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