TEXT-S&P: Amber Holding assigned 'B' rating, stable outlook

Wed Dec 5, 2012 12:40pm EST

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Overview
     -- SumTotal Systems Inc. is issuing $540 million of credit facilities to 
refinance existing debt and pay a one-time dividend to its private equity 
sponsor, Vista Equity Partners.
     -- We are assigning a 'B' corporate credit rating to the parent holding 
company, Amber Holding Inc., a global provider of human capital management 
software and services.
     -- We are also assigning our 'B+' issue-level rating to SumTotal's 
proposed first-lien credit facilities ('2' recovery rating), and our 'CCC+' 
issue-level rating to its second-lien term loan ('6' recovery rating).
     -- The stable outlook reflects the company's predictable and recurring 
revenue base.

Rating Action
On Dec. 5, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate 
credit rating to Amber Holding Inc. The outlook is stable.

We also assigned a 'B+' issue-level rating to operating company SumTotal 
Systems Inc.'s $30 million revolving credit facility and $370 million 
first-lien term loan. The recovery rating on these issues is '2', indicating 
our expectation of substantial (70% to 80%) recovery in the event of a payment 
default. In addition, we assigned a 'CCC+' issue-level rating to SumTotal's 
$140 million second-lien term loan, with a recovery rating of '6', indicating 
our expectation of negligible (0% to 10%) recovery in the event of a payment 
default.

Rationale
Standard & Poor's ratings on Amber Holding, parent company of SumTotal 
Systems, reflect the company's "weak" business risk profile, as defined in our 
criteria, characterized by its modest overall position in the human capital 
management (HCM) software market and its "highly leveraged" financial risk 
profile. Offsetting some of these issues is the HCM market's critical and 
growing role, the company's rising position in the segment, and its highly 
recurring revenue base. We view the company's management and governance as 
"fair."

SumTotal is now a global provider of strategic HCM following its 
diversification from providing only enterprise learning management systems to 
an integrated end-to-end HCM platform. The company provides integrated 
products in talent management, workforce management, learning management, and 
core human resources (HR) and payroll services to enterprise and small to 
midsize business (SMB) customers via on-premise, public, and private cloud 
solutions. The integrated HCM suite was rolled out early in 2012. The company 
has more than 3,500 customers and more than 43 million end users. Although 
revenues are heavily weighted toward North America, recurring revenues--which 
account for more than 70% of total revenues--are diversified among many 
verticals, with the largest (financial services) accounting for less than 25%.

We view the company's business profile as weak, reflecting its modest overall 
market position in the $11 billion HCM market, competing with numerous 
companies, including several much larger and long-established players in 
selective parts of the market with greater resources. However, this is partly 
offset by its suite of integrated products that span the full HCM market, with 
opportunities for cross-selling and adding vertical functionality.

We expect the HCM market to increase by the mid- to high-single-digit 
percentage area, as companies continue to focus on reducing costs and 
deploying their human capital in a more strategic fashion. While major 
companies such as ADP, SAP, Kronos, Oracle, and IBM have significant positions 
in selected parts of the market, the company's integrated suite has helped it 
to increase its modest overall market share and win contracts with major 
companies. The average tenure of its customers (including acquired customers) 
exceeds five years, and customer retention is approximately 95%. The top 25 
customers account for approximately 20% of recurring revenues, and recurring 
revenues account for more than 70% of total revenues. The company's EBITDA 
margins have dramatically improved to near 30% at year-end 2011 from 8% in 
2010 as revenue also showed dramatic growth during the period, growing to $190 
million from $90 million.

SumTotal has a highly leveraged financial risk structure following the 
transaction, and we estimate leverage will exceed 6x for 2012. We do not 
believe leverage will drop meaningfully over the next several years. We expect 
future capital expenditures to be slightly higher than historical averages at 
2.5% of revenues. Revenue growth for 2012 will be restrained as the company 
de-emphasizes low-margin and unprofitable third-party business. After that 
transition, our base-case scenario assumes growth in line with the industry in 
the high single digits and EBITDA margins remaining near present levels. This 
results in leverage remaining higher than 6.0x for the next several years, 
unless the company allocates most free cash flow, which we estimate to be more 
than $30 million annually, to debt reduction.

Liquidity
We view Amber's liquidity as "adequate," as defined in our criteria. We expect 
sources of cash to exceed uses over the next 12 to 24 months. Cash sources 
include free cash flow and access to a $30 million revolver. Uses include 
working capital growth and modest capital expenditures. Loan amortization is 
minimal and the loans mature in 2018 and 2019. We expect cash at closing to be 
$25 million.

Other relevant aspects of Amber's liquidity include:
     -- Sources of cash are likely to be above 1.2x in the next 12 to 24 
months;
     -- Net sources are likely to be positive during the period even if EBITDA 
falls by 15% to 20%;
     -- Sufficient covenant headroom exists for EBITDA to fall by 30% without 
the company's breaching a covenant;
     -- Besides the minimal amortization, there are no debt maturities during 
the next 12 to 24 months; and
     -- We assume the company will not make any major acquisitions or 
dividends. 
     -- 
Recovery analysis
For the full recovery analysis, please see the recovery report on Amber, to be 
published as soon as possible following this report on RatingsDirect.

Outlook
The outlook is stable, reflecting the company's predictable and recurring 
revenue base. We could lower the rating if debt-funded acquisitions or 
competitive pressures were to cause margins to dip and leverage to be 
sustained in the mid-7x area. Alternatively, we could raise the rating if debt 
reduction, coupled with organic revenue growth and margin improvement that 
leads to EBITDA growth, resulted in leverage sustained below 5x.
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