-- U.S. contact-center software provider Aspect Software's revenues and
profits experienced a greater-than-expected decline during the June 2012
quarter, resulting in higher-than-expected leverage and limited covenant
-- We are lowering our corporate credit rating to 'B-' from 'B'. The
outlook is negative.
-- The negative outlook reflects our concern that sustained operating
performance weakness will further pressure credit metrics and the company's
ability to comply with its leverage covenant.
On Aug. 28, 2012, Standard & Poor's Ratings Services lowered its corporate
credit rating on Chelmsford, Mass.-based Aspect Software Inc. to 'B-' from
'B'. The outlook is negative, reflecting weak near-term earning prospects and
limited covenant headroom at current debt levels.
At the same time, we lowered our issue-level rating on Aspect's first-lien
credit facility to 'B' from 'B+' and our issue-level rating on its senior
second-lien notes to 'CCC+' from 'B-'. The recovery ratings on the debt remain
The ratings reflect the company's recent revenue decline and diminished
profitability, as well as tightening covenant cushion. We view Aspect's
business risk profile as "weak," reflecting the company's modest overall
market position and vulnerability to competition from larger and more
diversified companies. Aspect's "highly leveraged" financial risk profile
incorporates our expectation that declines in revenue and EBITDA will lead to
leverage of approximately 7x at fiscal year-end. These factors are partially
offset by the company's recurring revenue base, ample cash balances and
positive year-to-date free operating cash flow (FOCF).
With annual revenues of about $480 million, Aspect's revenues in the June 2012
quarter declined by approximately 24.5% from the year-ago period, which was
below our expectations. The decline reflects soft corporate spending, which
slowed the adoption of Unified IP and Workforce Optimization products and
contributed to a decline in maintenance revenue. Standard & Poor's expects
revenue levels will continue to be challenged by weak corporate spending,
economic headwinds in Europe, and increased competition.
We also expect that EBITDA margins will be compressed by increased spending on
development and sales and marketing efforts related to a new release of
Aspect's Unified IP platform. As a result, we anticipate that leverage will
rise to approximately 7.0x by fiscal year-end from 5.7x as of the second
quarter ended June 30, 2012. We believe that an improvement in credit metrics
would have to incorporate debt repayment. With low capital expenditures and
working capital requirements, we expect the company to generate positive
levels of FOCF in the near term.
We revised Aspect's liquidity to "less than adequate" from "adequate,"
reflecting a diminished cushion under the company's total and first-lien
leverage covenants. The company had less than 10% headroom under its total
leverage and first-lien leverage covenants as of June 2012. In addition,
covenant step-downs in 2013 and our anticipated EBITDA decline could lead to
further deterioration in headroom. However, the company currently has the
ability to use its ample cash balances and cash flow to repay debt and improve
its covenant cushion.
Other relevant aspects of the company's liquidity are as follows:
-- Covenant coverage tests could be breached if our forecasted EBITDA
were to decline by just 10%.
-- As of the quarter ended June 30, 2012, Aspect had a cash balance of
about $146 million and positive FOCF on a 12-month basis. An undrawn $30
million revolving credit facility is unlikely to provide significant liquidity
given covenant requirements.
-- Uses of cash are modest, comprising low capital expenditures and no
significant debt maturities until 2016.
-- We expect potential acquisitions to be moderate in size and not
materially impact Aspect's liquidity profile.
The negative outlook reflects our expectation of a decline in revenues and
EBITDA over the near term and limited covenant headroom. We could lower the
rating if a continuing decline in Aspect's revenues and EBITDA result in
materially diminished liquidity or failure to comply with covenants. We could
revise the outlook to stable if the company demonstrates revenue
stabilization, and restores adequate covenant headroom.
Related Criteria And Research
-- Industry Economic Outlook: Despite Economic Headwinds, Global
Technology Shows Balanced Ratings Trend, July 9, 2012
-- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, June
-- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile,
But Ratings Remain Stable, June 11, 2012
-- Top 10 Investor Questions: How Will The Global Technology Industry
Fare Amid An Economy In Flux?, April 26, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Downgraded; Outlook Action
Aspect Software Inc.
Corporate Credit Rating B-/Negative/-- B/Stable/--
Downgraded; Recovery Ratings Unchanged
Aspect Software Inc.
Senior Secured B B+
Recovery Rating 2 2
Senior Secured CCC+ B-
Recovery Rating 5 5