S&P: Rocket Software Inc. 'B' Rating Affirmed On Capital Structure Changes And Dividend Recap; Ratings Assigned To New Debt
At the same time, we assigned our 'B+' issue-level rating to the company's proposed $630 million senior secured first-lien term loan and $35 million revolving credit facility. The '2' recovery rating on the first lien and revolving debt indicates our expectation of substantial (70%-90%; lower half of the range) recovery in the event of a payment default.
We also assigned our 'B-' issue-level rating to the company's proposed $215 million senior secured second-lien term loan. The '5' recovery rating on the second lien indicates our expectation for modest (10%-30%; lower half of the range) recovery of principal in the event of a payment default.
"The ratings reflect our view of the company's small position in the overall software services market, focus on the declining mainframe end market, and high reliance on its relationship with a large original equipment manufacturer (OEM), but also its high profit margins, high percentage of recurring revenue, and high customer retention rates," said S&P Global Ratings credit analyst Minesh Shilotri.
The ratings also reflect pro forma leverage in the low 5x area and the company's acquisitive growth strategy. We also give positive consideration to the company's ability to broaden its portfolio and increase its scale through acquisitions. Rocket's exposure to the declining mainframe market is partly alleviated by the fact that there is still a large install base of mainframe customers – blue chip companies for whom moving away from mainframes is cost prohibitive.
The stable outlook reflects our expectation that Rocket Software's revenue base will remain highly recurring, that profitability and margins will remain stable, and that the company will generate positive free cash flow over the next 12 months.