 
of $56.3 million at Sept. 30, 2012, a $25 million revolving credit facility 
availability, and moderate free operating cash flow. The company's revolver 
matures in 2013; however, our current rating and outlook incorporate 
expectations that the company will extent the revolver's maturity on 
substantially similar terms by the end of 2012.
Uses of cash include modest working capital needs, and capital expenditures of 
around $9 million to $11 million. 

Our liquidity analysis includes the following:
     -- We project sources of cash to exceed uses by more than 1.5x for the 
near term.
     -- Net sources are expected to be positive, even if EBITDA declines by 
15%.
     -- Free cash flow is assumed to pay down debt.

Recovery analysis
For the complete recovery analysis see the recovery report to be published 
shortly on RatingsDirect.

Outlook
The positive outlook reflects our expectation of an improved financial risk 
profile and more sustainable revenue growth following the proposed sale. We 
could raise the rating if the company can maintain leverage at or below the 
mid-4x area. We could revise the outlook to stable if investments in R&D and 
sales don't translate into sustained revenue and EBITDA growth in the near 
term, or if leverage were to exceed 5x on a sustained basis.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
Ratings Affirmed; Outlook Action
                                        To                 From
SafeNet Inc.
 Corporate Credit Rating                B/Positive/--      B/Stable/--

Upgraded; Recovery Ratings Revised
                                        To                 From
SafeNet Inc.
 Senior Secured
  US$131 mil 2nd lien term bank ln due  B                  B- 
  2015                            
   Recovery Rating                      3                  5
  US$250 mil 1st lien term bank ln due  BB-                B+ 
  2014                            
   Recovery Rating                      1                  2
  US$25 mil revolving credit bank ln    BB-                B+ 
  2013                        
   Recovery Rating                      1                  2
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