September 17, 2012 / 7:53 PM / 5 years ago

TEXT-S&P cuts SkillSoft debt rating to 'B+'

Overview
     -- U.S. e-learning company SkillSoft recently announced its intention to 
acquire MindLeaders PLC (unrated) and is adding $50 million to its existing 
$90 million incremental senior secured term loan B to help fund the 
acquisition.
     -- We are affirming our 'B' corporate credit rating on the company and 
lowering our bank loan rating on its first-lien secured debt to 'B+' from 
'BB-', while revising the recovery rating to '2' from '1'.
     -- The stable outlook reflects our expectation that the company will 
successfully integrate MindLeaders, and realize cost synergies over the next 
12 months.

Rating Action
On Sept. 17, 2012 Standard & Poor's Ratings Services lowered its issue-level 
rating on Nashua, N.H.-based SkillSoft Ltd.'s first-lien senior secured debt 
to 'B+' from 'BB-'. We also revised the recovery rating on the debt to '2' 
from '1'. The '2' recovery rating reflects our expectation of substantial 
(70%-90%) recovery of principal in the event of payment default. The proposed 
addition of first-lien debt to SkillSoft's capital structure results in lower 
first-lien recovery prospects, but does not alter our negligible recovery 
expectations for the senior unsecured debt.

We affirmed our 'B' corporate credit rating and the existing 'CCC+' 
issue-level rating on the outstanding $310 million of senior unsecured notes. 
The '6' recovery rating on the notes remains unchanged as well and indicates 
expectations for negligible (0%-10%) recovery of principal in the event of 
payment default.

Rationale
The ratings on SkillSoft reflect the company's "highly leveraged" financial 
profile and "weak" business risk profile. Although the proposed acquisition of 
MindLeaders, also an e-learning company, will expand SkillSoft's customer base 
and geographic diversity, ratings continue to reflect the company's narrow 
business profile and niche market position.

SkillSoft focuses exclusively on the e-learning industry, primarily in the 
corporate training market. It provides on-demand e-learning and performance 
support solutions as well as training in business skills, IT, desktop 
applications, and compliance issues. The company also offers its services to 
governments and educational institutions. MindLeaders, with 2011 revenue of 
$28 million, provides business skills, IT skills, and compliance and 
certification products to small-to-midsized businesses (SMBs) in the U.S., 
Europe, and Asia. In 2011, SkillSoft acquired Element K, another e-learning 
company, with $43 million in revenues. The acquisitions do not materially 
improve SkillSoft's market position, but will provide opportunity for 
additional cross-selling and market growth. 

SkillSoft's weak business risk profile reflects its modest position in the 
global corporate training market. While e-learning is the fastest-growing 
corporate training segment, many of SkillSoft's competitors typically operate 
in the significantly larger instructor-led training (ILT) market or compete 
via a blended ILT and e-learning model. Further, while individual courses and 
materials may be proprietary, there is little or no protection from 
competitors producing superior courses on the same or similar topics. These 
factors are offset partly by SkillSoft's diverse, contractually bound 
installed base of more than 5,000 accounts worldwide, inclusive of Element K. 
This provides a large portion of recurring revenues, which allowed the company 
to demonstrate relative operating performance stability through the recent 
weak economy. 

Pro forma for fair value adjustments to its deferred revenues, SkillSoft's 
revenues grew in the low-double digits for the 12 months ended July 2012, 
reflecting some organic growth as well as revenues arising from the Element K 
acquisition. Modest organic revenue growth reflects increased competition for 
reduced customer training budgets, resulting in longer sales cycles and 
smaller training and IT outlays. As a result, Standard & Poor's expects 
near-term growth in the low- to mid-single-digit area. EBITDA margins declined 
to 33% for the latest 12 months ended July 2012 (down from 39% in 2010) due to 
increased R&D and sales and marketing-related expenditures, which have yet to 
result in a meaningful increase in sales. 

We view SkillSoft's financial risk profile as highly leveraged, reflecting 
incremental acquisition-related debt. Standard & Poor's adjusted leverage of 
6.2x as of July 2012 compares with a fiscal 2011 level of 5.3x. Pro forma for 
the MindLeaders acquisition, we expect fiscal 2013 (ending January 2013) 
leverage to rise to the mid-6x area. We expect EBITDA growth and internal cash 
flow, in part reflecting anticipated cost synergies, to provide for moderate 
leverage reductions over the intermediate term. The company's private-equity 
ownership structure and acquisitive growth strategy are likely to preclude 
sustained de-leveraging. 

Liquidity
We view SkillSoft's liquidity as "adequate." Liquidity is provided by the 
company's $53 million cash on hand as of July 2012 (to be reduced by $19 
million that it will use for the acquisition) and availability under its 
undrawn $40 million revolver. We expect the company to generate positive free 
cash flows in fiscal 2013, benefiting from improving margins, and modest 
capital expenditures and working capital needs. There are no significant 
maturities until 2017.

Additional relevant aspects of SkillSoft's liquidity are:
     -- We expect coverage of cash sources to uses to be more than 2x in the 
intermediate term.
     -- Net sources are likely to be positive, even if EBITDA were to decline 
more than 20% from the current level.
     -- No additional material acquisitions are incorporated into the current 
rating.
     -- The bank covenant calculation adds the full expected cost synergies to 
EBITDA. As a result, we expect SkillSoft to maintain adequate covenant 
headroom.

Recovery analysis
For the complete recovery analysis, please see Standard & Poor's recovery 
report on SkillSoft, which will be published shortly on RatingsDirect. 

Outlook
The stable outlook reflects our expectation that the company will successfully 
integrate MindLeaders and realize cost synergies over the next 12 months. Pro 
forma leverage somewhat high for the rating, ongoing margin pressures, and 
uncertainty surrounding SkillSoft's ability to accelerate revenue growth and 
improve margins all currently limit a possible upgrade. As a result, we do not 
expect leverage to return to fiscal year 2011 levels over the outlook horizon. 

On the other hand, we could lower the rating if additional acquisitions, 
integration issues, or further margin pressure caused leverage to exceed the 
mid-7x level for a sustained period.

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 
29, 2012
     -- 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

Ratings List

Ratings Affirmed

SkillSoft Ltd.
 Corporate Credit Rating                B/Stable/--        

Downgraded; Recovery Rating Revised
                                        To                 From
SkillSoft Corp.
 Senior Secured                         B+                 BB-
   Recovery Rating                      2                  1

Ratings Affirmed; Recovery Ratings Unchanged

SSI Co-Issuer LLC
SSI Investments II PLC
 Senior Unsecured                       CCC+               
   Recovery Rating                      6                  


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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