Overview
— Global data protection solutions provider SafeNet Inc. has entered
into a definitive agreement to sell its government solutions (GS) business.
— We are affirming our ‘B’ corporate credit on SafeNet. We are raising
our rating on the company’s first-lien term loan to ‘BB-‘ from ‘B+’ and
raising the rating on the second-lien notes to ‘B’ from ‘B-‘.
— We are revising the outlook to positive from stable.
— The positive outlook reflects our expectation of debt repayment
following the sale, and a subsequent reduction in leverage.
Rating Action
On Nov. 21, 2012, Standard & Poor’s Ratings Services revised its outlook on
Belcamp, Md.-based SafeNet Inc. to positive from stable. At the same time, we
affirmed our ‘B’ corporate credit rating on the company. We also raised our
issue rating on the company’s existing first-lien term loan to ‘BB-‘ from ‘B+’
and revised our recovery rating on the debt to ‘1’ from ‘2’, indicating our
expectation for very high (90% to 100%) recovery of principal in the event of
payment default. In addition, we are raising our rating on the company’s
existing second-lien term loan to ‘B’ from ‘B-‘. We revised our recovery
rating on the debt to ‘3’ from ‘5’, indicating our expectation for meaningful
(50% to 70%) recovery of principal in the event of payment default.
Rationale
The outlook revision reflects our expectation of an improved financial risk
profile following the sale of the GS business.
The company plans to use the sale proceeds to repay approximately 80% of its
outstanding first-lien debt, for taxes, fees, and expenses, and to add $5
million of cash to the balance sheet.
The rating on SafeNet reflects its “weak” business risk profile, which
encompasses the company’s modest scale, as well as vulnerability to
competition from large vendors with stronger financial profiles and its
“aggressive” financial risk profile. These factors are partly offset by a
diverse customer base and growing addressable markets.
Our base-case rating assumptions include mid-single-digit revenue growth,
reflecting new products in the data protection business and revenue
stabilization in the software rights management (SRM) business. We also assume
EBITDA margins will improve to the mid-double-digits by the end of 2013,
reflecting growth in higher-margin products and maintenance revenue.
SafeNet provides data protection and software monetization solutions to
commercial and government customers. The company specializes in
certificate-based token authentication products, hardware security modules,
data encryption and control solutions, and SRM.
We are maintaining our “weak” business risk profile evaluation for SafeNet.
Although the company’s revenue base will be substantially smaller (GS
accounted for approximately 30% of year-to-date Sept. 30, 2012, revenues) and
we expect its EBITDA margins to decline following the sale, our business risk
evaluation incorporates substantially better growth prospects for the
remaining company. The company’s GS business, which includes Type 1 solutions
used by the U.S. government agencies, has been rapidly declining due to its
vulnerability to budgetary pressures. Revenues from GS products decreased by
approximately 32% year-over-year for the nine months ended Sept. 30, 2011. We
expect the company’s pro forma revenues to grow in the mid-single-digits in
the next year due to growing demand for data protection solutions for the
cloud, storage, and virtual environments, as well as new product
introductions. We also believe that the SRM business will grow in low-
single-digits compared with SRM’s depressed revenue base in 2012.
Excluding the higher-margin government business, we expect pro forma EBITDA
margins to be about 12% for fiscal 2012, compared with combined margins of
around 20%. However, we expect the margins to improve in 2013 to the
mid-double- digits, due to growth in higher-margin products and maintenance
revenue and modest operating scale improvements.
In our assessment, the company’s management and governance is “fair”. We
revised our view of SafeNet’s financial risk profile to “aggressive” from
“highly leveraged,” incorporating the expected debt repayment. We expect lease
adjusted debt to EBITDA to be in the mid-4x area in 2012 and then decline to
below 4x in 2013. Pro forma funds from operations (FFO) to debt is expected
to be around 20% exiting 2013. Although the company’s financial metrics are
moderate for the “aggressive” financial risk score, the rating incorporates
the company’s relatively modest scale following the sale, and potential
revenue and earnings pressure due to economic weakness in Europe.
Liquidity
We expect SafeNet to maintain “adequate” liquidity, consisting of cash on hand
of $56.3 million at Sept. 30, 2012, a $25 million revolving credit facility
availability, and moderate free operating cash flow. The company’s revolver
matures in 2013; however, our current rating and outlook incorporate
expectations that the company will extent the revolver’s maturity on
substantially similar terms by the end of 2012.
Uses of cash include modest working capital needs, and capital expenditures of
around $9 million to $11 million.
Our liquidity analysis includes the following:
— We project sources of cash to exceed uses by more than 1.5x for the
near term.
— Net sources are expected to be positive, even if EBITDA declines by
15%.
— Free cash flow is assumed to pay down debt.
Recovery analysis
For the complete recovery analysis see the recovery report to be published
shortly on RatingsDirect.
Outlook
The positive outlook reflects our expectation of an improved financial risk
profile and more sustainable revenue growth following the proposed sale. We
could raise the rating if the company can maintain leverage at or below the
mid-4x area. We could revise the outlook to stable if investments in R&D; and
sales don’t translate into sustained revenue and EBITDA growth in the near
term, or if leverage were to exceed 5x on a sustained basis.
Related Criteria And Research
— 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
— Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
— 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
SafeNet Inc.
Corporate Credit Rating B/Positive/– B/Stable/–
Upgraded; Recovery Ratings Revised
To From
SafeNet Inc.
Senior Secured
US$131 mil 2nd lien term bank ln due B B-
2015
Recovery Rating 3 5
US$250 mil 1st lien term bank ln due BB- B+
2014
Recovery Rating 1 2
US$25 mil revolving credit bank ln BB- B+
2013
Recovery Rating 1 2
