-- Despite high debt leverage, we expect U.S. video relay
service provider Sorenson Communications Inc. will generate
positive discretionary cash flow and maintain adequate liquidity
over the next 12 to 18 months.
-- We are assigning Sorenson a preliminary 'B-' corporate
credit rating with a stable outlook. We are also assigning
preliminary issue-level and recovery ratings to the company's
-- The stable outlook reflects our expectation that despite
the potential for a lowering of rates pending a final FCC
review, we expect the company to generate positive discretionary
cash flow and that liquidity will remain adequate over the near
On Dec. 12, 2012, Standard & Poor's Rating Services assigned
a preliminary 'B-' rating on Salt Lake City, Utah based Sorenson
Communications Inc. The outlook is stable.
At the same time, we assigned the company's first out
revolver due 2017 a preliminary 'B+' rating, with a preliminary
recovery rating of '1', indicating our expectation for very high
(90% to 100%) recovery for lenders in the event of a payment
We are also assigning the first-lien notes and term loan due
2020 a preliminary 'B-' rating, with a preliminary recovery
rating of '3', indicating our expectation for meaningful (50% to
70%) recovery for bondholders in the event of a payment default.
We are also assigning the first-lien second out notes a
preliminary 'CCC' rating, with a preliminary recovery rating of
'6', indicating our expectation for negligible (50% to 70%)
recovery for bondholders in the event of a payment default.
The preliminary 'B-' rating and stable outlook reflect our
expectation that despite the company's high debt leverage, it
will generate positive discretionary cash flow and maintain
adequate liquidity over the next 12 to 18 months. Our rating
incorporates uncertainty surrounding the potential that the FCC
chooses to adopt a final reimbursement rate lower than the
interim reimbursement rate of $5.07 per minute, an 18.8%
reduction from the previous rate of $6.24. Under the interim
rate structure, and taking into account the company's recent
cost cuts and growth at Caption Call, we believe the company
should continue to generate positive discretionary cash flow and
maintain adequate interest coverage.
We regard the financial risk profile as "highly leveraged,"
based on the company's high pro form lease-adjusted
debt-to-EBITDA ratio of greater than 5x and questions
surrounding private equity ownerships long term financial
policy. We view the company's business profile as "weak" based
on its exposure to the regulatory reimbursement rate setting and
potential that the market is in a mature state limiting future
growth prospects. Our governance assessment is "fair."
Sorenson provides video relay services (VRS) that facilitate
telephone communication for deaf and hard-of-hearing persons in
the U.S. The company has entered the mature phase of its growth
cycle due to high penetration levels in the serviceable market.
This trend suggests that high-quality VRS is widely available
within the deaf community and that new pockets of underserved
customers may be more difficult to find. Additionally, the niche
market for VRS services is getting more competitive as interim
rates are higher for smaller competitors. The Caption Call
business, a new service for the hard-of-hearing, is currently
experiencing high growth rates, but there is uncertainty
regarding the sustainability of current adoption rates as well
as the potential for increase future competition.
For the remainder of 2012, we have assumed revenue and
EBITDA could grow at a low-double-digit percent rate because of
modest growth in VRS minutes and continued growth in Caption
Call. In 2013, we expect a continuation of recent trends at
Caption Call and have assumed a low-single-digit reduction in
the rate from the interim level would likely lead to
high-single-digit to low-double digit-percentage growth in
revenue and EBITDA. For the third quarter ended Sept. 30, 2012,
revenues and EBITDA increased 13% and 16%, respectively, led by
modest 1.5% growth in VRS minutes and easy comparisons to last
year as the new segment Caption Call contributed minimally last
year. Sorenson's EBITDA margin remained healthy and increased
over the last 12 months due to growth in the Caption Call
segment and cost reduction efforts undertaken. Absent a
significant change in rate, we expect the margin to modestly
expand in 2013 as a result of recent cost-reduction efforts and
near-term adoption of Caption Call.
As of Sept. 30, 2012, lease-adjusted total debt to EBITDA
pro forma for the refinancing transaction was high, at 6x, down
from 6.7x as a result of EBITDA growth. EBITDA coverage of
interest was 1.8x up from 1.3x last year. Based on our base-case
assumption of a modest reduction in rate in 2013 and growth in
Caption Call, we believe that lease-adjusted total debt to
EBITDA could decline to the mid-5x area in 2013. Going forward,
we still project that the company will generate positive
discretionary cash flow, although down from historical levels.
Our rating is predicated on the assumption that the company will
continue to generate positive discretionary cash flow and
deleverage over time.
We believe the company has "adequate" liquidity to cover its
capital needs over the next 12 to 18 months. Expectations and
assumptions that support our liquidity assessment are as
-- We expect sources of liquidity over the next 12 to 24
months to cover uses by 1.2x or more.
-- Net sources would be positive, even with a 15% to 20%
drop in EBITDA over the next 12 months, in our view.
-- We expect Sorenson will have no maintenance financial
covenants on term debt or notes.
-- Based on the company's current cash balances and
availability under its revolving credit facility, we believe it
could absorb low-probability, high-impact shocks over the coming
As of Sept. 30, 2012, Sorenson's liquidity sources pro forma
for the transaction include cash balances of $10.4 million;
healthy funds from operations that we expect could decline
moderately over the next 12 months due to higher interest costs
associated with the refinancing. We expect the company has full
access under its proposed $27.5 million revolving credit
facility due 2018. Uses of liquidity include manageable working
capital usage and capital expenditures of about $45 million.
There are no significant maturities until 2018, when the
revolver comes due, and 2020, when its first-lien term loan,
first-lien notes, and second-lien notes will come due. We expect
Sorenson's credit agreement will contain no maintenance
See the recovery report on Sorenson, to be published in a
separate report as soon as possible after this release.
The stable rating outlook reflects our expectation that
Sorenson will generate positive discretionary cash flow and
maintain adequate liquidity over the next 12 to 18 months. We
could raise the rating if Sorenson can reduce leverage below 6x
and if the final outcome of FCC review does not meaningfully
impact Sorenson's ability to service its debt.
Conversely, we could lower the rating to the 'CCC' category
if reimbursement rates are lowered more than our
low-single-digit percent annual assumption over the next three
to five years, or if we become convinced that a slowdown in
growth of VRS minutes could lead to negative discretionary cash
flow generation or interest coverage approaching 1x. We would
also lower the rating if the proposed financing does not close.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Liquidity Descriptors For Global Corporate Issuers, Sept.
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April
-- 2008 Corporate Criteria: Rating Each Issue, April 15,
-- 2008 Corporate Criteria: Ratios And Adjustments, April
Sorenson Communications Inc.
Corporate Credit Rating B- (prelim)/Stable/--
First out revolver due 2017 B+ (prelim)
Recovery Rating 1 (prelim)
First-lien nts and term loan due 2020 B- (prelim)
Recovery Rating 3 (prelim)
First-lien second out notes CCC (prelim)
Recovery Rating 6 (prelim)