Open Solutions Is on Default Danger List
Moody's estimated that 45% of the companies on the list, called the Bottom Rung, will default on debt in the next year.
In December, Open Solutions was downgraded by Moody's from a corporate family rating of B2 to B3 and revised the company's ratings outlook to negative from stable. Moody's also lowered the ratings on Open Solution's senior secured credit facilities to B1 from Ba3 and senior subordinated notes rating to Caa2 from Caa1.
In its report, Moody's said that the downgrades "reflect the company's weaker than expected financial performance resulting in weaker credit metrics and reduced liquidity profile stemming from very tight cushions for the financial maintenance covenant under its bank credit agreement." For Open Solutions, Moody's said there is approximately $960 million of rated debt affected.
Robert Davis, chief financial officer for Open Solutions, said that when he talked with Moody's in December about the ratings downgrade, Moody's said it was taking a harder look at companies in the financial services industry.
"As you can imagine with the events of last summer, anyone in the financial services sector is going to be under tighter scrutiny. We discussed with Moody's, that if we generated added cash flow in 2009 they would reconsider the ratings downgrade."
Among all the companies on the Bottom Rung list, Open Solutions is one of the few that is a private company.
In a letter to credit unions, Open Solutions Chairman/CEO Louis Hernandez said, "Our appearance on this list is a direct result of our private-equity transaction. As part of this transaction, the company took on additonal debt, which is normal in a private-equity transaction."
Open Solutions, located in Glastonbury, Conn., offers core data processing applications to financial institutions. The applications allow financial institutions to offer Internet banking, cash management, CRM/business intelligence, financial accounting tools, imaging, Check 21 and interactive voice response.
In early 2007, Open Solutions was acquired by the Caryle Group and Providence Equity Partners, two private-equity firms. The acquisition caused Open Solutions to change from a publicly held company to a private company.
"Leverage came when we went to a private company. We are able to invest in our products, which I think will help us serve our customers much better in 2009," said Davis.
Right now, Davis said the company is undergoing a transformation and has a lot of costs. In the third quarter of last year it had $20 million worth of reductions in expenses, a number that Davis said has gone up. One of his goals right now is to execute a leaner cost structure.
Davis joined Open Solutions in November of last year along with Open Solutions President Steve Cameron.
"We're going to continue to bring in strong leadership that will carry the company forward," Davis said.
Addressing Moody's concern over defaulting, Open Solutions has two large interest payments it has to make each year, according to Davis. One payment occurs between January and February and the other occurs between July and August.
Davis said it made the payment for January-February with no problems, and he sees no reason why they will not be able to do the same in July.
"We've made our recent covenants and interest payments this year, and I don't foresee any trouble going forward this year."