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TEXT-S&P revises Ipreo Holdings 'B' rating outlook to positive
September 26, 2012 / 7:06 PM / 5 years ago

TEXT-S&P revises Ipreo Holdings 'B' rating outlook to positive

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.

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