Overview -- Ipreo's recent performance has been above our expectations, causing leverage to fall to the mid-5x area. -- We are revising our 'B' rating outlook on the company to positive from stable. -- The positive outlook reflects our expectation that performance will be solid and leverage will continue to fall. Rating Action On Sept. 26, 2012, Standard & Poor's Ratings Services revised its 'B' rating outlook on Ipreo Holdings LLC to positive from stable. Existing ratings on the company, including the 'B' corporate credit rating, were affirmed. Rationale Our 'B' corporate credit rating on Ipreo Holdings reflects its narrow business focus, competition from much larger competitors with greater financial resources, and its revenue sensitivity to both changes in debt and equity securities issuance volume, and financial markets and interest rate volatility. These risks underscore Standard & Poor's Ratings Services' assessment of Ipreo's business risk profile as "weak" (based on our criteria). We regard the financial risk profile as "highly leveraged," reflecting the company's high debt to EBITDA (adjusted for operating leases) of 5.5x, based on the trailing-12-month EBITDA as of June 30, 2012. Ipreo is a financial services technology, research, and data provider. The company operates in three segments: capital markets (50% of revenue for the 12 months ended June 30, 2012), research, sales & trading (RS&T) (24%), and corporate (26%). The capital markets segment provides software workflow solutions to automate debt, equity and municipal securities marketing, issuance, and purchase. The company's revenue, especially from municipal debt issuances, is highly dependent on new issuance transaction volumes and activity levels at its large investment banking and brokerage clients. We estimate approximately 50% to 60% of revenues in the capital markets segment are transaction related--and therefore inherently variable. The RS&T and corporate segments provide client relationships, market intelligence, and analytics products and solutions to the investment community and corporate investor relations groups. These segments are less sensitive to capital market volumes, serve a broader client base than the capital markets segment, and offer a degree of stability. About 85% of revenues across these two segments are subscription based. We believe the embedded nature of Ipreo's software products and services, and expanding market opportunities, will support revenue growth over the balance of 2012 and in 2013. We also believe that debt issuance could continue to be strong with significant corporate debt funding needs, low interest rates, and healthy investor appetite. According to the Securities Industry and Financial Markets Association, U.S. municipal issuance has increased by over 50% year to date through August 2012. For 2013, we expect capital markets activity to be flat or modestly higher than 2012 levels. For full-year 2012, our base-case scenario includes revenue growth at a low-teens-percentage rate and EBITDA growth of over 20% as a result of sharp increases in municipal bond issuance and the operating leverage inherent in the business. In 2013, we expect revenue growth at a mid- to high-single-digit percent rate, spurred by an assumption that the company will continue to gain market share across segments. We expect EBITDA growth at a high-single-digit to low-double-digit percent rate, with potential for expansion in the EBITDA margin. For the quarter ended June 30, 2012, revenue was up 20% and EBITDA increased by more than 30%. For the second quarter, revenues for the RS&T, capital markets, and corporate segments were up 8%, 28%, and 15%, respectively. Performance during the quarter was driven by increased municipal bond issuance, strong corporate debt markets, and increases in average contract values. The company's EBITDA margin was about 29% for the 12 months ended June 30, 2012, up from about 28% for the period a year earlier. Adjusted leverage is in line with the indicative financial risk debt/EBITDA threshold of 5x or greater that characterizes a "highly leveraged" financial risk profile, under our criteria. Pro forma EBITDA coverage of interest expense was adequate, at roughly 2x. Under our base-case assumptions we expect debt to EBITDA to decline to the low-5x area by the end of 2012 and to 5x or less in 2013, and EBITDA coverage of interest to improve slightly throughout the rest of 2012 and 2013. We also expect the company to convert roughly 20% to 40% of its EBITDA into discretionary cash flow in 2012 and 2013, as a result of manageable working capital and capital spending requirements. Discretionary cash flow was minimal during the 12 months ended June 30, 2012, as a result of transaction expenses during the second half of 2011. Liquidity Ipreo's liquidity sources are "adequate" (based on our criteria) for its uses over the next 12 to 18 months, in our opinion. Relevant factors and assumptions supporting our liquidity assessment are as follows: -- We expect the company's sources of liquidity (including cash and facility availability) over the next 12 to 18 months to exceed its uses by 1.2x or more. The company has minimal maturities over the intermediate term. -- We would expect net sources to remain positive, even if EBITDA declines by 15%. -- Compliance with financial covenants could survive a 15% drop in EBITDA, in our view. -- Because of the company's good conversion of EBITDA to discretionary cash flow, we believe it could absorb low-probability, high-impact shocks. Liquidity sources include cash balances of about $16 million, access to an undrawn $20 million revolving credit facility, and $15 million to $25 million of funds from operations in 2012 and 2013. Uses of liquidity include minimal working capital needs and roughly $5 million of capital expenditures per year. Debt maturities are minimal and consist of amortization on the term loan ($1.5 million per year). The senior secured credit facility contains an 8.5x leverage covenant, which is calculated net of cash. This covenant steps down at year end to 8.25x and then steps down twice in 2013. The covenant only applies if the company draws on its revolving or swingline loans or issues letters of credit. The company currently has over a 40% cushion with this financial covenant, and we expect headroom to remain wide. Recovery analysis See Standard & Poor's recovery report on Ipreo, to be published on RatingsDirect as soon as possible following the release of this report. Outlook The positive outlook reflects our view that Ipreo should be able to generate positive discretionary cash flow and continue to reduce leverage. Specifically, if the company is able to reduce leverage to under 5.5x with continued growth in non-transaction related revenue, we could raise the rating. Although less likely, we could revise the outlook to stable if revenue growth moderates significantly. This could happen as a result of adverse financial market developments, macroeconomic trends, client losses or operational missteps. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From Ipreo Holdings LLC Corporate Credit Rating B/Positive/-- B/Stable/-- Senior Secured BB- Recovery Rating 1 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.