August 21, 2012 / 4:37 PM / 5 years ago

TEXT-S&P cuts Allen Systems Group to 'CCC-'

Overview
     -- U.S. systems management and cloud computing software provider Allen 
Systems Group violated its bank agreement financial covenants for the 
reporting period ended June 30, 2012.
     -- We are lowering our corporate credit rating to 'CCC-' from 'B' and 
lowering the issue-level ratings on the company's debt.
     -- We are also placing our corporate credit rating and issue-level 
ratings on CreditWatch with developing implications. 
     -- We could raise the ratings if the company improves its liquidity and 
obtains significant covenant relief (including a waiver of its current 
covenant breach).
 
Rating Action
On Aug. 21, 2012, Standard & Poor's Ratings Services lowered the ratings on 
Allen Systems Group Inc. and placed them on Credit Watch with developing 
implications, which means that we could raise or lower the ratings. 

We lowered our corporate credit rating on the company to 'CCC-' from 'B'. We 
also lowered our issue-level rating on its first-lien senior secured loan to 
'CCC+' from 'BB-'. The recovery rating on its first-lien senior secured loan 
remains at '1', indicating our expectation for a very high (90% to 100%) 
recovery of principal in the event of payment default. At the same time, we 
also lowered our issue-level rating on the senior secured second-lien notes to 
'CC' from 'B' and revised the recovery rating to '5' (formerly '4'), 
reflecting our expectation for modest recovery (10% to 30%) if a payment 
default occurs.  
 
Rationale
The downgrade and CreditWatch placement follow the deterioration in the 
company's liquidity profile and profitability, as well as its recent covenant 
breach. We revised Allen's liquidity profile from "less than adequate" to 
"weak," reflecting its current minimal cash balances, the remaining 
availability under the revolver, and lower-than-expected cash from operations. 
Cash sources may not exceed cash uses over the near term, depending on 
operating performance.

In addition, the company did not comply with its total leverage, fixed charge 
coverage, and minimum liquidity covenants for the financial reporting period 
ended June 30, 2012. It is our understanding that the company is in 
discussions with its lenders to obtain covenant relief.

Allen's revenue growth and EBITDA margins in recent quarters were below our 
expectations, as the company's significant investments in acquisitions and 
sales force coverage during 2011 did not result in high-teens revenue growth. 
Furthermore, increased investments in new technologies and softness in legacy 
product markets contributed to depressed margins. We still believe that recent 
acquisitions and the expansion of the company's product offering to cloud 
computing solutions will generate revenue growth over the remainder of the 
year, though at lower levels than we previously expected, especially given 
continuing economic headwinds in Europe and increased competition in the 
company's legacy product offerings. Allen Systems' credit metrics have 
deteriorated in fiscal 2012, reflecting margin erosion and an increase in debt 
to finance additional acquisitions. As of June 2012, debt to EBITDA was over 
8x (including some of the acquisition-related synergies).

We revised our view of Allen Systems' business risk profile to "vulnerable" 
from "weak," reflecting its modest scale and operations in a highly 
competitive sector against larger and better capitalized companies such as IBM 
and BMC. In addition, the company continues to find it a challenge to mitigate 
revenue declines from legacy products and solutions. Moreover, it has not yet 
realized benefits of acquisitions at levels the company expected. These 
factors are partly offset by the high percentage of contractually recurring 
revenues--which compose 60% of the company's total revenues--a diversified 
customer base, and broad geographic coverage. 
 
Recovery Analysis
For the complete recovery analysis, see the recovery report on Allen Systems, 
to be published as soon as possible on RatingsDirect, following the release of 
this report.
 
Credit Watch
Standard & Poor's will monitor the company's progress in negotiating a 
covenant amendment with its lenders and its progress in enhancing its 
liquidity profile, prior to resolving the CreditWatch listing. Our review will 
also include an assessment of near-term business prospects.

We could raise the ratings if the company improves its liquidity and obtains 
significant covenant relief (including a waiver of its current covenant 
breach). Alternatively, we would lower the rating if the company is not able 
to address its financial covenant breach and therefore its debt obligations 
are accelerated.
 
Related Criteria And Research
     -- Top 10 Investor Questions: How Will The Global Technology Industry 
Fare Amid An Economy In Flux?, April 26, 2012
     -- Global Technology Ratings Trend Shifts To Negative In The First 
Quarter, April 11, 2012
     -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 
29, 2012
     -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 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
Downgraded; CreditWatch Action
                                        To                 From
Allen Systems Group Inc.
 Corporate Credit Rating                CCC-/Watch Dev/--  B/Negative/--

Downgraded; CreditWatch Action
                                        To                 From

Allen Systems Group Inc.
 Senior Secured                         CCC+/Watch Dev     BB-
   Recovery Rating                      1                  1
 Senior Secured                         CC/Watch Dev       B
   Recovery Rating                      5                  4

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.

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below