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TEXT-S&P Revises Wall St Systems 'B' Rtg Outlk To Stable
September 26, 2012 / 10:27 PM / 5 years ago

TEXT-S&P Revises Wall St Systems 'B' Rtg Outlk To Stable

-- Wall Street Systems, a leading global provider of foreign exchange and treasury management systems and wholly owned subsidiary of ION Investment Group (unrated), has proposed issuing a $365 million first-lien credit facility and a $140 million second-lien credit facility to refinance outstanding debt and pay a dividend to its owners.

-- We are revising our rating outlook on the company to stable from positive and affirming the ‘B’ corporate credit rating.

-- We are assigning a ‘B’ issue-level rating with a recovery rating of ‘3’ to the company’s proposed first-lien term loan and revolving credit facility, and also assigning a ‘B-’ issue-level rating with a recovery rating of ‘5’ to its proposed second-lien term loan.

-- The stable outlook reflects our view that the company’s material base of recurring revenues, good free cash flow, and recent profitability gains support the rating.

Rating Action

On Sept. 26, 2012, Standard & Poor’s Ratings Services revised the rating outlook on New York City-based Wall Street Systems Holdings Inc. to stable from positive. The outlook revision reflects a more leveraged financial profile pro forma for the transaction. We also affirmed our ‘B’ corporate credit rating on the company.

At the same time, we assigned a ‘B’ issue-level rating to the company’s proposed $335 million first-lien term loan due 2019 and $30 million revolving credit facility due 2017. The ‘3’ recovery rating indicates our expectation of meaningful (50% to 70%) recovery in the event of payment default.

In addition, we assigned a ‘B-’ issue-level rating to the company’s proposed $140 million second-lien term loan due 2020. The ‘5’ recovery rating indicates our expectation of modest (10% to 30%) recovery in the event of payment default.

The new facilities will be issued by WSS Delaware Inc., a wholly owned subsidiary of Wall Street Systems Holdings Inc. The corporate credit rating is assigned to Wall Street Systems Holdings Inc. based on our expectation that all existing debt at Wall Street Systems Holdings Inc. will be repaid by the proposed transaction. Therefore, for analytical purposes, we treat of WSS Delaware Inc. as a fully consolidated entity.

Rationale

The ratings reflect Wall Street Systems’ “weak” business risk profile resulting from its narrow market focus and its revenue exposure to the financial sector and Europe, as well as its “highly leveraged” financial profile, with pro forma leverage in the low-7x area. Nevertheless, we expect the company’s solid base of recurring revenue and good profitability to allow it to reduce leverage to below 6x in 2013, as revenue recognition from existing contract cycles’ past-purchase accounting deferred revenue write-downs.

Wall Street Systems’ foreign exchange solutions provide trading, risk management, operations, and accounting capabilities for financial institutions, while its treasury management solutions allow multinational corporations and central banks to manage cash positions; foreign exchange, interest rate, and credit risk; and fixed-income and equity investments. Since the leveraged buyout (LBO) in June 2011, the company has focused on increasing recurring revenue and removing excess capacity in its professional services organization.

Wall Street Systems’ weak business risk profile reflects its narrow focus on the foreign exchange and treasury software markets, much larger and better resourced competitors, and limited history of operating at current profitability levels. We expect the company’s near-term growth prospects to be limited by its exposure to financial institutions and European weakness. However, the company has a material base of recurring revenue and good free cash flow, and its products are critical to its customers’ operations, resulting in high retention.

Wall Street Systems generated U.S. GAAP revenues of $185 million for the 12 months ended June 2012, down from $200 million in 2010 because of purchase accounting deferred revenue write-downs after the LBO. We expect revenues to rebound to pre-LBO levels in 2013 after the company has amortized most of its existing deferred revenue. Revenue has been relatively flat over the past few quarters as the company has focused on increasing recurring revenue. However, EBITDA margin improved from about 30% to the high-30% area over the past 18 months, reflecting expense reductions. We expect revenues near $210 million in 2013, with EBITDA margins in excess of 40% as the company continues to expand its recurring revenue base and recognizes higher U.S. GAAP revenue on new contracts.

The company’s highly leveraged financial risk profile reflects leverage of 7.1x, annualized for the first half of 2012 (which does not include management’s non-GAAP revenue adjustments) and pro forma for the proposed financing, up from current leverage of 5.3x. We expect leverage to drop to below 6.0x over the next 18 months, based on a revenue rebound to preacquisition levels and modest expense growth. The rating does not incorporate capacity for large, debt-financed acquisitions.

Liquidity

Wall Street Systems has “adequate” liquidity, with sources of cash likely to exceed uses for the next 12 to 24 months. Cash sources include an expected cash balance of $15 million after the proposed transaction, full availability of its proposed $30 million revolving credit facility, and expected positive annual free cash flow. We expect uses to include mandatory debt amortization and modest capital expenditures of about $5 million.

Our assessment of Wall Street Systems’ liquidity profile incorporates the following expectations, assumptions, and factors over the next 12 to 24 months:

-- Sources of liquidity will exceed uses by at least 20%.

-- Net sources would be positive, even with a 15% decline in EBITDA.

-- Covenants will only apply if the proposed revolver is drawn and they will be set such that the company can maintain covenant headroom of at least 15%.

Recovery analysis

For the complete recovery analysis, see the recovery report on Wall Street Systems, to be published separately on RatingsDirect.

Outlook

The stable outlook incorporates our view that the company’s solid recurring revenue base and good free cash flow support operating stability. Although unlikely over the next 12 months, if the company can maintain its recent profitability gains while reducing leverage below 5x, we could raise the rating by one notch.

Conversely, if sales fall as the result of poor macroeconomic conditions, if the company experiences margin compression, or if it pursues debt-financed acquisitions or shareholder returns, precluding it from reducing leverage from pro forma levels, we could lower the ratings.

Related Criteria And Research

-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- 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

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed; Outlook Action

To From

Wall Street Systems Holdings Inc.

Corporate Credit Rating B/Stable/-- B/Positive/--

New Ratings

WSS Delaware Inc

Senior Secured US$335 mil first-lien term bank ln B

due 2019

Recovery Rating 3

US$30 mil revolver bank ln due 2017 B

Recovery Rating 3

US$140 mil second-lien term bank ln B-

due 2020

Recovery Rating 5

Ratings Affirmed

Wall Street Systems Holdings Inc.

Senior Secured 1st lien B

Recovery Rating 3

Senior Secured 2nd lien B-

Recovery Rating 5

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