-- 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
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
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
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.
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
Other relevant aspects of Amber's liquidity include:
-- Sources of cash are likely to be above 1.2x in the next 12 to 24
-- 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
For the full recovery analysis, please see the recovery report on Amber, to be
published as soon as possible following this report on RatingsDirect.
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.