TEXT - S&P cuts Open Solutions Inc to 'CCC+'

Thu Dec 6, 2012 3:50pm EST

Overview
     -- Open Solutions' operating results continue to be affected by ongoing 
economic weakness and uncertainties surrounding its recapitalization plans. 
The company also faces significant refinancing risk from debt maturities in 
2014 and 2015.
     -- We are lowering the corporate credit rating on Open Solutions to 
'CCC+' from 'B', and lowering the issue-level ratings by two notches as well. 
The recovery ratings are unchanged.
     -- The outlook is developing, reflecting our uncertainty surrounding the 
recapitalization and refinancing.

Rating Action
On Dec. 6, 2012, Standard & Poor's Ratings Services lowered the corporate 
credit rating on Glastonbury, Conn.-based Open Solutions Inc. to 'CCC+' from 
'B'. The outlook is developing.

We also lowered the issue-level rating on the company's senior secured debt to 
'B-' from 'B+'. The recovery rating is unchanged at '2', indicating that 
lenders can expect substantial (70%-90%) recovery in the event of a payment 
default. At the same time we lowered the issue-level rating on the company's 
subordinated notes to 'CCC-' from 'CCC+'. The recovery rating is unchanged at 
'6', indicating that lenders can expect negligible (0%-10%) recovery in the 
event of payment default.

Rationale
The rating action reflects the ongoing uncertainty surrounding the company's 
ability to repay or refinance its upcoming maturing debt, its weak liquidity, 
and very high leverage. Continuing economic weakness and its owners' plans to 
sell their holdings in the company have affected revenues, which, after a 
brief period of growth, have resumed their decline.

Our ratings on Open Solutions reflects a targeted industry product focus with 
strong competitors, very high leverage, and weak liquidity. A contractually 
recurring revenue base and high switching costs partially offset those 
factors. We view the business risk profile as "vulnerable" and the financial 
risk profile as "highly leveraged."

Open Solutions develops, markets, licenses, and supports enterprise software 
and services used to perform financial institution data processing and 
information management functions. The company also has complementary offerings 
in Internet banking, check imaging, and payment processing. Its customers 
include banks, credit unions, thrifts, and insurance providers. 

Our business risk assessment is based on Open Solutions' position as a 
relatively small player in the financial services information technology (IT) 
industry, and the fact that it competes against larger companies with greater 
resources, such as Fiserv Inc. and Fidelity National Information Services Inc. 
High development costs of core processing software, a highly regulated 
industry, and contractual terms leading to high switching costs provide some 
barriers to entry. Revenues for 2011 were about $381 million and are largely 
(about 75%) recurring in nature, providing decent visibility. While 
year-to-date revenues are essentially even with year-earlier levels, they have 
recently dropped, reflecting economic headwinds and the uncertainty engendered 
by reports that the company's private equity owners are looking to sell their 
holdings. Although the company's proprietary and recently updated core 
processing software had led to increasing sales in mid to late 2011, and were 
beginning to offset declines from the runoff of the legacy business and the 
effect of customer consolidations and shutdowns, revenues and margins have 
recently been pressured. For the quarter ended in September revenues dropped 
4%.

Our financial profile assessment is based on the company's ratio of operating 
lease-adjusted debt to adjusted EBITDA approaching 10x. While cash flows can 
cover working capital and capital spending needs for the next year, they 
clearly are unable to meet the upcoming maturing debt in early 2014 

Liquidity
We characterize Open Solutions' liquidity as "weak." While the company can 
meet immediate liquidity needs for the next 12 months with internal cash, the 
company faces a $531 million maturity of its senior term loan in January 2014 
and an additional $418 million of maturities in the subsequent 12 months, 
which it cannot pay from its internal sources. The company has an undrawn $30 
million revolver that matures in January 2013 and contains a springing debt 
leverage covenant of 5x, which limits access to the facility.

Near-term liquidity is supported by modestly positive annual free operating 
cash flow. We expect uses to include annual capital expenditures of less than 
$10 million.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Open Solutions, to be published shortly on RatingsDirect

Outlook
Our rating outlook on Open Solutions is developing, meaning we could raise or 
lower the ratings, reflecting the uncertain outcome of the company's 
refinancing efforts. We could raise the ratings if revenues resume their 
growth trajectory and the company is able to refinance its maturing debt. The 
company continues to be in discussions regarding a recapitalization financing. 

On the other hand, we could lower the ratings if operating results remain weak 
and the company does not make progress in the coming year in its efforts to 
refinance the 2014 debt maturities.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Downgraded; Recovery Ratings Unchanged 
                                To                     From
Open Solutions Inc.
 Corporate credit rating        CCC+/Developing/--     B/Negative/--
 Senior secured
  $30 mil. revolver due 2013    B-                     B+
    Recovery rating             2                      2
  $570 mil. term loan B 
  due 2014                      B-                     B+
    Recovery rating             2                      2
 Subordinated
  $325 mil. 9.75% notes
  due 2015                      CCC-                   CCC+
    Recovery rating             6                      6
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