OREANDA-NEWS. S&P Global Ratings said today that it had affirmed its 'B+' long-term corporate credit rating on Ireland-headquartered ION Trading Technologies Ltd. (ION Trading), a wholly owned subsidiary of ION Investment Group Ltd. The outlook is stable.

At the same time, we assigned our 'B+' long-term corporate credit rating to ION Trading's wholly owned financing subsidiaries ION Trading Technologies S. a.r. l and ION Trading Finance Ltd.

In addition, we assigned our 'B+' issue rating to the company's proposed new €200 million first-lien term loan due 2023, in line with our rating on the company's existing first-lien term loan and its US$40 million senior secured revolving credit facility (RCF). The new term loan will be issued by the two financing subsidiaries. The '3' recovery rating on all first-lien debt instruments is unchanged, indicating our expectation of meaningful recovery in the event of a payment default, with recovery prospects in the lower half of the 50%-70% range.

The affirmation primarily reflects S&P Global Ratings' expectation that, despite the increase in leverage from the proposed recapitalization, ION Trading's solid operating performance and healthy free operating cash flow (FOCF) generation prospects will enable the company to reduce its leverage to below 5.5x in 2017. ION Trading is seeking to issue a €200 equivalent incremental first-lien term loan. The company intends to use the proceeds to repay its €37.5 million term loan taken over with the Lab49 acquisition in February 2016. The remainder will be distributed to ION Investment Group (IIG) in the form of a dividend. We expect the maturity of the existing term loans to be extended in line with the new loan.

Our view of ION Trading's financial risk profile continues to reflect its highly leveraged credit metrics. Our assessment of ION trading's business risk profile continues to reflect the company's very narrow product focus on trading solutions for electronic fixed-income markets and its high industry and end-customer concentration (its top 10 clients accounted for 40% of revenues in 2015). These constraints are partly offset by the group's large recurring revenue base and high client retention. The mission-critical nature of ION Trading's products to its financial services customers supports revenues and client retention, as does our view of favorable industry prospects for ION Trading's solutions. We see continued growth in outsourcing of information technology functions to third-party providers like ION Trading, and increasing compliance, risk-management, and regulatory requirements for financial institutions creating additional demand for new products from ION Trading.

The stable outlook on ION Trading reflects our assumption that the company will maintain strong EBITDA margins of more than 45%, continue to generate solid FOCF, and deleverage to below 5.5x in 2017.

We could lower the rating if:ION Trading pursued debt-financed acquisitions or further shareholder distributions that pushed the leverage ratio above 6x;Sales fell due to a severe financial crisis or increased competition;ION Trading's adjusted EBITDA margin declined to below 40% as a result of increasing competition or complexities in the integration of acquired companies; or EBITDA interest cover dropped below 2.5x. Upside is unlikely over the next 12 months, given the higher leverage resulting from the recapitalization. We could raise the rating by one notch if adjusted debt to EBITDA declines sustainably below 4.5x, and at the same time the company maintains its high profit margins above 45%.