-- 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.
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.
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
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
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
For the complete recovery analysis, see Standard & Poor's recovery report on
Open Solutions, to be published shortly on RatingsDirect
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
Downgraded; Recovery Ratings Unchanged
Open Solutions Inc.
Corporate credit rating CCC+/Developing/-- B/Negative/--
$30 mil. revolver due 2013 B- B+
Recovery rating 2 2
$570 mil. term loan B
due 2014 B- B+
Recovery rating 2 2
$325 mil. 9.75% notes
due 2015 CCC- CCC+
Recovery rating 6 6